On 1 April, the Irish government announced that another £21 billion would go on bailing out Ireland’s bankers, bringing the total to £61 billion, equivalent to 45 per cent of the country’s GDP. And the debt is still too great.
Things are as bad in Portugal. Since May last year, the European Central Bank (ECB) has bought possibly 20 billion euros of government debt from Portugal. With European taxpayers bailing out the country via its banking sector, Portugal’s banks are using money they do not have in order to lend to the Portuguese government, knowing that the ECB will provide credit. This use of overvalued low-quality collateral to gain huge loans was one of reasons for the whole subprime crisis. Portugal is supposed to raise 39.4 billion euros this year – 25 per cent of its national wealth.
A bail-out could end up costing 80 billion euros, with Britain liable for 4.3 billion euros. For the Portuguese people, it will mean wage cuts, spending cuts, attacks on unions and privatisations. But cutting the incomes of the people who service the debt, without cutting the bondholders’ incomes, won’t reduce the debt.
Bail-outs are short-term loans. They land over-indebted nations with more highly-priced debt that they can’t afford. Eurozone members will still be stuck with an overvalued currency. Meanwhile, the money loaned pours straight into bankers’ pockets.
The bond market used by countries to raise money punishes those that cut rapidly, like Ireland, Portugal and Spain, killing their economic growth. Countries that tried to pay off their debts immediately with huge cuts have suffered most: all the countries that have implemented fiscal austerity policies saw their GDP fall in the fourth quarter of 2010: Greece (-1.4 per cent), Iceland (-1.5 per cent), Ireland (-1.6 per cent), Portugal (-0.3 per cent) and Britain (-0.5 per cent). Countries like South Korea, which have had the biggest stimulus packages, paid for with higher debt, have recovered fastest.
Now the ECB has raised the cost of borrowing, even though in Portugal bank loans are already falling: that reduces domestic demand, employment and investment, further harming the economy.
The International Monetary Fund’s Global Financial Stability report says European banks are still “vulnerable to shocks”. Further, it says Irish and German banks face the most “acute” need to reschedule debt repayments: as much as half of all their outstanding debt is due in the next two years. German banks hold 225 billion euros in non-performing loans (loans which are unlikely to be repaid), while British banks hold 175 billion euros. Irish and Spanish banks hold 110 billion euros and 100 billion euros, respectively.
The eurozone’s taxpayers (or institutions backed by them) have already loaned about 208 billion euros to Irish banks alone. This is mostly down to the continuing exposure to the bust real estate market: 5.7 per cent of all homeowners are at least three months behind with their mortgages, representing possible losses of 8.6 billion euros to Irish banks. Anglo Irish Bank has announced losses of 17.7 billion euros, despite receiving 30 billion euros from the Irish government. ■