Small comfort, but most of Europe also faces big sovereign debts

Most Europeans appear to crave the certainties of pointing to other nations for their supposedly poorer economies, more corrupt politicians, lazier and more bloated public administrations, less efficient public transport and more potholed roads than their own. In the midst of the biggest economic crisis the world has faced since the 1930s, the Germans are currently at the top of the pile in the economic rankings, while the Greeks are popularly depicted somewhere buried well under some malodorous debt pile. In quick time, Greece has replaced Ireland in the international press headlines to head the rankings of the most profligate nation that turned the boom times into dust in the shortest possible time. Yet, it is somewhat alarming that an Irish national newspaper reporting on Athens can be blind about the almost identical debt burdens facing the two countries, and those of Britain, too. I read one account in recent weeks filed by an Irish journalist from Athens which failed to mention Ireland's debt problems and Britain's looming debt issues. After all, it is exactly a year ago this week that Ireland, paying Greek-style six per cent interest rates to service its government borrowings, faced the possibility of being cut off from the sovereign debt markets. Last spring, many big financial bets were waged on Ireland being only days away from sharing the fate Britain faced in 1976 of needing to call on the IMF for some ready cash. For Ireland, the market crisis has eased considerably, while it may only be starting for Britain. It appears that, even now, on the eve of the transfer of tens of billions of euro worth of private bank loans into the public taxpayer-supported National Asset Management Agency (Nama), that few people outside of Government circles realise the full horrors of what the banks were up to here in the last four years. A handful of banks loaned what amounted to half the annual worth of the economy to a small bunch of property developers. As a percentage of GDP, the amount of loans was probably greater than the banks of any country anywhere had loaned to a small concentrated group of borrowers. Outside of Iceland, it was probably a concentration of risk seen nowhere else in the world. The anger of taxpayers would be even greater if they comprehended that those who oversaw this disaster did it in a short time. From 2003 to 2007, the handful of Irish lenders - AIB, Bank of Ireland, Anglo Irish and the tiny Irish Nationwide - borrowed huge sums from abroad in bond debt and loaned out huge sums in commercial property loans. During a 48-month lending frenzy (in a shorter term than most drivers are allowed to pay back expensive car loans), the Irish banks pledged and bet multiples more of the nation's wealth that property and land prices would continue to soar. The lending of four banks, overseen by a handful of executives, to a group of about 100 property developers amounted to over €90bn, or well over half of Ireland's boom-time GDP. The hijacking of the banks is still little understood but the decisions of a small group of executives saddled Irish citizens with some of the biggest debts in the world in the shortest possible time. It represented the biggest dumping of private debt into the laps of public taxpayers anywhere in the world. It is not overly dramatising the numbers to say that it took only 48 months to transform an almost debt-free Government into one with one of the largest debt piles anywhere in the world. Greece may be facing the opprobrium of international commentators in recent weeks but Greece has better prospects of reducing its debt load than here in Ireland. The burden of this banking crash will be carried by Irish taxpayers for many years to come. In short, the legacy of those 48 months will be paid for by people who had absolutely no hand in creating a boomtime economy and certainly saw little of its fruits. A report published last week shows that the legacy of the boom times, not just in Ireland but across Europe, will be paid for over many years. Standard & Poors (S&P) is one of the world's three largest debt ratings agencies. For people who lend to companies, banks and governments, it ranks the probability or risk that they won't get their money back. The higher the perceived risk that the borrower, be it a company, bank or a government, will face difficulties in meeting its interest payments or default altogether in paying back the principal, then the company, bank or government will normally have to pay a higher interest rate to service its loans. In late 2008, people who lent money were exercised by the probability that world banks would fail to pay back their debts - all that bond debt the banks had raised to help fuel lending was at risk. Then, last year, the investors switched to fretting about government defaults, too, because governments had all but guaranteed that the private debts of the profligate banks would be met, in whatever circumstance, by their taxpayers. Hence, the private debt of the banks was, in an instant, transformed into public sovereign debt. Last week, S&P predicted that all 46 European governments it covers, including the big populous countries such as Russia, Germany, France and Britain, as well as the smaller nations like Ireland, will together need to borrow €1,446bn this year. "In our view, this record level of European sovereign borrowing will be the result of central governments' sustained high net borrowing requirements - government revenues are still depressed by only gradually recovering economies, while expenditure remains elevated by high unemployment and remaining fiscal stimulus measures, we observe," said the S&P experts in Frankfurt. They added: "We estimate that Italy will borrow €259bn in 2010, or 18 per cent of total European sovereign borrowing. We believe Britain will be on 15 per cent, Germany at 14 per cent, and France on 13 per cent will follow. Meanwhile, Spain, where gross borrowing has multiplied over previous years, has expanded the previous group of the four largest European sovereign borrowers to five, accounting for nine per cent of total European borrowing," S&P said. The rating agency believes that, in net terms, that Britain this year will be the largest borrower in Europe, at an estimated €189bn. Germany will need to borrow the least among Europe's top five borrowers, at €64bn in net terms, it says. All those national clichés are indeed becoming worn. Most of Europe is in the same boat. Some commentators believe Britain, with annual deficits larger than that of Greece and Ireland, could be facing similar stormy market turmoil as Athens and Dublin faced in recent times. So it's time to shake up the popular perceptions surrounding European indebted nations altogether.