ECB criticises Ireland for not seeking a bailout earlier

It’s a Bank Holiday here in Irelandtoday so a relatively slow news day domestically. However over in Berlin, one of the seven members of the ECB board, the Florentine, Lorenzo Bini Smaghi has delivered a noteworthy speech which might be of interest over here. Lorenzo of course is the quite-often controversial member of the ECB board and his comments in the past have raised hackles here and elsewhere (for example here and here). However he is generally good for an interesting, if sometimes provocative, opinion and today is no different.

His full speech is here. And early on in it he chides Ireland, Greece and Portugal for not seeking bailout financing earlier. And worse, for then blaming the EU (and presumably ECB) for their domestic predicament. Sound familiar?

The main focus of his speech is an attack on sovereign default. He claims there are very few successful restructurings, that restructuring takes a long time and will ultimately hurt tax-payers in both debtor and creditor countries. He points out that countries with a history of restructuring will see interest premia imposed on future borrowings. His comments are a thinly veiled warning to Greece.

He claims that Greece is perfectly capable of dealing with its present predicament. And Greece’s future success will boil down to political will and the will of the people. He claims “restructuring should only be the last resort, i.e. when it is clear that the debtor country cannot repay its debts” There are some that would say that Greece is already at that point, but it is clear that Lorenzo disagrees, indeed elsewhere he claims that Greece’s gross debt of €330bn is largely matched by assets of €300bn. Not at all sure where the €300bn comes from, but it will include the privatization of some €50bn of state-owned assets that Greece has now agreed to in principle.

What might be of intense interest inIrelandis when Lorenzo makes a distinction between private sector debt and sovereign debt. With the former he says “the basic rationale behind involving private creditors when a debtor is in distress is straightforward and uncontroversial: creditors and investors should bear the consequences of their decisions as fully as possible and should not rely on taxpayers’ money to be bailed out. The underlying reason has long existed: a bailout by taxpayers today may encourage risky lending by private investors in the future”

When I read this I wondered if someone had hit poor Lorenzo over the head with a paddy wacker, as it is crystal clear that bondholders are “private creditors”, that our banks are “in distress”, that bondholders should “bear the consequences of their decisions as fully as possible and not rely on taxpayers’ money to be bailed out”. How on earth are unguaranteed senior bondholders in Ireland different to the creditors described in the remarks above?

You might also be amused at the claim “EMU is based on two pillars. The first is price stability, ensured by an independent central bank. The second is sound public finances, promoted by the Stability and Growth Pact. This second pillar has not worked properly and needs to be repaired” The Stability and Growth Pact famously calls for deficits to be kept below 3% of GDP. It also calls for debt:GDP to be capped at 60%. And although our Finnish friend, Olli Rehn always thought to mention the former, he somehow developed amnesia when it came to the latter and seemed perfectly happy for Ireland to take on debt which will grow to well in excess of 100% of GDP. Amusing to hear the ECB also talk in support of the Stability and Growth Pact whilst totally ignoring burgeoning national debt levels.

And lastly you might be amused by the suggestion that a restructuring of debt will have a cost to tax-payers in both debtor and creditor countries! Of course it will, the usual resolution of a debt that can’t be paid, normally involves pain to both debtor and creditor. It would seem to be a perversion of free market economics for it to be any different.

So on this slow news day inIreland, we should express our gratitude to Lorenzo for livening up the day. And hopefully his words will be recorded by our “negotiators”, as they seem to converge with our own national views in many areas.

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