Too Big to Fail Becoming Too Big to Bail

The Irish are having another awful year. Not the Fighting Irish mind you, their year could better be described as mediocre, but hopeful. The future prospects of the nation of Ireland on the other hand are anything but hopeful. Having just announced an $113 billion bailout to rescue its banks, Ireland’s economy is still hovering on the brink of collapse. The luck of the Irish has apparently run out.

They are not alone. Earlier this year the EU was forced to bail out Greece whose public indebtedness had grown to crisis levels and the government threatened to default. The debt contagion is spreading fast across the Eurozone. Spanish, Italian, and even German bonds yields have risen sharply, an indicator that investors are reluctant to hold them in the event that the Euro tumbles. With Ireland being the latest domino to fall, the European Union is now resigned to looking around and wondering who is next?

Sadly, it doesn’t take much effort to find that Portugal will likely be next in line to come begging for a bailout. As the New York Times reported, “Investors have been alarmed by Portugal’s inability so far this year to stick to its pledge to cut its bloated deficit. In fact, in the first nine months of the year, the budget deficit of Portugal’s central government widened 2.3 percent from a year earlier to $12.7 billion.” The rising debt will also lead to an increase in spending that must be devoted to maintaining interest payments, which the European Commission has already warned will be the be the fastest-growing spending item and a major factor hindering improvements in the government balance in the coming years.”

Among Portugal’s other problems are poor economic growth and a disastrous unemployment rate. The European Commission found that Portugal’s real GDP growth will actually be in the negatives – about -1 percent – this year before returning to sluggish growth in 2012. Likewise, its unemployment predictions are dire. The unemployment rate is expected to rise from 9.6 percent this year to 11.2 percent in 2012. With economic indicators headed in the wrong direction it could be a fast slide into bankruptcy unless drastic measures are taken.

Massive government debt, poor GDP growth, and an unseemly employment rate – sound familiar?

In response to its enormous deficit Portugal has put forth the beginnings of an austerity plan. Among the government’s proposals to reduce the deficit from 7.3 percent of GDP to 4.6 percent (by comparison the U.S. deficit was 10.6 percent of GDP in 2010):

  • Five percent cut in private sector pay
  • Two percent increase in the national sales tax
  • Selling off state-owned stakes in 32 companies
  • Introduce a new tax on profits made in the stock market
  • Raising the surcharge on companies whose annual profits exceed 2 million euros from 25 percent to 27.5 percent
  • Create a new 45 percent tax bracket on incomes over 150,000 euros a year

This is our future if we do not preemptively work to get our deficit in line. Western governments are falling like dominoes, the result of unsustainable government spending and ever-more burdensome social welfare programs. The national debt is not just a number. It represents very real dollars that our investors would like to be paid back. We must not let our nationalistic pride blind us from the fact that we are not immune from the same fate. Thus far our status as the world’s reserve currency and our place as an economic power have shielded us from bondholder worry. But with our balance sheet bleeding red ink far into the future, how patient will the holders of our debt be?

Unlike Greece, Ireland and Portugal, we shouldn’t wait to find out. In a gesture of good faith to our investors and an act of necessity to our citizens our government, we must begin to make the painful choices necessary to get our debt under control. As one economic researcher noted about Spain, “it is possible that too big to fail becomes too big to bail.” With the largest economy on earth, he might as well have been talking about us.

by Brandon Greife, Political Director of the College Republican National Committee