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'The government should not bankroll airlines'

"If airlines lack adequate insurance coverage for natural disasters, they need to start planning better rather than ask the government for help", economist Daniel Waldenström writes.

Airlines have lost $1.7 billion from ash chaos
A volcanic cloud over airline SAS' earnings
“Let the troubled banks fall”

Not many days of travel chaos had passed before voices were raised demanding public support for the airlines affected by the Icelandic volcano eruption. It's difficult to wrap your mind around these demands.

A key objection is that creditworthy private businesses that are experiencing cash flow problems should be refinanced by their owners (who contribute more funding) or banks (that lend them money). The public sector, which ultimately means the tax payers, can hardly be subject to such a refinancing role for private commercial interests (unless we're talking about government-owned entities).

However, in a situation where the owners or the banks are having cash flow issues, one could perhaps justify a temporary government action. Is this the case here? Absolutely not. There are plenty of strong equity holders, both in the East and in the West. And Western banks are currently enjoying extremely cheap borrowing rates with the central banks, so they are definitely able to extend credit to businesses that are creditworthy in the long run. The fact is that this is the archetypal relationship between a bank and its clients; when the clients experience temporary cash flow problems, the bank, with its longer-term perspective, remedies the situation.

Some argue that we are presently experiencing a natural disaster (the spread of volcanic ashes) and that this justifies handing out taxpayer money to private business. But this is not a sustainable position either. Every farmer has since ancient times been forced to insure themselves against both expected and unexpected natural problems. There are even insurance policies for earthquakes and other large-scale disasters. If airlines lack adequate insurance coverage for natural disasters, they need to start planning better rather than ask the government for help.

Overall, it's difficult to see any valid reasons why the public sector should bankroll or act as patron for illiquid (and probably underinsured) private businesses that just as well can seek financial support in the private sector – if they deserve it. Let's hope that Minister for Infrastructure  Åsa Torstensson (C) also realizes this.

Daniel Waldenström
Associate Professor, Research Institute of Industrial Economics

Published in collaboration with the blog Ekonomistas.

Translation by Jonas Vesterberg,
U.S.-based journalist and communications consultant.

 

Last Updated (Wednesday, 21 April 2010 11:16)

 

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