Bail-in or Bail-out?

The European crisis is not over, nor is it even asleep. True, it doesn’t make headlines every day, but that’s because there is so much competition from around the world – and also because, after several years of Europe-dominated news, people outside Europe are suffering from ‘Europe crisis fatigue’. The Europeans themselves are also worn out and worn down by the ongoing crisis and its very real impact on most of them, in terms of shrinking economies, soaring unemployment and a deep and growing sense of hopelessness. The media refer to this as ’austerity fatigue’.

But, despite the frequent protestations of politicians from across the region, the financial and economic dynamics of the crisis are still very much at work in the background — until they abruptly flare up in this or that country. This week, it was Portugal’s turn to grab the limelight, for the first time in nearly three years. The Portuguese story is fairly standard for a PIIGS country, in that the austerity measures imposed on the country by the EU (read Germany) and the IMF have not really worked. They have crushed the local economy and sent GDP lower, unemployment higher and the country’s young people fleeing to wherever in the world they identify opportunity. But they have not made the government more solvent – rather the opposite.

As a prize for good behaviour on the part of the Portuguese government, in terms of its readiness to impose on its citizenry the dictates of Berlin, Brussels and Washington, the EU and IMF have repeatedly deferred deadlines regarding performance targets by the Portuguese economy. In other words, the Portuguese are trying hard, suffering much – but failing to achieve what was demanded from them. This week, perhaps inevitably, the domestic political struggle between those seeking to take the pressure off the economy and public and those determined to adhere to the promises made to foreign creditors led to the fall of the coalition government, triggering a political crisis.

What is especially interesting about this latest development is how it is playing out compared to previous crises, in Portugal and in other European periphery countries. The Portuguese stock market slumped, Portuguese government bonds fell heavily – but the impact in other countries was quite limited. The financial analysts noted with satisfaction that there was little ‘contagion effect’ to this latest political storm in Portugal – in sharp contrast to the Greek political crisis last year.

Yet at the same time, the realization is dawning that Portugal will never be able to pay back its massive debts – and that therefore there will have to be some form of debt restructuring. This is a polite way of going bankrupt and sharing the losses between different entities and groups. That realization is, ultimately, good news for Portugal, since without reducing its debt load, the country will never recover. But the bad news is that the creditors are also suffering from ‘fatigue’, and are no longer prepared to bail out countries again and again.

Instead, what is being talked about . is the prospect of a ‘bail-in’ rather than a ‘bail-out’. Whereas a bail-out sees outsiders coming to the rescue of a troubled entity, by extending new loans or writing off old ones, a ‘bail-in’ requires domestic players to be part of the rescue, by writing off or giving up some of their assets.

In the case of Greece, the bail-in imposed on the country took the form of a large reduction in the amount of debt owed to private sector lenders by the Greek government, especially domestic holders of government debt. In Cyprus, where the crisis was centred in the banking sector, the bail-in took the form of seizing deposits held by the public in the banking sector. At the time (a few short months ago), everyone was at pains to stress that the Cyprus solution was unique and not a template for future crises. The cynics scoffed at that and it looks increasingly as though they will be proven right.

The attempt to impose a massive wealth transfer from the public to the government may yet trigger a run on the banks across Europe, as was feared during the Cyprus crisis. The financial analysts view this as a potentially catastrophic development – but there are much worse things that can happen to a country than capital flight. Indeed, there are much worse things happening already, in Portugal, Greece, Ireland and other European countries, and that is people flight. Money is important, but people – especially young people – are more important.

France was abuzz this week because a leading businessman, Felix Marquardt, wrote in a New York Times op-ed piece on Sunday that the best hope for France’s young is to get out, leave, emigrate. Put differently, the only hope for Europe and its sinking countries and Union is for them and it to persuade the young generation to bail in by offering them an incentive to stay and work for a better future. Once the young are convinced that they have no job prospects and no future to work for, they will bail out and take their country’s future with them.

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