Our debt burden is too onerous

Nearly three weeks after the election of the Syriza government in Greece, we are still no closer to understanding how the Greek situation is going to unfold, writes Jim Power.

Last week, the ECB threw a spanner in the works when it declared that it would no longer be prepared to lend money to the Greek banks in return for the security of bonds backed by the Greek government.

Strictly speaking, the ECB should not be allowed accept bonds that are below a certain credit rating as collateral for lending. Given that Greek bonds have junk bond status, this should certainly rule them out. However, the ECB has been prepared to accept Greek bonds because the government signed up to the terms of the bailout, just as we did back in 2011.

Now, however, the ECB assumes that the new Greek government is not prepared to abide by the agreed terms, hence its dramatic actions last week. The Greek banks will still be able to borrow at higher interest rates from their own central bank under the emergency liquidity assistance arrangement, but the risk will not be borne by the ECB.

Given the very justifiable loss of deposits in the Greek banking system in recent months, the banks certainly do need to borrow. Greek depositors remember what happened in Cyprus two years ago and are sensibly not prepared to take any undue risks with their money. This is a huge problem for Greece, whose bailout is due to end on February 28.

If it is not able to borrow again, or more precisely, if it is not willing to borrow again, then it would appear to have little option than to default.

Perhaps the ECB and its political masters will be prepared to swap Greek debt for debt that will be based on certain growth rates being achieved in the economy, but acceptance of this sensible scheme is far from certain, not least because if Greece gets such concessions, then every other country with unsustainable/dangerous levels of debt should be entitled to something similar.

Simon Coveney was correct in his assertion that different standards should not be applied to Greece than to countries such as Ireland and Portugal who have gone through not too dissimilar economic and financial difficulties. It is a total mess, and logic would suggest that Greece’s time in the euro is limited.

Greece would be better off exiting the system and allowing its exchange rate to depreciate sharply. It could then seek to rebuild a sustainable economic model based on sound principles. Finance minister Yanis Varoufakis should understand what this would entail. For the eurozone, getting rid of by far its weakest link would in theory be no bad thing. In reality it could be very dangerous.

The whole euro project was a victory for politics over economics and it has been kept together by amazing political resilience and a belief in its irreversible nature. If Greece were to leave, this notion of irreversibility would be fundamentally altered and the future of the European Monetary Union could be nasty, brutish, and short.

Meanwhile, the powers that be in the EU have explicitly ruled out any debt deal for Ireland. This is stupid.

A recent report from McKinsey Global Institute showed that at 390% of GDP, Ireland has the second-highest level of debt of the 47 countries considered.

Between 2007 and 2014, Ireland’s debt expanded by 172 percentage points, the highest growth rates of the countries considered. Government debt increased by 93 percentage points as a result of our generosity to bondholders; corporate debt increased by 90 percentage points; financial sector debt declined by 25 percentage points; and household debt fell by 11 percentage points.

This deleveraging of household debt is obviously a factor depressing consumer spending. However, these statistics highlight the dangerously onerous debt burden that still afflicts the economy.

However, our European partners do not appear to care. And as long as we are prepared to accept onerous personal taxes and quasi- Third World public services, why should they care?

One part of me feels that the powers that be in the eurozone deserve what they might be about to get.