Irish Bond Spreads Up Sharply

Common sense ???
Take your heretical ideas else where Mister!

It’s funny to watch the lack of interest (and yours) in this. It’s almost invisible on newscasts, and yet it’s like a tsunami is about to hit -one that could make topics like NAMA seem like a side show.

Old Europe is a bit tired. Regulation lags speculation, and there’s a pot of money to be made shorting vulnerable sovereigns.

As Edward Harrison put it on Seeking Alpha:
‘this looks like the moment when the Greek problems really start to generate contagion across the eurozone region. We’ll see rates on government debt trending higher, asset prices (such as real estate) falling even more, and renewed concern about banks on the European “periphery”.

Overheard at the Dept of Finance* — “And we would have gotten away with it too if it hadn’t been for those meddling Greeks”

*Not.

@ All,

Isn’t the long and short of it, the same old problem which Paul Krugman, Ciaran O’Hagan and many other observers have referred to. Namely, that too much savings are chasing far too few opportunities. Supplies of bonds offering decent yields from all of the safe economies in Europe are gone. So that investors are having to look down the line at places such as Ireland to find decent returns. I mean, at what stage is the European region going to come up with a real plan to issue bonds, related to some kind of economic plan, which will offer decent returns in medium/long term, and actually put people back to work in Europe? I listened to coverage of British election campaign in news this week, and the basic issue was no jobs, no jobs, no jobs. At what point, in the larger states such as Britain are so-called leaders going to wake up, and develop a real plan? BOH.

@Sarah Carey:
The RTE website headlines mention Greece only in the context of its Prime Minister’s plea for time and serenity. But of course, now that politicians are renouncing their pensions, all our economic troubles are over.

bjg

PS Why does Quinn Insurance employ so many truck drivers?

Very worrying. What can be done to ensure contagion doesn’t spread to Ireland?

@ BOH,

Perhaps the leaders of Europe are still divided (blinkered) as ever.

Just like WW1 and WW2 the Americans will have to ride to Europe’s rescue again.

A bit embarrasing really, Europe should be able to show more leadership and less dittering and doddering.

Where is the sense of ownership? The Greek difficulty is our difficulty, and we (Europe) are going to sort it out. Or is “The Domino Theory” staring us down the barrel of a financial gun?

@Dreaded Estate – quoting percentage moves on geared derivatives (CDS) is a bit meaningless. The cash market spreads are the things to focus on, not headline-chasing press releases from (I presume) CMA.

We have been unable to sort out our problems in an honest and coherent fashion Now, let us see how the “Only game in town” and “we are where we are” spinning stands up to the rigorous analysis of the bond market.

Regardless, as to whether there is a news blackout on RTE or even national denial, the Irish people are about to become acquainted with sovereign debt and all its intricacies. it will soon be the most important issue in the economic lexicon. If the market remains hostile and it probably will, it will not take long for us to burn through our “generous cash pile” which of course is not cash at all, only borrowed money stacked high by the NTMA.

Am I alone in viewing our sovereign debt as a measure of our failed economic and political policies? In that sense, in look forward to a full and rigorous examination of both. We never get straight answers maybe in the next few months there will be some enforced honesty in both codes.

When we wanted answers on this site from our politicians all we got was fudge, recrimination and bluffing.

We have proved very adept at running up sovereign debt in the knowledge that it will have to be paid off by our children and those coming after us. This was always morally wrong and cowardly. All of this, so we can live beyond our means, spending the money on current consumption such as tribunal salaries. Was that ever a good strategy? Our only concern, and still is our only concern, is whether or not we will be allowed to borrow more and more money. Is that a good strategy? Why did the department of finance advise the government that they could offer the public sector unions protection from cuts up to 2014? Do they know something about double dip recessions and sovereign debt markets that the rest of us don’t know about? We all know there is a huge wave mortgage defaults waiting to manifest itself in the loan books of our main banks. All completely separate from NAMA. I would like to know the DoF plan to deal with that?

First of all, the DoF never saw any of this in good time because they were primarily responsible for it, then they exempted themselves, now they see fit to extended the offer. I was aghast at this bending over backwards, surreal approach to the parlous state of our countries finances. I believe that it will prove immaterial whether they are accepted or not as the “unforeseen” circumstances clauses will be invoked.

The DoF optimism is not shared by Ken Rogoff or by the yields on our government bonds. Meanwhile our ability to do anything is severely hampered by the strait-jacket of the guarantee.

@ David O’Donnell

Frau Merkel also has the Verfassungsgericht to contend with not just an election and there is good chance that the professors will win their case.

