Hamish McRae: Let's just accept it. They can't pay, and they won't pay

King and Trichet's real fear is that the politicians will fail to contain the sovereign debt crisis

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The Independent Online

If someone cannot repay a debt then there is not much point in threatening to throw them in jail and even less in pretending that they can stump up. That goes for individuals, for companies and for countries. The wise lender calculates how much of the debt can reasonably be repaid, writes off the rest – and vows not to make that mistake again.

And so it is with Greece. The European high command, in the shape of Angela Merkel and Nicolas Sarkozy, has agreed that there has to be a deal, something that has been blindingly obvious for the best part of a year, and that deal will accept that Greece pays back only half its debts.

As a consequence, several European banks will have to be recapitalised. To try to stop these concerns spreading to other financially-challenged countries, the European funds designed to bail out countries in trouble have to be beefed up. And if things really get bad the European Central Bank may have to flood the markets with liquidity.

All this has to be agreed in the next three weeks. And there is the first problem. Something that in principle is very simple is in practice fiendishly complicated. It is complicated technically: who shells out the money to recapitalise the banks and on what basis? It is complicated politically: how do you get the entire eurozone to agree? And it is complicated conceptually: to what extent is Germany giving an almost unlimited guarantee over the credibility of the eurozone.

Even if a deal can be done – and while that is an odds-on probability, there are huge risks – it does not solve the core problem of the eurozone, which is that the single currency has increased divisions within the region, not decreased them. The deal keeps Greece in the eurozone but maybe a spell has been broken. Exit is no longer inconceivable. The fascinating question now is whether breaking the spell changes things in ways we cannot predict.

An example: I was talking with an executive in a large company recently who acknowledged that it had to have a Plan B, to determine what it might do were the eurozone to break up. It did not expect this outcome but it had to be prepared. I suspect that every sizeable firm in Europe is carrying out a similar exercise. Once you change the psychology of both investors and corporate treasurers, then you change not just the day-to-day actions – which banks in which countries are on your list of places to deposit money – but you also change the longer-term plans on investment, location of regional headquarters and so on. Investors will always flip between optimism and despair and we have seen huge swings of mood in the past week. But corporations have to plan for the long term.

Actually large well-run corporations are pretty robust. Any company that operates globally has to cope with political uncertainty, dishonesty by business partners and its own staff, physical disasters, huge swings in input prices, sudden changes in consumer preferences – the entire gamut of commercial life. Individually they may make huge errors, but collectively they are tough, and I find that encouraging when contemplating present tensions.

So Europe and indeed the rest of the world cannot escape the issue: what if? The only rational explanation for the gloom of Mervyn King last week and Jean-Claude Trichet yesterday was that they both really fear the politicians will fail to contain the present sovereign debt crisis. The former warned of a worst ever financial crisis; the latter of the sovereign debt crisis becoming systemic.

It would really be towards the outer edges of the possible outcomes were what happens in Greece to trigger a series of sovereign defaults that went far beyond the other two members of the eurozone hospital ward, Ireland and Portugal. But if that were to happen – were, for example, Italy to default – then the eurozone would indeed break up in a messy way.

What do we mean when we refer to 'poverty'?

The word "poverty" is in danger of becoming devalued, and anyone who cares about social ills should be troubled by this. The expression "fuel poverty" is being used to show the way in which rising fuel prices have hit poorer people especially hard.

There are two main problems with the expression. One is that it is usually defined in relative terms – that is to say that poverty increases even if living standards of people in poverty are stable but the standards of society as whole rise. You can see merit in that argument but to classify people as poor because they cannot afford a foreign holiday would seem to many people of an older generation as odd.

The other problem is choice. All people make choices. If that choice is to live somewhere where they need a car, then a rise in the fuel price may indeed push them into poverty, however defined.

My point is simply this. There will be huge pressures on living standards over the next decade and society has to try and protect the vulnerable. But we should try and understand this and not use a concept as a slogan.



h.macrae@independent.co.uk

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