CNN en Español interviewed senior fellow Liliana Rojas-Suarez on the importance of the Euro Crisis.
Summary of the interview:
Commenting on the recent Irish crisis, Rojas-Suarez expressed concern that the crisis may cause a domino effect in countries like Portugal and Spain, and it may even have a possible effect on the sustainability of the euro. Further, concerning Latin America, she argued that a Euro Crisis could affect the region through trade and financial channels.
Comparing the Irish crisis to the Argentinian crisis, she noted several similarities. Among them, she said the most important one was that both countries developed problems in their banking systems. Just as in Argentina, the greatest fear in Ireland is currently a massive bank run, which occurred in Argentina and ended in default. In the case of Ireland, the Government gave a “blank check” to bail-out the banks, and the result was a government deficit of 32% of GDP. However, in spite of all the financial support, the risk of a bank run may not be avoided. Rojas-Suarez argued that a bank run would result in a default of Ireland’s government debt since the interest rates that the Irish Government would have to pay to meet its obligations would be extremely high.
She also agreed with the comments of Mr. De la Rua, former president of Argentina, who said that the IMF has played a better role during the Irish crisis than in the Argentinian case. Rojas-Suarez argued that this is because the IMF recognizes the importance of maintaining economic growth. Because of this it does not want the fiscal adjustments to be excessively drastic, as requested by the European Union, since the effects on growth could be too severe, leading to political pressures that would force the authorities to reverse the fiscal adjustment. Under such circumstances, investors, including local depositors would conclude that a default is inevitable.
Rojas-Suarez is not optimistic about the near and medium term future. Germany is doing well, but its citizens are growing increasingly reluctant about absorbing the costs of rescuing peripheral countries. The German authorities have announced that the private sector should also share the costs of the crisis. This process, known as bail-in implies that bond holders of Irish debt will have to accept some reduction in the value of these assets. A potential problem with the introduction of bail-ins in the middle of a crisis, however, is that bondholders might try to get rid of the bonds, which in turn would induce an increase in the borrowing costs faced by the Irish authorities. If the costs increase excessively, the Irish authorities would find it harder and harder to roll-over existing maturing debt.
In Rojas-Suarez’s view, Greece and Ireland are currently at serious risk of a default and that the coming months will reveal whether countries such as Portugal and Spain also join this group, and, most importantly, whether the Euro remains a viable currency.