GREECE, IRELAND, AND THEN ? / THE NEW YORK TIMES EDITORIAL ( HIGHLY RECOMMENDED READING )

Editorial

November 24, 2010

Greece, Ireland, and Then?

In May, the International Monetary Fund and the European Union thought they had solved Europe’s financial troubles. They crafted a $150 billion bailout for Greece, part of a $1 trillion rescue fund for vulnerable countries using the euro. With defenses like that, no investor would bet against Europe’s financial stability.


Six months later, Greece is still tottering, and the Irish financial crisis shows that their deterrent was neither as persuasive nor as effective as they thought.


The bailout recipe for Greece, and now Ireland, has a fundamental problem: It fails to acknowledge that these deeply indebted countries will not recover until they reduce their crushing public debt, which in both cases is on its way to hit a staggering 150 percent of gross domestic product within three or four years. Ireland’s total foreign debt, public and private, amounts to 10 times its G.D.P.


Growth could help, raising tax revenues and cutting the ratio of debt to G.D.P. But neither Greece nor Ireland is growing. And the draconian austerity budgets that are the price for the rescue deals — Ireland has promised to cut its budget deficit to 3 percent of G.D.P. by 2014, from 32 percent this year — will make things worse.


Unless they are allowed to restructure their debt, extending payouts or reducing the principal, they will hobble along for years. And any new scare, say financial problems in Portugal, would send investors bolting.


Debt write-offs weren’t discussed during the Greek bailout, not least because it owed a lot of money to banks from other European Union countries. Ireland owes even more. Right now, nobody is talking about restructuring. Instead, the European Union and the I.M.F. seem likely to plow billions more into the Irish banks.


Forcing creditors to swallow debt write-downs also carries big risks. It would hurt the balance sheets of many European banks. It would spook investors, temporarily barring other weak countries from bond markets. There are ways to mitigate these risks by addressing the problems of all the weak countries at once.


Creditors in Ireland’s banks could be pressed to swap debt for equity, which would reduce banks’ indebtedness. And the I.M.F. and European Union rescue fund could inject capital into some banks that couldn’t get it from the markets, as well as shore up governments until they recovered access to private financing.


This won’t be easy, especially if the rescue needs to be extended to a much bigger country such as Spain. Yet despite the risks, this approach may offer the only path to lasting solvency for these countries — and long-term stability for the euro.