This doesn’t bode well, but it’s making our decision to sharply cut public expenditure look smarter by the minute. If only we’d decided to forego NAMA too 🙁

Ben
Why are they so influential? OPM. They are trusted. Just as we used to trust banks. They are another mal-investment. Don’t worry, though, they will apologize. A chain is as strong as its weakest link ……..

Edmund Burke
I advised Au$ not euro even if Dutch. Cloth ears! Besides the point is devaluation of the euro. There may be a break up, but Ireland will be on the fast track, as a sort of floating aircraft carrier ………

Robert Browne
As always, on the button! I stand with you, from 11,000 miles away!!!!
Yes it is a pretty mess isn’t it!

I pointed out, in sworn testimony, that there was official written evidence linking banking to Government, suggesting further secret linkages, including the clear use of evaded taxes to build up bank capital. The written evidence was accepted by the PAC sub-committee. None of the three chairman of the Revenue could ever recall reading it. Nor could the vauntedly efficient Revenue find who had written it although every inspector of taxes had been issued with the memo. Jimmy Livingstone disobeyed the memo as did Tony McCarthy. Both were moved from their investigative positions. Tony was refused due course promotion.

But no one cared. Caring now anyone?

BOH
“Isn’t the long and short of it, the same old problem which Paul Krugman, Ciaran O’Hagan and many other observers have referred to. Namely, that too much savings are chasing far too few opportunities.”

Priceless! Those savings were ravaged long ago. Watch as the balloons deflate and food costs rise. Too many savings!!!!!

“tull mcadoo Says:
April 27th, 2010 at 10:37 pm

If commonsense does not prevail here, no Greek bank will be able to access the International credit markets. ”

And? What happens then, exactly? Will they have to dismantle their houses and send the materials back to the bankers? Bankers. Oh, yes that is what we mean when we say markets……

@Aiman
You may feel the percentage moves in the CDS market are meaningless but the fact remains. Ireland was the worst performing sovereign credit yesterday.

The same can be seen in the bond market with the 10 year spread exploding for Ireland, Portugal and Greece.

Interestingly Spain and Italy seem to have come away a bit unscathed.

Portugal +48bps to 280bps
Ireland +20bps to 220bps
Greece +13bps to 670bps!!!

Italy +3bps to 115bps
Spain 2bps to 117bps

The notion that Ireland has decoupled from the PIIGS is completely incorrect. It has really become a PIG.

But the fundamentals are rotten too. Anyone following Lehman and Bear Stearns knows that. Similarly PIG fundamentals are rotten too.

Careful Karl,

Them horses are starting to look jittery again..

The market clearly doesn’t agree Eoin
Spain and Italy are both trading 100bps below Ireland

@ Kevin: What type of European leadership were you hoping for? One that brings closer fiscal union even if that is not what the ‘citizens’ want? Never waste a crisis etc!

There is no ‘European’ leadership, merely leadership of different European states, no fiscal unity. And there is massive opposition in Germany to transferring billions to Greece. However the IMF has already upped its contribution.
“So far the EU’s policy process has been a net contributor to this crisis. We need to hear something that does not fall short of our lowest expectations. Otherwise Greece will be heading for default, and the crisis will spread to Portugal and beyond.”=Munchau
http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html

There is European leadership, just not the talking heads who have learned their lines before appearing on TV. It is of course, behind the scenes. Bilderberg? Trilateral Commission? We know what happens in a depression.

Fiat currencies are devaluing. The fewer commodities produced in an economy, the further the currency will fall. Hence the AU$ is higher and the Euro lower. The fear of the IMF is that the voters get to pay for the waste by the capital directing class.

But ’twas ever thus! Those without power get squeezed. Squeeze and release. Have you not noticed the loss of human rights recently due to all dem planes dat do be crashing into dem buildins? Fear stalks the land and the air……. We are at war! Against Terror! Sacrifices are needed to defeat Eurasia or East Asia. Oceania will triumph!

@ Zhou & All.
I don’t think Ireland will default for 2 reasons:
1. We have to keep borrowing in the coming years, so we need bond markets to be receptive to us.
2. We don’t have an enormous accumulated debt, so it wouldn’t really pay us to default.

Nor do I imagine that the Germans would abandon the Greeks at this moment. They will feign disinterest to the last, to secure maximum concessions from the Greeks in the deal, but ultimately, the European economy is too fragile for Germany to stand aside as a MS defaults. Once we are past this, all the present hysteria will seem overblown. Yes, things can get worse, but only if national leaders have a zest for self-harm. I am somewhat confident (borderline hubristic) that the money will come through on time and in full.

The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);

Austria 3.38
Belgium 3.52
Finland 3.21
France 3.26
Germany 2.93
Greece 9.54
Ireland 5.25
Italy 3.95
Netherlands 3.20
Portugal 5.61
Spain 4.03

Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.

Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.

Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.

Bu even in the optimistic scenario, it is clear that Irish government policy has failed even in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.

Perhaps it is worth trying to learn something from the Greek experience after all, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show

http://graphics.thomsonreuters.com/310/GR_ECON0310.gif

Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.

By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.

@Michael Burke

Whoa back, laddie!

The Irish recession was exacerbated by lack of fiscal stimulus? That won’t go down well in these parts!

Re Irish sovereign debt:
“Uh oh, uh oh, uh oh, oh no, no” (Beyonce et Jay-Z, 2003)

Although stating the obvious, we need to be careful when talking about contagion. So far, only countries with risky attributes are getting hit. There are two underlying reasons for Ireland’s weakness. Firstly, unsustainable government spending. Secondly, Mr Lenihan acting out the wedding feast of Cana turning junk into sovereign debt. Both of these can be traced to the property-based credit superbubble.

A further problem which has been fostered during this crisis is the interdependence of Government and banks. Irish sov risk accounts for too much of Irish bank’s balance sheets (direct gov bonds and NAMA bonds). Much of their liabilities require a government guarantee. Equally, the banks (& possibly their managed funds) are buying Irish gov bonds. I don’t like this.

The scenario seems to be as follows

Greeks: We need money
Germans: No way
Everyone else: Give it to them or we are all doomed
Germans: Oh okay
A short time later
Greeks: We need money
Go back to beginning and repeat endlessly

When (if ever) do we decide enough is enough.

@ Ahura Mazuda

The assertion that the primary cause of Ireland’s weakness is government spending is false. Government spending in 2009 is jut €3.3bn higher than it was at te end of 2007, and is €1.7bn below its trend growth growth rate. By contrast, taxation revenues are €14.2bn below their 2007 level, and €24.1bn below their trend level. Any effective cure for government finances must begin with a programme to restore tax revenues. The opposite course, tax increases and spending cuts, has been tried, and failed.

@ Pope Eptot

I go further. The recession was deepened and prolonged by fiscal austerity. Since government spending is a component of GDP and its investment a component of GCFC, then it could hardly be otherwise, even before we take into account multiplier effects. The alternative scenario, where private investment and demand is ‘crowded in’ to replace withdrawn government spending, has manifestly failed to materialise.

@ tull mcadoo

Opponents of fiscal stimulus have been arguing unaffordabiity forever- even when the government finances were in broad balance in early 2008. Now that their contrary policies have created the highest deficit in the EU, their determination is redoubled. It is slash&burn that is unaffordable.

NTMA’s pre-funding, the surpluses of the NPRF, tax hikes in areas that will not hit domestic demand combined with targeted transfers to the poor, abandoning bank bailouts and endng NAMA, and borrowing on the international markets could all provide a surfeit of funds for fiscal stimulus.

But I agree it should be done quickly, before the government policies result in a crisis of confidence.

@MB

So it is no response to these arguments to suggest that “stimulas would work” – if you cant get over the first hurdle which is – would anyone fund our stimulus plans if we tried to implement them?

I read this today on a site….

It is a myth …
State funded and ran schools are good for a nation.
Education can be neutral and is the solution to all our problems.
Soverign debt does not matter.
Treaties of Maastricht and Lisbon signing were positive.
The two world wars were necessary
Fiat money promotes long-term economic growth.
Ethics and culture are relative.
The Renaissance was rational; the Dark Ages were not.
The universe is 13.3 billion years old and will die.
The welfare state is legitimate.

Following these myths cause the yield on Irish government debt to jump dramatically over the past week. This was baked into the cake and the timer has gone off.

Ahura Mazda says,

A further problem which has been fostered during this crisis is the interdependence of Government and banks. Irish sov risk accounts for too much of Irish bank’s balance sheets (direct gov bonds and NAMA bonds). Much of their liabilities require a government guarantee. Equally, the banks (& possibly their managed funds) are buying Irish gov bonds. I don’t like this.

Here, here. BOH.

Martin Feldstein is worth reading on all things Hellenic http://www.project-syndicate.org/commentary/feldstein22/English

@MB

“… Hungary’s premier-in-waiting stated that the country, which was bailed out last year, will not be able to meet IMF fiscal targets and should widen its deficit even more to stoke growth. Traders went into risk-aversion mode, with emerging market and junk bonds also suffering. And as we mentioned, quite a few people in London expect a significant devaluation of the pound after their elections.”

http://www.nakedcapitalism.com/2010/04/greece-downgrade-what-shoes-will-drop-next.html

@ Michael Burke,

2007?

