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A Tale of Two Bailouts Revisited

February 11, 2011

The March edition of Vanity Fair has a very interesting and in-depth article about the history of Irish property bubble and how this lead to the Irish government’s fiscal problems, eventually leading to Ireland needing a bailout from the EU, IMF, UK, and others.  Many American readers might be struck by how this property bubble is sadly similar to the Savings and Loan Crisis in the 1980s in the U.S., where banks loaned large amounts of money to property developers who in turned built more houses and offices than the market needed.  In both cases, the banks discovered that they had a lot of bad loans and the government decided that they had to rescue the financial institutions.  Of course, a big difference is that the U.S. could safely afford the S&L bailout whereas Ireland’s economy could not.

As I have argued before, while it is convenient to talk about Ireland and Greece in the same sentence, it really is a Tale of Two Bailouts.   Michael Lewis convincingly argues that Ireland’s financial mess is the cause of a hand full of Irish banks (much like Iceland’s recent problems), but Greece’s problems have other causes—namely borrowing too much money when times were good and loans were cheap, only to discover that you cannot afford to pay back the loans when the economy slows down, nor had you made the reforms necessary to keep the good time rolling.

Lewis also points out that while the Irish are somberly accepting the fact that everyone will now have to pay because of a few banks, the Greeks have taken to the streets to protest wage and benefit cuts when the blame for the crisis is more evenly spread out among the Greek government and citizens.  To highlight this difference, NPR reported on Friday that there is a rising “We Won’t Pay” movement in Greece of people refusing to pay tolls, bus fees, etc.  Besides the fact that these fees are for specific services, it also begs the question “If the government is already in trouble due to a mountain of debt and not paying for services is going to increase this debt, how will the government service its debt?”  Unfortunately, this question might already be academic, as Greece is still on the edge of the abyss and Greece might still go bankrupt.  In fact, The Economist recently modeled the government debts of Greece and found that they were unsustainable.

As a result, the EU must still act to support the euro, but with member states having fiscal trouble for different reasons, how does one create a unified policy?  As a result, much debate about a solution remains in Europe.

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