Eurozone crisis - Bondholders must accept some losses

THE great uncertainty about how Greece can continue to function and pay its debts will test the European Union’s capacity to support its member states, its commitment to solidarity and whether the EU is more committed to the needs of the citizens of Europe or protecting Europe’s banking system.

Yesterday’s plea from French President Nicolas Sarkozy to other EU leaders to quickly reach an agreement on how the crisis might be contained underlined the urgency of the situation. The indecision and disagreement blocking a unified approach sent fresh shock waves through currencies, money markets, equities and derivatives yesterday. The euro fell more than 2% in the past two days and reached its lowest ever point against the Swiss franc. The cost of protecting corporate bonds soared to its highest level since January, with credit-default swaps anticipating about a 74% chance that Greece would not repay its loans.

In an effort to create some degree of stability the IMF has agreed to immediately lend funds to Greece to try to prevent a default. This support came against a background of political chaos and street violence as protests against new austerity measures intensify.

It is hard not to think that we are approaching some sort of defining moment for Europe and, of course, for Ireland.

It is hard not to think too that Finance Minister Michael Noonan’s Washington announcement, that he had the support of the IMF for a Government plan to impose “substantial” losses on senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society would be supported by the great majority of Irish citizens and political parties.

In what is a significant but very welcome change in policy Mr Noonan will broach the subject with the ECB and everything depends on “what attitude they may take”.

It is a measure of how completely we have lost our economic independence that ECB bureaucrats will decide whether Irish taxpayers pick up the tab for the reckless investors who bankrolled the rogue banks,Anglo Irish Bank and Irish Nationwide.

It might be foolish to be overly optimistic, especially as the European Commission has opposed such moves in the past, but it is encouraging that the Commission is now prepared to consider Mr Noonan’s plan.

It is hard not to believe too that the moral weight in the argument lies with Mr Noonan’s proposal to make some bondholders accept the consequences of their bad and destructive investments. And though it has been said many times before the fundamental truth — that it is wrong to expect Irish citizens to make good the losses of international financiers who invested very unwisely in private Irish banks — is undeniable.

If the ECB vetoes Mr Noonan’s burn the bondholders proposals we will know whose interests the bank is committed to protecting.

In what is a very complex and difficult situation, and in a situation where the stakes could hardly be higher, we are on the right side of the argument. Let us hope Mr Noonan prevails. So much of what this society needs to do depends on it.