Wednesday, December 1, 2010

Eichengreen on the Irish Bailout

Barry Eichengreen has an important, and terrifying, article on the Irish bailout.
The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.
The big problem is the unwillingness of anyone to force bondholders to take a haircut. But if the debt is not restructured, the problem is not solved, just postponed.

One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.
And so it goes.

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