Too Big to Bail? Spain is Repeating Ireland’s Mistakes

“Spain is now heading down the same path that bankrupted Ireland,” INET grantee Stephen Kinsella of the University of Limerick and Mark Blyth of Brown University warn on the Harvard Business Review’s blog.

As Kinsella and Blyth point out, Spanish policy makers are making a huge mistake by following Ireland’s lead. Instead, Spain should be applying lessons from Ireland’s recent economic past.

“Ireland is not a role model for austerity policies, but rather a cautionary tale,” Kinsella and Blyth say.

The difference between Spain and Ireland – and it’s an important one – is that Spain’s problem is much bigger. Indeed, Spain has become what the two economists call “too big to bail.”

“Ireland went bankrupt stopping its banks going bankrupt,” Kinsella and Blyth write. “Spain simply cannot do this even if it wanted to: the problem is too big.”

They recommend several courses of action to prevent an Ireland-style collapse on a massive scale.

First, the Spanish government shouldn’t issue the same blanket guarantee on banking sector debt. Second, “either Spain’s bondholders should be lined up and politely told they are taking a loss, or failing that, most of the banks should be nationalized.” And third, the resolution of Spain’s banking problem must take into account both the creditors and the debtors in Spain.

“Right now, all resolution attempts are aimed at ensuring creditors get their money back” Kinsella and Blyth write. “A program of debt forgiveness, targeted to reduce moral hazard, is necessary given the precarious nature of the balance sheets of both financial corporations and households.”

“Spain can, and should, do better, if it learns from Ireland’s mistakes,” they continue. “If it fails to do so and follows the same path, the results will be too big to bear.”

Let’s hope Spain has learned this lesson.

Click here to read the article