There was a time, not so long ago, when we were taught that it--- was practically impossible for a country to be declared bankrupt. Our tutors would at most concede that maybe some South American and Asian countries could conceivable default,­­­­ but Western style economies were unlikely to do so because they could either devalue their way out of trouble or increase taxes.

The Greek bailout earlier this year found most euro area political leaders unprepared. After weeks of dithering they mounted a joint rescue plan that ensured that Greece could still find the money to pay its maturing debts. Capital markets calmed down and the sovereign debt of euro area countries became attractive again in the eyes of investors. In these last few weeks the sovereign bond market has once again faced substantial turmoil and calmness has once again evaporated.

With investors becoming increasingly jittery about the prospects of a reasonable economic recovery in Ireland, with the Greek government facing a slumping tax revenue, Portugal facing political gridlock over next year’s budget, and Italian politics engulfed in the latest allegedBerlusconi sex scandals while the economy stagnates, investors’ patience and optimism is wearing out. But what really upset the bond market was the agreement reached in Brussels in late October that upheld the thesis of the new Iron Lady, Angela Merkel, that investors rather than taxpayers should in future pay the price for irresponsible debt building by eurozone countries.

The genuine anger faced by European taxpayers during this year as they saw their governments borrowing more money to bail out banks and other large businesses facing bankruptcy is palpable in most city centres throughout Europe. Many ordinary workers are losing their jobs while their political leaders introduce austerity measures to bail out banks that, if they were to fail, could pull down the whole economy with them. So far it has been the taxpayers that have underwritten the repayment of this excessive public borrowing.

But it was not just banks that indulged in irresponsible behaviour. Governments courting popularity on the eve of important electoral appointments made equally irresponsible promises to deliver goods to the electorate that the economy could not afford. They really promoted the dangerous notion that overspending was not really a problem because in the end we could always borrow more money to make both ends meet. If investors were prepared to lend us this money today, why should we not grab it and let tomorrow take care of how we will pay it back?

One has to admire political leaders of substance like Angela Merkel who, rather than injecting her people with complacency, as most Club-Med countries are doing, spoke about the need for austerity to strengthen the already viable German economy. She did pay a political price for all this, but in the end she did what was right for her country, and indeed for the euro area.

In a few years time countries facing bankruptcy like Greece, Ireland, Spain and Portugal will know that they have to pay a high price to be rescued from their own irresponsible fiscal behaviour. The new element that the latest Brussels agreement on state bailouts has introduced is that in future, investors who buy sovereign bonds of these countries will have to share the cost of the bailout with taxpayers.

It is this element that has upset the bonds’ market. Investors immediately factored in a premium for the perceived increase in their risk. Silent taxpayers’ could no longer be considered as guarantors of repayment of last resort.

The European Central Bank governor, Jean-Claude Trichet, expressed “deep concern” about this development which he believes could upset the stability of the bond market. But political leaders, for once, acknowledged that they could no longer ignore taxpayers’ concerns. The EU leaders decided that if a country and the investors who lent it money faced bankruptcy, than the taxpayers should not be asked to carry the burden of bailout on their own.

Now that the political leaders have reluctantly agreed on the way ahead, it may take up to three years for the fiscal screws to the tightened by the bureaucrats in Brussels. But the signals are loud and clear. Investors who are prepared to lend money to irresponsible governments can no longer rely on European taxpayers to bail them out.

jcassarwhite@yahoo.com