OK, the Greek thing has happened. What happens next? It will either be Greece (again), or Portugal – and I don't know which. Either way, this is bad news for the European economy, for far from being on the road to a solution, it will linger on and on.
Greece has been billed as the largest sovereign debt restructuring ever, and I suppose that is right. It is also, as has been widely observed, the first developed country to go down that route.
But the thing that strikes me is that the scale of the loss to private bondholders is very large even by the standards of such events. They lose something like 70 per cent of the face value of their bonds and are given new bonds in exchange. But those new bonds are not worth their face value either, though we will have to wait for a few days and see how the market settles before we know quite what these things trade at. But it looks as though they may be worth only half their face value, with Louise Cooper at BGC Partners estimating the real loss at 80 to 90 per cent.
That says two things. First, there will be another Greek default/rescue. And second, this outcome is much worse for investors than the typical debt collapse of poor countries, where investors have got between 40 per cent and 60 per cent of their money back. It is even worse than the debt repudiation by Argentina a decade ago.
The reaction of many to this will be to say that people were fools to lend to such a dodgy country. I don't feel comfortable with that. Greece has a proud and independent history but has been ill-served by politicians and bankers. Had it not joined the euro it would have been OK, for higher interest rates would have curbed the excesses. As it is, Greece has the worst of all worlds. No one in their right mind would buy Greek debt; it has a huge burden of existing debt hanging over it; and it cannot escape by devaluing, or rather not yet – because that is what will happen in the end.
That is clear. But the sequence of events is not. As Christine Lagarde, managing director of the International Monetary Fund, warned: "They still haven't built this firewall that many people ask them to build.
"Let's assume, for a second ... the Greek deal that is currently in play doesn't work out. Let's assume for a second that this debt swap is a failure ... The Europeans have to stop the contagion because then there ... would be a risk that what happens in Greece, you know, percolates nicely to more risky territories because they're much bigger in terms of amount."
Bigger than Greece? Well, Portugal is smaller and the general perception is that it is next in the firing line. But were Portugal to need another rescue, the focus would then shift to Spain. At the moment, Spanish debt looks quite low by European standards, but there have been accusations that the official figures conceal the true debt. Already the yield on Portuguese and Spanish debt has started to climb. Clearly the markets are listening to Christine Lagarde.
But to focus on where the next crisis might be is to neglect the wider problem facing not just the eurozone but the whole of the developed world. This is that public debt is now at a level where it is likely to become a serious drag on growth.
The seminal work on this was done by Carmen Reinhart and Kenneth Rogoff in Growth in a Time of Debt, published in 2010. In this they looked at the historical relationship between the two and concluded that if public debt rose above 90 per cent of GDP it increasingly damaged performance. Below that level it did not matter too much. In other words, going from 40 per cent of GDP to 70 per cent did not do significant harm.
From the narrow perspective of the UK that would seem mildly comforting. We will have gone from around 40 per cent to something around 85 per cent before we get things under control again. We will, of course, get an update on our progress in the Office for Budget Responsibility's projections in 10 days' time. It is possible to be similarly hopeful about the two biggest eurozone countries, Germany and France, both of which are in roughly the same position.
But it is not easy to be comfortable about Italy, which has debts of some 120 per cent of GDP, nor of Spain, where, according to unofficial estimates, the country's real debt is around 90 per cent of GDP already.
Nor, I am afraid, is it easy to be comfortable with the developed world as a whole. The graph shows the debt position in simplified form: public debt in the developed world is already above 100 per cent of GDP, pulled up by the huge burden of debt carried by Japan (roughly 250 per cent of GDP) and the still-rising debt of the US. The eurozone actually is not in too bad shape, though this conceals huge divergence across the region.
The most striking thing, though, is the contrast with the emerging world. A decade ago it is true that our debt was higher relatively than theirs. But since 2007 our debt has been going up while theirs has been coming down. That is partly a function of our slow growth – negative growth in fact.
If an economy shrinks and the debt stays the same, its debt-to-GDP ratio rises even if its government is balancing its budget. But it bodes ill for the future if different debt levels build in differential levels of economic growth. Look at Japan.
So what's to be done? Goldman Sachs has carried out some work on this which deserves notice – and let's draw a veil over Goldman's contentious role in the Greek crisis.
The bank's conclusion is that there is actually no precise level at which high public debt damages growth, but whatever it is, debt needs to be unwound carefully. Institutions matter, for debt levels that cause problems in some countries don't cause problems in others.
I am afraid on the great issue as to whether countries should cut debts as swiftly as possible there is no clear answer – but cut debts they must.
Pension raids damage workers' mental health, and the taxpayer suffers as well
Pensioners aghast at the way successive chancellors chop and change pension regulations, or permit devices such as quantitative easing, which the National Association of Pension Funds reckons has cost them £90bn, have been handed new ammunition.
The latest edition of the Economic Journal, the publication of the Royal Economic Society, has an article demonstrating that raiding pensions damages mental health.
Research by Professor Maarten Lindeboom, Professor Andries de Grip and Dr Raymond Montizaan, looks at experience in the Netherlands after public pensions were suddenly cut. The study shows "that a sudden irreversible deterioration of future prospects has an immediate impact on the mental health of employees nearing retirement. This is especially true when their own employer reneges on pre-existing arrangements (violates an "implicit contract") in ways that are "difficult to adjust to once one has taken those rules into account in one's plans."
So public-sector workers in Britain would seem to have a right to be angry. But the people hit hardest may be the taxpayers as a whole. The report notes mental health illnesses among the old cost the state a huge amount. Whether a chancellor desperate for revenue is going to take any notice is a different thing, for an "implicit contract" is not something that looms large in Treasury thinking. Think back to Gordon Brown; raiding pensions is one of those political responses that crosses party lines.