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Something's got to give

Economic storms continue to batter countries throughout Europe as their governments struggle vainly to keep their heads above the tsunami of debt.

After weeks of wrangling among the eurozone countries an agreement was reached on a support package staving off state bankruptcy for Greece and the collapse of the euro. Backing from the International Monetary Fund and the European Central Bank was judged sufficient for the country’s government to return to selling its debt on the international bond markets to raise the cash needed to fund its monumental deficit.

But international investors are yet to be convinced by the Greek government’s ability to impose its programme of further austerity measures on its unwilling population. The 5.9 per cent interest payments needed to attract buyers for its latest €5 billion issue turned out to be much higher than was hoped for.

Now the additional costs will have to be passed on in the form of deeper “structural reforms” which are certain to further destabilise the already volatile political crisis and intensify the conflict with the Greek trade unions.

Meanwhile, on Europe’s western extremity, Ireland’s National Asset Management Agency began operations yesterday as the country’s “bad bank”, buying up the “impaired assets” that litter the country in the wake of the global financial meltdown and continuing recession.

NAMA is just one part of the Irish government’s attempt to steady its economy, which has suffered the most severe contraction of any industrialised country: the value of annual national output shrank by a cumulative 12 per cent in the three years to 2009.

The basic idea is that NAMA will buy up the banks’ bad debts and valueless property, in the process cleaning up the economy so that those left standing can return to the old game of turning a profit.

But there were shocks in store when NAMA announced the scale of the operation. It has counted up the face value of the toxic debts in the economy and arrived at a figure of €81 billion, which is equivalent to almost half the total value of all goods and services produced in the country in 2009.

The new agency is highly experimental. Nobody knows if what it is supposed to do will work. The terms of its first round of purchases stunned the markets. It is buying property-based loans with a book value of €16 billion. But NAMA has the power to set its own price, and it has awarded itself a discount of 47% based on the current market value. The agency is set to become the owner of hundreds of pubs, empty office blocks, abandoned shopping centres and acres of unused farmland, as well half-finished housing projects abandoned by bankrupt speculative builders.

As part of the deal, the newly state-owned Irish banks are required to restock their capital balances after years of floating on thin air. They are €32 billion short, so they’ll have to sell off their valuable assets in the US, the UK and Poland. This action will reverberate throughout the world.

In the meantime just like Greece, Portugal, Spain, the UK the US, and a growing list of countries facing up to state bankruptcy, Ireland has to set about reducing its budget deficit which is the second largest in the eurozone after Greece’s. Something’s got to give - and it is already. The British state is apparently preparing for emergency political measures in the event of a hung Parliament after the upcoming general election to prevent a run on the pound. We'd be well advised to prepare for all eventualities ourselves.

Gerry Gold
Economics editor
31 March 2010

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