I am writing this while the future of the Greek bailout hangs in the balance and this made me start thinking about the whole concept of credit and limited liability. One of the central pillars of the Euro agreement was that there was to be no possibility of a bailout from the EU if a member got into difficulty. However, we saw countries scurry around and put together a rescue package to try and save the Greek finances. I suppose it could be argued that the deal was a refinancing deal with commercial rates (as far as inter-government rates might be) with proper commercial terms, which included a requirement for the Greek Government to sign up to certain austerity measures. Many at the time suggested that the deal was not affordable, and that was before the change of Government.

All things have a cost and we see small limited liability companies go to the wall almost without any thought, to the extent that the owners might be protected by limited liability, and we might argue that the lack of emotion is because so few are affected. Larger companies sometimes fail, but that often gets a few headlines in the press about bad timing (Note City Link), but they soon fade. Lloyds of London also got into difficulty when it created Equitas to runoff some of its difficulties, which lead to a number of names going bankrupt. It was not really until the financial crisis when it looked as if major banks might collapse that the idea of too big to fail really came to the fore. In the US, in particular, a number of small banks went to the wall but in the UK which is dominated by a few international banks, our Government thought that could not happen - Northern Rock was small enough to go, but politically what if one of the major banks had gone, taking with it the savings of many. So we ended up with an effective nationalisation, something Governments have done in the past for essential services, and the hope of eventual payback.

The question is whether Greece is too large to allow to fail. After all look at Iceland who have rebuilt their finances after effective collapse, the work the Eire has done in restoring its position and what of the other EU countries which might follow. Many might say that the population of Greece is a very small percentage of the EU population and the big impact would only be for Greece and Greek politicians, but what would be the overall impact. If Greece fails what next - actually I suspect the future of Portugal, Spain or Italy might be a factor, but my suspicion is that it also might be the impact on the global banking system (or more likely that of the EU) which is more of a worry.

Will a deal be done, I suspect so,but only at the last second. Will it last - probably not. A lasting solution for Greece will only be if it can balance its current account and we will worry about repayment later. I doubt that will be achievable, but the EU banking system needs more time to build its reserves from you and I, so that it can take the loss and in the interim Germany will have yet more fiscal and hence political trauma as the funder of last resort for the EU!

Jonathan Russell

Partner

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