The government has three main arguments for supporting Euroland countries with bail out money. The first is the EU market and banking systems are important to UK prosperity. The second is the UK does not have to put up new cash, as the IMF, the European Financial Mechanism and the European Central Bank already have money to lend. The third is the money is only loans, which will be repaid.
There are problems with all these arguments. Of course it is in our interest that Euroland prospers, avoiding a banking crash. Sensible critics of the government do not wish the Euroland economy harm or want to see a banking collapse. The question in dispute is can lending more money to overborrowed countries solve their problem of overborrowing? Why didn’t the first Greek bail out, or the revised bail out work? Can the weaker members get out of their difficulties without leaving the Euro and devaluing? If they and their weakest banks need to reduce the amount of interest and capital they repay on past debts, wouldn’t it be better to agree that now instead of lending them more money to pay the interest on what they cannot afford? The UK also needs to remember that it imports a lot more than it exports to the EU, and the trade is subject to global as well as EU rules to prevent protective measures against us.
The three main mechanisms for lending these countries more money through international institutions could end up with those institutions needing more capital from the sponsor states including the UK if they lend and lose too much. It is true that the UK has not subscribed much capital to the ECB and is not meant to be liable for losses or to benefit from profits. The UK should make it clear that it has no intention of subscribing any more capital to the ECB, which owns too many loans to countries at risk and to banks in difficulty. It should also press for less of the new lending to come from the EU fund and more from the Euroland fund. It should be questioning why the IMF thinks it a good idea to lend money to countries that share a currency which does not work for some of its members,, when it would be better for them to recreate their own currencies and follow their own policies subject to market disciplines on their borrowing.
Finally, it is important to heed the message of the markets, that there could be serious realised losses in due course on some Euroland sovereign debt and banking paper. A country seeking to strengthen its own financial position by moving towards better control on its own deficit should be wary of having to stand behind too many possible losses. If we had to mark to market – take the true current value – of these loans to Euroland in trouble, we would already have lost substantial sums through the various mechanisms and on the direct loan. The market thinks Greece should pay 23% for 2 year money – that’s a long way from the 5% or so Greece is being charged for the bail out.