Guardian
July 6, 2011
Wednesday was one of the bloodiest days on the debt markets this year. The cost of insuring loans issued by Greece, Portugal and Ireland soared after Moody's interrupted the wrangling in the EU over how to bail out Greece for a second time with a Rapier missile.
The ratings agency warned that plans to engineer a rescue by forcing French and German banks into a "voluntary" rollover of Greek debt had terrible implications for Portugal. And while it didn't mention Ireland, everyone knows Dublin's debts are next in the firing line.
Moody's analysis highlighted the contradiction in the plans, which, as they currently stand, will involve banks extending their loans in exchange for a complex form of debt insurance. As far as Moody's is concerned, the private sector is being press-ganged into supporting the bailout, which must lead to a boycott on lending to other bailed-out countries. Why should a private lender – a pension fund or bank – loan money to Portugal, when a debt problem down the road will be resolved with private sector sacrifice? It is entirely fair that the private sector share the pain when their loans turn sour, but the word "fair" doesn't have much currency among private investors seeking the highest yield at the lowest risk. In these circumstances, German bonds or US treasuries seem like a better option. And there was little surprise on Wednesday when figures showed the cost of insuring both declined.
Without an EU-wide plan of debt forgiveness, none of the bailed-out countries will escape social unrest or worse. They can never grow fast enough to pay off the debts. It will hurt the French and German exchequers, and will seem unfair to other countries who have restrained their borrowing, but there is a price to preserving monetary union and no amount of clever dealing in Brussels will escape that fact.
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