Hamish McRae: Whatever the outcome of the talks, the taxpayers will have to pay out more


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The Independent Online

Yes, but what is actually going to happen? We will get some sort of outline deal out of the European summit today, but neither the detail nor the full consequences are likely to be immediately apparent.

Whether the "haircut" imposed on Greek bondholders is 50 per cent or 60 per cent and how the European Financial Stability Facility is geared so that it can guarantee more sovereign debt is of considerable significance to holders of Greek debt or would-be buyers of Italian bonds.

But for Europe as a whole the thing that matters is that Greece is on some sort of a path back to a position where it can borrow money again from willing lenders, and whether investors feel they can safely lend to Italy – or Spain – and have a half decent chance they will get their money back.

Unfortunately, the greater the losses investors have to accept on Greek debt, the less likely they are to want to lend to Italy, or even France. France has seen the gap between what it and Germany have to pay for their loans widen to the greatest amount since the euro began.

That points to a fundamental dissonance between politics and finance that has really only become clear in the past few weeks. The dissonance is that the political pressure is on governments to impose as much as possible of the burden on private holders of Greek debt – the "make the banks pay for their stupidity" argument. But the greater the loss, the greater the premium those holders will impose when making new loans, not just to Greece but to any even slightly suspect eurozone country. Either way, the taxpayers pay more.

But this does, however, give us a benchmark to measure the success or otherwise of the action Europe is taking. If, after a few days, the spreads narrow between German bonds on the one hand and Spanish, Italian and French bonds on the other, then this summit will have achieved some sort of success. It will have bought a bit of time.

That must be the more likely outcome. If they don't, or at least don't narrow significantly, then I am afraid the next summit will have to come up with something else, and fast.