Wednesday, December 1, 2010

Repaying sovereign debt

Ireland's EU/IMF bailout plan places the full burden of the crisis on the borrowers, rather than making the lenders pay something too (something that should have been judged both fair and prudent). For both economic and political reasons, this is going to make successful resolution of Ireland's crisis that much more difficult. Barry Eichengreen has a scathing piece in Germany's Handelsblatt newspaper on this today (translation here; the German title is far better than the English one, though).

Given the high likelihood that Ireland will need to return to the negotiating table for some new solution, concerns about the handling of potential similar problems in other eurozone states are mounting. Willem Buiter, Chief Economist at Citigroup, has a good economic overview of the problems facing European sovereign debtors in particular: Sovereign Debt Crisis Update. Figure 34 in this article is particularly interesting (or worrisome).

Key points from Buiter's conclusion: "There is no such thing as an absolutely safe sovereign," "the distinction between public and private balance sheets can become blurred in a crisis." Not grounds for great optimism, in other words.

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