Readers will know I am against the UK lending any money to Euro member states in trouble. We kept out of the Euro thanks to some of us arguing that case. Some of us forecast the likely problems and do not see why the UK should pick up any of the bill for the failures of a badly executed currency scheme..
The Coalition government has rightly taken the UK out of any future bail outs of Euro states in the new regime after 2013. That leaves the issue of bail outs under the current system, where the UK was opted in during the transition post election in May 2010.
Mr Darling tells us he did accept the need for the UK to be part of the rescue parties. He also says he told Mr Osborne and Dr Cable, and they allowed him to make the decision. Mr Osborne implies he did not feel he could override Mr Darling but agrees he did let him make the decision. The Coalition government de facto underwrote the arrangement when they got into office and did not resile from Mr Darling’s consent. Some of us wanted them to notify our EU partners that we do not agree with what they are doing or the way they are doing it, but we lost that argument.
The case against the bail outs is this. Countries that have borrowed too much are not necessarily helped by lending them more. It is true the new loans come with policy conditions attached. They include requirements for the member state to increase taxes and cut spending in an effort to reduce future borrowing needs. Where the problem is mainly one of bank solvency and lossees, they include requirements to put more capital into the banks. It might however be better to sell assets and bring in new finance from outside, not on the state to state model.
Few think that Greece or Ireland can pay all the interest and repay all the debt they and their banks have incurred in recent years. Market rates for their debt imply that at some point they will have to delay repayment, cut the interest paid or cut the capital owing. Greece has already rescheduled its Spring 2010 loan.
The Uk has lent to Ireland at 5.8%. It may lend to Portugal at a similar rate. Market rates for Ireland are around 9% and for Portugal around 8%. The loan to Ireland should appear as both an asset on the Uk balance sheet at a sensible value, and as a liability through the debt we have taken on in order to make the advance. If you valued the loan to Ireland at market rates it would have a value of around 75% of its face value today. This could rise if the market thinks Ireland is fixing its economic problems, or fall if things get worse.
What the Irish, Greek and Portuguese economies need is stronger economic growth. That would help raise asset values, which would make default on bank loans less likely. It would mean more incomes and better incomes from more jobs, whcih would also make default on loans less likely. It would mean more tax income to pay the interest on state debt.
Instead, locked into the Euro and not fully competitive at current Euro exchange rates, these economies will struggle to grow. The combination of spending cuts, higher taxes and a high exchange rate make it difficult to see how they can quickly resume a happy outcome.
Getting overseas interests to take on bank liabilities and refinance the banks would be a better answer than nationalisation and state to state loans on the EU and IMF model. There is a price for everything, and the private sector may have a better answer than the top down state model they are following.