COMMENT
Breadcrumb trail navigation:
By Simon Tilford
Published: May 12 2011 11:38 | Last updated: May 12 2011 11:38
Even as the ink is drying on Portugal's European Union and International Monetary Fund bail-out agreement, evidence is mounting that last year's bail-outs of Greece and Ireland have failed. Far from improving their access to the financial markets, Greece and Ireland face record borrowing costs. Notwithstanding the slightly less draconian terms of Portugal's agreement, it will surely suffer a similar fate. The EU will try to get away with "soft" restructurings, involving a combination of longer maturities and lower interest rates. But this will not work and by 2013 there will be no viable alternative to "hard" restructurings (default), comprising debt write-downs of 50 per cent or more. Unfortunately, in the case of Greece and Portugal at least, even this will not guarantee continued membership of the euro.
After all, interest payments on the crisis-hit countries' outstanding public debt account for a relatively small proportion of their budget deficits. Reducing the cost of servicing the outstanding stock of public debt by 50-60 per cent would make these countries' fiscal positions more sustainable. But unless the defaulting countries can engineer a return to economic growth, they will continue to struggle to tap the capital markets on anything but prohibitively expensive terms. Of the three peripheral economies, only Ireland stands a good chance of convincing investors of its solvency.
You have viewed your allowance of free articles. If you wish to view more, click the button below.
Read Full Article »