Crying over spilt milk on debt deal

On June 25, the Greek electorate looks set to bring a left-wing party, Syriza, into government, writes Jim Power.

This party has made a strong commitment to end austerity and to do everything it can to alleviate the human suffering caused by the dramatic programme of austerity that the Greeks have had to endure since the crisis began.

It is calling for an EU Debt Conference along the lines of the London Debt Agreement of 1953, which allowed Germany write off 50% of its external debt, which was owed to around 70 countries. This debt agreement literally gave the ailing German economy room to breathe again and it undoubtedly laid the basis for the subsequent German economic miracle, which saw economic output double between 1953 and 1963.

It is incredibly ironic that the key opponents to such a debt agreement today are the Germans. However, they must realise that, for countries such as Greece, and I would include Ireland, the debt burden is dangerously high and is a key impediment to a real economic recovery.

The real concern of course is that higher debt servicing costs on the back of a return to more ‘normal’ interest rate conditions could really test the sustainability of the debt burden in the future.

Granted, Germany in 1953 was in need of massive infrastructural investment and economic restructuring following the Second World War, but in many ways the same thing could be said for those countries that have been to the forefront of the ‘great recession’ since 2007.

In relation to Ireland’s particular situation, some of the revelations of recent days are enough to bring tears to the eyes.

Central Bank governor Patrick Honohan has revealed that then minister of finance Brian Lenihan wanted to adopt a much more sensible approach to the banking crisis, but was overruled by some smaller brains within government or elsewhere.

Then, in a great interview to coincide with the elitist/cringeworthy conference in Dublin Castle this week, IMF head Christine Lagarde expressed a wish that Europe’s finance ministers had been contacted before the all-encompassing bank guarantee, and if they had, they “might have come up with a different solution”.

Alas, the decision to bail in bondholders cost the Irish taxpayer a lot of money. The €34bn pumped into two now-defunct financial institutions is what is particularly hard to take.

It would be great to see Syriza succeed in delivering a debt agreement along the lines of 1953, because if Greece were to get relief, Ireland obviously would have to as well. However, it is not as simple as it looks.

Germany used the opportunity presented by the London agreement to fundamentally restructure and rebuild its economy through a combination of hard work, diligence, and sacrifice. This would of course not have been possible without the debt deal, but the Germans used the opportunity presented by the debt write off very sensibly.

Today, the those opposing a deal have justifiable concerns about how debt relief might be used by the beneficiaries. The precedent is not encouraging.

Greece has a long history of debt default and atrocious economic and financial management. There is a high probability that if Greece were to get a debt deal, it would only be a matter of time before the next crisis would arise.

Here in Ireland, there would be less cause for concern, on the face of it. However, there is also a danger that a debt deal would just be used as an opportunity to revert to the policies that got us into the mess in the first place.

The irrational opposition and hysteria in relation to the Central Bank’s very sensible proposals on mortgage lending standards, and the notion that the public sector pay cuts will be reversed at the first sign of growth, do not fill one with confidence that we would not just turn around and make the same mistakes all over again.

Any deal on debt in Ireland, Greece, or elsewhere has got to be backed up by a rock-solid commitment to use the relief to restructure the economy in a way that would benefit society in the long-term. I am far from convinced that this would happen, but more importantly I suspect the Germans are not convinced either.