Wall Street Journal
March 9, 2011
People often forget that Polonius's famous admonition was a warning to borrowers as well as to lenders. In Europe today, all eyes are on borrowers in trouble, such as Ireland. But lenders are in danger, too, of losing both capital and friends.
Irish politicians and many commentators have criticized the high interest rates (close to 6%) that the European Financial Stability Fund has set on Ireland's €67.5 billion loan. The rate is far greater than the growth rate Ireland can hope for anytime soon. It will thus lead to a snowball effect under which high interest payments increase Ireland's debt burden faster than its economy, and thus its government, can create the resources to service it.
However, this widespread impression that the "bailout" of Ireland constituted an onerous interest-rate diktat is misleading. A much larger "bailout" of Ireland, on very generous terms, has taken place silently via the balance sheet of the European Central Bank. Here again public attention has focused on a side-show, namely the ECB's direct purchases of distressed government bonds. The portfolio of government bonds held by the ECB under this so-called "securities markets program" so far comes to only €76.5 billion, of which only part will have been in Greek and Irish bonds. The ECB has not provided any fresh money to the countries concerned by buying their bonds in the secondary market; it has only increased the price at which some investors were able to sell their holdings of Greek and other bonds.
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