Charles Forelle writing in the WSJ points out some of the risks peripheral nations like Ireland and Portugal still pose for the Euro area, including the chances of our export-led growth strategy collapsing if the international economy begins to sputter, and the possibility of debt forgiveness and/or restructuring. From the piece:
Beside the government debt, Irish households are also heavily indebted—household debt hit €185 billion last year, or 119% of GDP. That’s down from the €203 billion peak in 2008, but it’s still more than twice household income.
“We are going to have to make a choice: What do we want to restructure”—government debt or household debt? asks Constantin Gurdgiev, an adjunct lecturer in finance at Trinity College Dublin and head of research for St. Columbanus AG, an asset manager.
Much of the debt is mortgage-related, and the government has faced intense pressure to craft a mortgage-relief program for homeowners, something it has resisted. Data show rising mortgage arrears and rising levels of negative equity among borrowers.
It’s a risky move. If too many borrowers with negative equity “strategically default,” the cost becomes huge for Irish banks, which would then have to turn to the government for more help—in effect, household debt would be transferred to the government.
“At a macro level, a debt-forgiveness scheme makes sense because people will be consuming rather than paying their debt,” says Philip Lane, professor of international macroeconomics at Trinity College Dublin. “But the scheme has to be surgically targeted so only the people most in need use it.”