Bailed out European countries should default on their loans
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The concept of bailed out countries reffers to the financial help offered by foreign entities (organisations, banks) to states that an on the verge of facing bankrupcy or failure. (1)
In order for bailed out countries to prosper they will have to somehow regain competitiveness with the other economically stabile countries, thus implying focusing on the country’s recovery rather than paying back the loans.
Greece’s economy continues to shrink, while Ireland’s seems to have stopped losing ground but has yet failed to grow. Unemployment is above 14 percent in Ireland and even higher in Greece.
Datas imply that it is mandatory to adopt a more radical solution in order to cope with the situation and stop the crisis from spreading. What the affirmative team sustains in this debate is that a debt default (a haircut) is a more promissing way to tackle the problem. The term reffers to a partial payment of debt towards the creditors, recalculating the sum according to the ability of the state to cover it.
Though setting default on the loans of the EU-bailed out countries might seem like a huge demand for the creditors, it is a worth it. Rescheduling the term of the loan and recalculating it might be the answer for the situation ongoing right now.The leap of faith that we are discussing is the key, because it also implies a reassessment on the agreements between the creditor and the debtor, and also a shorter grip on the debtor, which implies a better cooperation.
The proposition team will take Greece, Ireland, and Portugal as points of reference in this debate.
Continued bailouts have proven an ineffective and potentially damaging alternative for Eurozone countries.
We begin our argumentation by highlighting the fact that the European Union has realized the menace of a bankruptcy of an Eurozone member, slowly accepting that harsher concessions are needed in order to avoid the chain reaction about to be triggered.
The main problem of the bail-out mechanism envisioned as a solution by the EU is that it is based on paying urgent debt with money provided by other debts. Having lost the market confidence, the bonds created by such a plan come with higher and higher interest rates, which created a snowball effect by worsening the burden these countries have to bare.
First of all, a disadvantage of the bail-out system is that most of the creditors of these three countries are foreign. By giving away large sums of money, the funds are not reintegrated in their economies by further investments that would produce profit. In other words, the countries mentioned are entering in a black whole not having assured a mechanism for them to re-activate their economies.
Secondly, the high interest rates (5.6 % in the case of Ireland, 9.5 % in the case of Portugal and 15% in the case of Greece) (1) have the effect of increasing the debt that the bonds were supposed to cover. Thus, the bailout helps with the liquidity on the spot, increasing the deficit in the long term. This is a reason why even after receiving loans to exit de crisis, Greece still has a 140% debt-GDP ratio. Without a default, the balance is estimated to reach 178% in 2018, whilst the recommended ratio is not supposed to exceed 90%. (2)
Lastly, there is a powerful impact of the austerity measures imposed in order to offer the loans, affecting the innocent taxpayers. It is debatable whether the states these have the total responsibility of the situation they find themselves in now. The case of Greece raises many questions regarding the indulgent attitude the EU had towards countries entering the Eurozone.
2 2. http://www.ze
The default would ensure an economical growth in the long term.
The question we have to answer to is why the risks of a default are less threatening than continuing to loan money to these countries for them to pay their constantly accumulating debts.
A default would help spread and reduce the debt shock. 70% of Greece’s creditors are foreign entities that would each suffer a proportional, smaller and more bearable loss by not receiving back the sums of money they loaned. Though the cost is clear from their part, on a large scale it is preferable to have the various creditors suffer than concentrating the whole burden to a single state.
Having analyzed Greece’s situation, Citi Bank concludes that the most sustainable solution for the country is to apply a 42% haircut, in addition to improving the fiscal discipline and make privatization efforts. Thus, they estimate that the debt-GDP ratio could fall below 90% in 2013 and below 60% in 2020. (1) To be clear, we are not denying that there are some unwanted side-effects of this measure, amongst them a reduced access to capital markets as creditors would lose their trust, and also a need for recapitalizing the banks affected by the default. However, as the study points, starting with 2013 Greece would be able to re-enter into the capital markets, and thus, sustainably recover. Moreover, it is the only solution that would reduce the pressure of the unpopular austerity measures.
The example of Argentina’s default sustains the line of reasoning mentioned above. The country’s economy started growing again with a surprising 7%, only two years after the measure was imposed. (2)
What do you think?