October 25, 2020

News Analysis: A Bailout by Any Other Name

That is the cautionary lesson from the latest revamping of Greece’s financial rescue deal, according to some economists. And they warn that unless Europe starts enforcing its own stated rules against bailouts and big budget deficits, governments will never get serious about putting their financial houses in order.

Of course, none of the finance ministers who worked out the new financial terms for Greece in Brussels called it a bailout. But for critics it was precisely that. By reducing interest rates and extending the payback maturities on the €168 billion, or $217 billion, that European governments have lent Greece so far, those loans will now become barely profitable for the countries that made them.

As such, it is the sixth bailout since the European debt crisis exploded in 2009 — three for Greece and one each for Ireland, Portugal and Spain. And these rescues have occurred despite the fact that the treaty underpinning Europe’s common currency project bars bailouts by forbidding one member country from assuming the debts of another.

But if the majority of euro zone countries did not consistently flout another treaty principle — the one limiting a member government’s debt to 60 percent of gross domestic product — there would not be a euro zone debt crisis in the first place. Greece might be the most glaring violator, but Germany and France are also breaking that rule.

Although it buys time for Greece, the latest debt deal has been widely criticized for being overly optimistic in expecting Greece to produce the growth and fiscal discipline needed to bring its debt down from the level of 195 percent of G.D.P. today to below 120 percent after 2020.

Skeptics cite Germany’s demand that Greece impose another round of spending cuts in return for this latest dispensation as further proof that the architects of monetary union have decided that the last best hope for the euro’s survival is to continue subscribing to the principle that punishments and threats from Brussels will keep spendthrift nations from falling into hock.

But some economists contend that as long as countries in trouble continue to accept that they will get bailed out when they run out of money, there will be scant incentive for them to accede to the demands of the euro zone’s stability and growth pact, which requires countries to keep their debts and deficits at reasonable levels.

“There is an acknowledgment in Brussels and Berlin that the stability pact has not worked because it was not strong enough — so now they have tried to make it tougher by imposing more punishments,” said Charles Wyplosz, an international economist at the Graduate Institute in Geneva who contends that latest Greek debt deal is nothing more than another bailout. “But what they don’t realize is that this will not work as long as local parliaments remain sovereign.”

In a recent paper, Mr. Wyplosz argues that the only way sovereign states will become fiscally responsible over the long run is when they truly grasp that Brussels will abide by the founding treaty’s prohibition against country’s bailing out one another.

He points to the United States as an example.

With dozens of states that manage their own fiscal affairs, yet operate comfortably within a federal system, the common currency system in the United States has long been seen as a model by those who seek improvements in euro zone policy.

At the root of this success, say proponents of the U.S. model, is the fact that despite there being no law or constitutional provision against the federal government’s bailing out bankrupt states, in the past 150 years there has not been a single case in which Washington has had to rescue a penniless state.

And the last time a state went belly up was in 1933, when Arkansas stopped paying investors who held its highway bonds.

To be sure, as the economist C. Randall Henning, an expert on the topic, has described in detail, in the early years of the United States, the federal government presided over numerous bailouts — until Congress said no more in the mid-1840s.

For better or worse, American states got the message and the majority of them have adopted various legal statutes that require them to balance their budgets each year.

Article source: http://www.nytimes.com/2012/11/29/business/global/a-bailout-by-any-other-name.html?partner=rss&emc=rss

Deficits in Regions Compound Fears About Spain

Instead of opening, however, the centers, which were built at a cost of €14.5 million, or $21 million, are among 10 social and health infrastructure projects in the city that have been mothballed. The regional government of Catalonia, of which Barcelona is the vibrant, seaside capital, does not have the funds to operate them.

Despite its reputation for economic dynamism and the international allure of its golden beaches, Catalonia is facing a financing shortfall that has not only upset its drive toward greater autonomy from the rest of Spain, but also deepened market concerns about faltering fiscal discipline among Spain’s 17 regions.

Indeed, the failure of Catalonia and eight other regions to meet their 2010 deficit targets has helped to keep worries about Spain’s long-term financial footing alive, despite significant improvement at the national level.

Catalonia, which has traditionally been one of the wealthiest and most industrialized regions in Spain, is now among its worst performers.

Its recently elected government faces the daunting task of having to cut its budget deficit by two-thirds this year to fall back in line with targets set by the central government. At the same time, borrowing costs are rising, adding to an already heavy debt pile.

“For the general population, there has been surprise and even shock at the state of our finances,” Andreu Mas-Colell, the finance minister of Catalonia, said during an interview.

He is planning to cut public spending 10 percent this year, but still expects to have to borrow about €11 billion.

With an economy the size of Portugal’s, Catalonia accounts for 16 percent of the Spanish population, 19 percent of the country’s gross domestic product and 27 percent of its exports.

Catalonia’s €30.3 billion of debt, however, represents 28 percent of Spain’s combined regional debt pile, according to figures published in December by the Bank of Spain.

Its budget deficit reached 3.9 percent of its regional output last year, compared with a target of 2.4 percent. As a proportion of output, Catalonia now has the fourth-highest deficit and the second-biggest debt ratio among the 17 regions.

Warning of “challenges that will persist throughout this year,” Moody’s last month downgraded Catalan debt, alongside that of three other regions and the sovereign debt of Spain. The credit rating agency also cut the rating for the Barcelona city hall.

Catalonia’s difficulties are no different from those that have brought pain to the whole of Spain, with a credit crunch resulting from the worldwide financial crisis coinciding with a bursting of the real estate bubble that has left banks struggling to provision for bad loans.

Furthermore, Mr. Mas-Colell and others suggested that in the months before the election last year, governing politicians took their eye off the ball in an ultimately unsuccessful effort to keep their fragile, three-way party coalition in power.

“The fiscal adjustments that any sensible person should have seen as necessary two years ago didn’t start then, and some of them are only starting now,” Mr. Mas-Colell said.

The new Catalan government, however, has not allowed financial squeezing to undermine its push for more autonomy, from efforts to keep some ailing savings banks under Catalan control to a recent €10.5 million emergency loan to Spanair, a struggling airline based in Barcelona.

The financial difficulties have heightened the tensions that flare frequently in the decentralized Spanish political system.

Last month, Prime Minister José Luis Rodríguez Zapatero introduced energy-saving measures to offset rising oil prices that included ordering regions to cut fares on commuter trains 5 percent to encourage more use of public transport. Catalonia has led a campaign against the measures, refusing to shoulder the financial burden at a time when transport operating costs are rising.

Mr. Mas-Colell accused Mr. Zapatero’s government of setting double standards. “We get scolded in the morning for spending too much and a measure is then taken in the afternoon which has to be paid by us.”

The problem, many local commentators claim, lies not with past extravagance or mismanagement but with a national financing system that has left Catalonia contributing the equivalent of 10 percent of its G.D.P. to support poorer regions through taxes collected by the central government in Madrid.

Article source: http://www.nytimes.com/2011/04/01/business/global/01catalonia.html?partner=rss&emc=rss