Myth #8: „Financial aid is only delaying bankrupcy“

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Financial aid has to be repaid, it is not a gift

Financial aid is often misunderstood as a gift from the ‘rich’ EU countries to the ailing Member States. Bankruptcy may thus only be delayed but not prevented. However, financial assistance is not a gift but comes in the form of loans that have to be repaid.

Moreover, these loans also benefit the lenders. For example, loans from the rescue package allowed Irish and Spanish banks to service their outstanding debt obligations vis-à-vis other European banks that lent recklessly to the problem countries before the crisis. Without those rescue loans banks and other investors in Germany or Austria would have lost a lot of money and taxpayers in those countries would have been forced to bail out their own banks. It should also be kept in mind that creditor countries such as Germany make money out of the crisis as long as there is no default. On the one hand, the yield on German government bonds is historically low which has pushed down borrowing costs for Germany to unprecedented lows. On the other hand, the interest crisis countries have to pay on rescue loans is relatively high. This interest-rate spread is a form of profit that accrues to the lending countries.

myth 8

Whether the crisis countries will be able to fully repay their debt largely depends on the interest they have to pay on their loans. The lower the interest rate, the more likely will be its full repayment and the higher the rate, the greater the likelihood of a government default. The level of interest rates reflects the assessment of the market participants whether all debts can be redeemed, i.e. the more credible a repayment promise, the lower the interest rates. Conversely, a loss of credibility will act as a self-fulfilling prophecy, if exploding interest rates force an illiquid government into bankruptcy. In contrast, financial assistance and the associated economic reforms strengthen the credibility of crisis countries on financial markets and thus facilitate the repayment of their debt. For example, Ireland has already been able to issue bonds at affordable costs after two years of financial assistance.


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