Ireland debt crisis: no gain without pain
As talks continue over a multi-billion euro bailout to save Ireland from financial fallout, Prof Andrew Clare writes that unless debt holders learn hard lessons the economic crisis will persist.
Andrew Clare is the Professor of Asset Management at Cass Business School and the Associate Dean responsible for Cass’s MSc programme. He is also the co-founder and chairman of Fathom Consulting, a leading London-based economic and financial market consultancy.
For some people personal trainers are a modern day luxury, for others they are our only hope of keeping our weight below that of an average hippo.
In order to encourage those of us that were not blessed with svelte-like figures, these personal trainers push us beyond the point that we would be able to push ourselves with banal phrases like “winners never quit, quitters never win”. Another frequently heard expression is “no pain, no gain”.
To be honest I would rather have gain without pain, but when it comes to personal fitness it seems that you can’t have one without the other.
Gain without pain
Which brings me to the case of Ireland. In our view Ireland is currently being offered gain without pain.
In the case of the Irish it’s not physical fitness without the sit ups, instead it is fiscal stability without having to truly recognise the bad debts that are festering at the heart of its banking sector. At the time of writing it seems likely that the Irish government will be bailed out by its sugar daddies in continental Europe.
It seems that the plan is simply to hand over enough Euros to ensure that the Irish government can carry on supporting its broken banks. This might be humiliating and therefore a bit painful for Irish politicians, but lets face it politicians are a thick-skinned breed, they’ll get over it.
Tough love
Without wishing to mix too many metaphors in one short article, the Irish can be thought of as a wayward young adult that has left the family home and then managed to run up debts beyond their means; too many nights out; too many holidays; and too much money spent on the latest gadgets.
It seems likely that the Irish government will be bailed out by its sugar daddies in continental Europe.
What this person probably needs is some tough love from their parents, rather than a bailout. Parental bailouts can become addictive. Worse still, it sets a very bad example to the other kids. In economic speak, it creates moral hazard.
Eurozone
But if Ireland needs a bailout, what about Portugal? Assuming that an Irish bailout is sufficient to satisfy Irish creditors, will the markets turn their attention to Portugal? It seems likely to us that they will. That is the lesson of the South East Asian crisis of 1997. With Greece, Ireland, and Portugal ticked off the list in the short term the big question is whether the markets will then go after Spain next.
The only way to put a stop to this sovereign contagion within the heart of the Euro is to recognise the losses in the banking sector, and to write off those losses at the expense of bank equity and bond holders.
It is the investors in bank equity and the holders of bank debt that really need to feel the pain, not the relatively lowly paid public sector workers of the Eurozone.
Until this happens there will be no gain, and the crisis, like an unwelcome beer belly, will remain for all to see.