Portugal’s emergency loan – why ‘bailout’ is the wrong word
I was on the BBC World Service programme “World Have Your Say” (programme site, blog) earlier to talk about the implications of the election success of Timo Soini’s True Finns party in yesterday’s parliamentary election. The discussion briefly examined the reasons for the support for this populist party, but the main focus was what the consequences will be for Portugal’s ‘bailout’ from the EU, as all 17 Eurozone members have to agree to assistance for Portugal. The BBC has a Q&A about it here, Gavin Hewitt is talking about political earthquakes here, and YLA has a summary of the main parties’ positions here.
But what is this ‘bailout’ actually?
What – importantly – does the image of ‘bailout’ conjure up in your mind? It’s the picture of water being thrown overboard from a leaking ship and – once the water is out – it’s subsumed into the rest of the ocean, lost.
Hence – in political terms – the very image of ‘bailout’ is wrong. It implies that the money (from the Finns in the case of Soini’s argument) will never be returned. But that is not so, as eloquently argued in this blog post by Henning Meyer at Social Europe Journal. Money is being lent, not given, and is being lent at rates at which lending countries will make a profit.
So this is not a bailout for Portugal. It is an emergency loan. That’s an important difference.
December 22, 2007 via Flickr, Creative Commons Attribution
In theory it’s an emergency loan, in reality it’s a bank bailout and the media is telling us it’s a country bailout.
The problem seems to be that the “bailout” is going through the problem countries just to go back to the banks of the lending countries. It’s just a roundabout way of “socialising” the investment risks of German banks with the effect of messing up the countries where the banks did their irresponsible business.
As long as Germany and Merkel is being stubborn the crisis will not have an end. Germany seems intent on scaring up the markets with comments like the Finance minister expecting Greece to default.
Great post, but I think that there are a lot of pressures for defaulting – in Ireland in any case – and the weak performance of the economies locked into austerity means that there’s a big risk that they will not be able to pay all the loans back. The loans were a good way of buying time, but unless the Eurozone can tackle the underlying problems (and perhaps allow some restructuring of debt – so the creditor Member States take a manageable hit), there will be calls to default now and get it over with, rather than going through austerity only to default under the post-2013 programme anyway.
It’s an emergency loan that can never hoped to be repaid, therefore it is a bailout – al la Greece who is inevitably about to default on its “emergency loan” any time soon.
If there was a prospect of the loan being repaid then those countries could have raised the money on the markets at a reasonable rate. The fact they can’t speaks volumes. It’s a bailout
Interesting discussion. I just read Henning’s blog post and what I pick out as the most important point is this:
“These bail-outs look much more like a stabilisation programme for major European banks than anything else by socialising the investment risk they took on without and honest and transparent discussion that this is what is going on. And most European mainstream parties continue their smoke and mirrors communication strategy on this matter.
In such circumstances it is no wonder that European voters are disgruntled, feel betrayed and are susceptible to radical parties.”
@Jon For me it is hard to see how something positive can be made out of such a flawed operation (collectivise private losses and risk while continuing to allow outrageous private enrichment in the financial sector). I agree with @Henning that if mainstream political parties don’t develop a better and fairer answer to the financial crisis, we’re in for some nasty political weather in Europe. So far I’m seeing not much reason for optimism.
I wanted to keep my blogpost focussed that’s why I didn’t go into the detail of the default risk. As it happens, I think a haircut is the best option in these cases anyway as the emergency loan facility does not change the underlying structural issues. That’s why I say it even more looks like a facility that is meant to protect creditors, not debtors.
Also, the introduction of different debt layers from 2013 is likely to make this even more messy. The default risk is generally already priced in the interest rate (that’s why the are skyrocketing now) but this also means that the investor is first in line to take a hit.
John, I agree that bailout is not the appropriate term.
But it’s wrong to suggest that these emergency loans will just generate profits for the lender countries. There is a real risk that the borrowing country defaults (reflected in prohibitively high government bond rates). In case of a default — and this is becoming an increasingly probably scenario for Greece — (part of) the money will not be returned to the lenders. And that’s what many EU citizens worry about.
“Emergency loan” probably does describe it best, but I think “bailout” is actually more PR friendly, since it suggests a kind of (misleading) closure to the whole thing. You need not worry anymore, Portugal, Greece, and Ireland were bailed out. But of course this isn’t honest.
“Emergency loan” begs the question – now what? We will get our money back?
So in conclusion – countries should keep their budgets in check and save us from these semantic disputes!
@Rob – another suggestion then? I want something that implies that the cash will be returned, it’s not all hopeless.
@Erik – that may yet prove to be the case, but only the prophets of doom are talking about this at the moment, talking us towards a default. Some concerted positive action, and positive vocab, would help.
The term “emergency loan” sounds a lot scarier than a “bailout”!