Greek-style write-offs are just not affordable

WEDNESDAY night’s marathon summit in Brussels was the 14th held in the 21 months since European leaders originally agreed to rescue Greece.

The fact that so many summits have had to be held, with all them held against a backdrop of panic and crisis, is indicative of just how difficult it has proved to get European political and financial leaders to agree on a strategy of sufficient magnitude.

It would appear that the outcome from Wednesday’s night’s summit is the first time that they have stepped up to the plate in any meaningful way.

First off, private holders of Greek sovereign debt have agreed to accept a 50% haircut on their holdings. From a Greek perspective this was absolutely essential, because Greece was never going to be in a position to service and sustain the frightening levels of debt that it has built up in recent years.

Indeed it could be argued that a larger write-down might have been more appropriate. The fact is that Greece will still face a very tough challenge over the next decade to get its economy and its public finances back in order, but this week’s haircut will help.

Central to any Greek debt write-down was always going to be a commitment to re-capitalise those banks that would have their balance sheets seriously damaged by the 50% haircut on their holdings of Greek debt. This has been agreed to and in addition the European Financial Stability Fund (EFSF) has been raised to €1 trillion.

This fund is to ensure that if the markets now take on the bond markets of countries such as Italy or France, the firepower will exist to buy the bonds of those countries and support their financial systems.

Have no doubt about it — what European leaders agreed to on Wednesday night was an amazingly large step in the context of what has gone on over the past 21 months. The notion of a sovereign debt default would have been totally inconceivable a few months back, no more than the notion of putting €1tn into the rescue fund.

The European political system has now effectively acted in a manner that is recognising the reality that the cost of allowing the euro to fall apart would be far greater than the cost of any possible rescue deal. They are probably correct in this assertion. Merkel was probably also correct in her assertion on Wednesday that the end of the euro would spell the end of Europe.

Here in Ireland, we will continue to press ahead with our fiscal austerity path despite the agreement on Wednesday night. Nothing much has changed in that regard. Many European countries that lived totally beyond their means over the past decade will have to accept the reality of fiscal austerity until their debt levels are reduced to manageable levels. We are still a distance away from that situation, as are a number of other eurozone members. If it is any consolation, the US is very much in a similar situation.

The challenge now for the political system will be to convince the populations of those countries of the need for ongoing fiscal austerity measures. The obvious temptation will be to press for debt write-off, just as the Greeks have attained.

The reality is that Greek-style debt write-offs are just not affordable in countries such as Spain and Italy and should not be contemplated.

The necessary fiscal correction will act as a significant dampener on European economic growth over the next three years or so and that will create its own challenges for the Irish export sector. We just need to keep our heads down and press on with getting our revenue and expenditure back into balance; plough ahead with the recreation of a functioning banking system; and continue to work towards improving the overall competitiveness of the economy.