Posted on November 14th, 2010A poll conducted for Wall Street investors indicates that the majority believe Greece and Ireland will default on their public debt in the next 18 months, with Portugal coming in a close third and Spain a distant fourth.
The fiscal scare across EU has sent bond rates higher for Ireland as well as Southern and Eastern Europe, and it has resulted in a drop of the euro at a time that Germany is trying to keep the currency steady and struggling to convince Washington that the Fed has to stop its stimulative monetary measures. To calm the markets, deliberately leaked sources have revealed that within a few days Ireland will probably receive a bailout package in the order of 80 billion euros to service its debt beginning in 2011 when Dublin will be facing serious liquidity shortfalls. The problem with Ireland is not just the public debt as is the case of Greece, but the very weak banking system that will need massive capital injections to remain afloat. Whereas Ireland was expected to suffer a budgetary deficit of 12% of GDP in 2010, bailing out the banks will cost at least one-third of GDP, money that must come from deep cuts in the public sector and higher indirect taxes. This development comes on the heels of possible defaults for Greece and Portugal, or at the very least major debt restructuring, as I have written in previous postings when analyzing the massive EU public debt problem and its repercussions on the social and political arenas. If one of the smaller EU members actually defaults, or proceeds with debt restructuring, then Spain, the fourth largest eurozone economy, will have problems servicing its debt because interest rates will rise sharply. Because Spain has the additional problem of massive private sector debt which competes with the public sector for new credit, interest rates will rise further for Spain and the rest of Europe. A number of Eastern European countries, Romania and Czech Republic among them, are also on investors “watch list” as default candidates. To prevent the ripple effect, Ireland’s debt crisis will be addressed more or less in the same manner as it was in Greece, namely rigorous austerity measures that will cripple labor and the middle class. Like the Greek press and government earlier this year, Irish Prime Minister Brian Cowen blamed German Chancellor Angela Merkel for making public remarks that do not help EU debtor nations in the south and East. On the postive side of all this, EU officials will act more rapidly in the case of Ireland than they did in Greece, given that there is the 750 billion euro stabilization fund set up by the European Union and International Monetary Fund. Patrick Honohan, governor of the Irish central bank, tried to calm investors a few days ago by stating that there will be budgetary cuts, which of course translate into IMF-style austerity measures once Ireland accepts the EU-IMF bailout package. The cuts will be very painful for workers and the middle class that have already endured the pain of previous measures. It has now become necessary to ask bond investors to share in the sacrifice for the sake of long-term stability. French Finance Minister Christine Lagarde has stated that “all stakeholder must participate in the gains and losses” of the bonded debt. Merkel made similar remarks, apparently hinting that debt crises by EU members will entail at some point down the road, depending on how serious the problem becomes for EU monetary and economic stability, that debtor nations like Greece and Ireland (possibly Portugal and Spain) will only pay the interest and not the principal; a model of public financing that has long historical roots going back to the 19th century. The Irish crisis comes amid a US-China currency-valuation controversy that implies lack of consensus on a number of issues from trade to fiscal policy among the G-20, a phenomenon that can only lead to increased economic nationalism. China is about to cool its economic growth at a time that the global economy needs stimulus and the US is already on record for reducing the deficit by adopting what we have come to know as “austerity-style” measures. Both organized labor and conservatives have already reacted with sharply negative remarks about austerity-style measures that they otherwise support but not in their own country. AFL-CIO President Richard Trumka said: “The chairmen of the Deficit Commission just told working Americans to ‘Drop Dead,’” Grover Norquist, a Republican activist, was sharply critical of the Commission’s recommendation to raise $1 trillion in tax increases during the next 10 years. By 2015 when Obama asked for a balanced budget, the Bowles-Simpson proposals would reduce budgetary deficits by $380 billion in 2015. Interest payments, however, which currently account for $13.7 trillion, just $1 trillion under annual GDP, would be exempt from the Bowles-Simpson proposal, thus leaving the US with budgetary deficits not that different from EU’s worst cases like Greece, Ireland, Portugal and Spain who must comply with the rule of 3% budgetary deficit of GDP once the austerity measures are complete. At the heart of Greece’s and Ireland’s debt crisis, as well as those pending across southern and Eastern Europe, is the double standard that creditor and debtor nations belonging in the G-7 impose on weak debtor nations. “Out of the world’s 75 largest economies, the United States has the 20th largest as debt-to-GDP ratio, standing at 94.3%, with a gross external debt of $13.454 trillion and an annual GDP $14.26 trillion. In fact, out of the largest 75 economies, this number is just above the worldwide average of 90.8%. Western-European and North American countries dominate the upper end of the spectrum, with Switzerland (422%) and the United Kingdom (408%) at the #2 and #3 spots, respectively, and Ireland representing the most drastic debt-to-GDP ratio. According to the most recent World Bank data, Ireland’s number stands at a staggering 1,267%.” http://www.cnbc.com/id/33506526
If Germany which enjoys a substantial surplus had agreed to the formula that French finance minister is now proposing about bond investors “sharing in the gains and losses,” if the US had agreed with its G-20 counterparts to impose greater regulation on banks and investment firms and moved to cut defense spending and end swiftly the futile wars of Iraq and Afghanistan, while forcing Israel to negotiate peace in good faith, the world economy would have been far better better off than it is expected to be in 2011. If the G-20 had agreed on partial debt forgiveness, cost-sharing with investors, and debt rescheduling for debtor nations whose living standards are falling off the cliff as is the case not just for Ireland and Greece, but many mid-sized and small economies in all continents. The political decision to support finance capital at the expense of the middle class and labor remains at the heart of global crises, whether it is Ireland and Greece or the US that is about to bathe in some austerity-style measures that weak debtor nations have endured.