Why is it that the Irish must take upon themselves the debts of their banks, which in reality are debts owed to German and French banks?
… It is not about Germany and France wanting to help out Ireland and Greece (and eventually Portugal and Spain). They are not that benevolent. It is that they are worried about their banks going belly up.
Look at how upset the UK got when Iceland decided not to back their banks. Never mind that the bank debt was 12 times Iceland’s national GDP. Never mind that there was no way in hell that the 300,000 people of Iceland could ever pay that much money back in multiples lifetimes. The Icelanders did the sensible thing: they just said no.
Yet Ireland has decided to try and save its banks by taking on massive public debt. The current government is willing to go down to a very resounding defeat in the near future because it thinks this is so important. And it is not clear that, with a slim majority of one vote, it will be able to hold its coalition together to do so…
David Rosenberg wrote a few days ago:… “Ireland may have secured funding, but at a 5.8% interest with nominal GDP declining, the situation is untenable in terms of sustaining any balance sheet improvement. Debt restructuring is inevitable…”
… The euro never was an economic currency. It is a political currency, and for it to remain a currency or at some point in the future become an economic currency, it will take massive political resolve on the part of the members of the EU.
I wrote last year that there are only a few paths in front of us. The peripheral European countries can simply default – Greece did so just 20 years ago. Rates got up to 20% for them. Banks would take losses, but the ECB can be the backstop. And after a while people would forget and lend the Greeks money again.
Or some of the peripheral countries can leave and go back to their own currencies, taking the path to devaluation, like Iceland did. Or Germany can decide to go its own way after what will be a very volatile and controversial election in the future.
Or the ECB can print euros and buy out the debt on European banks’ balance sheets. Or create a massively large stability fund and combine that with some haircuts for euro bond holders.
There are no good solutions, just very difficult ones. And not one that I see that is euro-bullish in the medium term.