States now the top systemic threat

Allister Heath
SO no solution was found to the Greek crisis last night – we will have to wait a little longer before finding out what sort of fudge our leaders have in mind for the Eurozone, and how much taxpayer cash they are preparing to throw at the bottomless pit that is Greece. The markets, needless to say, will recover a tad if and when a deal is finally announced, but everybody knows that handouts will only buy time. The real problem is that the Greek public doesn’t really want to change and simply doesn’t accept economic reality – and that the EU has been too slow to learn the lessons of the crisis of 2008.

One poll found that 47 per cent of Greeks reject the austerity plan and want new elections – and just 35 per cent back the measures. The Greek public is in denial: it doesn’t want to start living within its means – and yet ordinary hard-pressed taxpayers in other countries are being called upon to stave off Greece’s total collapse. There is no justice in that. There was, of course, no justice in bailing out Western financial institutions either, but at least it was domestic taxpayers helping domestic institutions. Governments got stakes in return, which lessened or eliminated the cost of the handout. Shareholders were wiped out, though bondholders and depositors survived. The main justification for those bailouts was that there was no Plan B: regulators had failed to come up with an up-to-date bankruptcy code to tackle institutions with massive balance sheets, allowing them to fail in an orderly manner and hence protecting taxpayers. Everybody is now working on such schemes, which will re-inject capitalist discipline and ensure that losses as well as profits are privatised – but unfortunately none are ready for the looming sovereign debt crisis. This is a tragedy. Had populist European politicians not spent the past three years cracking down on the wrong things (hedge funds, private equity, bonuses, universal banks), they might have had a bit more time to actually improve the resilience of their financial systems.

Greece’s bailout has three functions: to save the euro; to prevent Greece’s collapse; and to bail out indirectly the banks, insurance companies, pension funds and others who own at-risk Eurozone sovereign debt. Yet the euro is unsustainable and Greece can’t be saved against its own will. But the biggest error is the establishment’s inability to accept that increasingly, the biggest systemic risk will come from states, not private financial institutions. It is not just Greece, Portugal and Ireland – Belgium is in real trouble, while Spain and Italy are also in the frame. At some point, something will have to change in Japan, a country with an exploding national debt and a weak economy. America is also in terrible trouble, and not just because of short-term issues over debt ceilings.

Far from being the answer to everything, governments are the world’s biggest problem. Just like banks, states need to be allowed to go bust in an orderly manner. So here’s an idea: we need a new bankruptcy code for countries. There is no time to lose.

Lights, camera, action: after deliberating for weeks, we are delighted to be able to reveal the shortlists for City A.M.’s 2011 awards. Turn to p18 for the first five names; and from tomorrow we will be releasing the shortlists for two additional categories every day.
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