Government spending in 2007 was too high. The exchequer’s coffers were bulging with tax from private sector borrowing. Elements of expenditure would also have benefitted from the credit frenzy (e.g. less dole etc). If anything, 2007 was peak madness! You need to go back several years.

Ahura

Is 1997 far back enough? Voted spending then was €19.7bn. The annual average growth rate to 2007 was 6.5%. This is markedly slower than either GDP at 10.8% or GNP, 10%. By contrast, tax revenues grew at a annual rate of 10% over the same period, dspite repeated and substantial tax cuts. So, it remains the case that increased spending is not the cause of the deficit.

@ Ahura Mazda,

Government spending in 2007 was too high. The exchequer’s coffers were bulging with tax from private sector borrowing. Elements of expenditure would also have benefitted from the credit frenzy (e.g. less dole etc). If anything, 2007 was peak madness! You need to go back several years.

The whole 2000s decades is a period of Irish history which we will only learn about properly in 30 years time, when official documents etc are released. As Eddie Hobbs said on The Frontline, we will be in nursing homes by that time most lightly. I formulated one possible theory in a blog entry, I called Corporate Tax, to try and explain some of our difficulties as a nation. What I have noticed in particular is the double pumped action which the Irish economy experienced during the period of the boom. I read a newspaper article penned by a member of Barclay investment managers a while back who noted, Irish people believe if they invest in a company which is down the road from them, that is safer in some way Than investing in something across the globe. Not necessarily so. If that theory were true, companies such as Intel who started in California should be gone out of business a long time ago. Which isn’t the case. Bear in mind, the public service in Ireland added a huge number of senior people to its ranks during the Celtic Tiger years (maybe that was the right thing to do, in addition to upgrading of railway tracks, funding more Phd thesises etc through the NDP). It follows that funds in the national pension reserve fund would have bulged all of a sudden. My suspicion (somewhat confirmed for me by talking to different people) is that much of the national pension reserve fund never left the island of Ireland. It stayed at home and it caused a lot more trouble than if it had left the country. Like the private money of Irish billionaires created by the Celtic Tiger from construction. We are all familiar with the story of Sean Quinn and Anglo. I use the phrase, double pumped action, to describe what the Irish economy was doing. There was simply no plan or no blueprint for the amount of capital and funding available on this small island (either from public sources, private sources, pension funds or otherwise). If you look at entreprises in Ireland which are somewhat robust today – CRH, Ryanair, Food companies and even Irish bank subsidiaries – they haven’t been wiped out, like much of what was linked to the domestic Irish economy. BOH.

http://designcomment.blogspot.com/2010/04/corporate-tax.html

I don’t believe the move in Irish spreads is solely related to Greek contagion. I believe the admission that Anglo is to be wound down has become known in the market. The Eurostat reclassification was the first leak, others have followed.

The effects of adding the wind-down costs of Anglo to the national debt are not inconsiderable (increasing it by about 25%). There must also be a question as to how this wind-down is to be effected. Can it be done with NAMA-type bonds? Or must ‘real’ money be used? What is the timescale?

The NTMA could find that its mountain of cash becomes something of a molehill…

@ Ahura,

What I’m not a fan of is indivduals and large amounts of credit.

Well put. BOH.

@ Mike Burke

Hi
Surely in considering questions of economic stimulation one would also have to consider the existing/historical condition of the economy.
I am not saying that I am against it, I am just asking what is the historical level of stimulation as a reference point for what is achievable and affordable for the present day.

Thanks Mike

My point, is that we cant really start from here!
We are in a compromised position, without any reserves wiped out cleaning up real and imagined messes.
Would you see ‘getting our house in order’ as a preconditional step or something that can be done as we go on?

Looking at the multiplier projection I have to ask whether there is a cyclical of tidal multplier observable.
Consider alot of the farmers who sold land to the NRA and bought bank shares.
Or is that beside the point…

@ Michael Burke

its as simple as this – any stimulus will be funded from abroad. Fact. Not just this year, but for the next 5 years. So any stimulus is not really “our” decision to make. At this point in time its extremely difficult to say that external funders would be willing to go along with an increased stimulus package beyond a 14% deficit when you see what is happening to Greece, Portugal and Spain on the markets and what is happening to the same three from the ratings agencies, who referenced deteriorating budget deficit situations as being one of the mains causes for the recent downgrades.

@ Eoin,

its as simple as this – any stimulus will be funded from abroad. Fact. Not just this year, but for the next 5 years. So any stimulus is not really “our” decision to make.

I’m shocked tonight. Absolutely shocked. The reality had never quite struck home to me, how dependent sovereigns are on external funding sources, until I switched on the news at nine and I heard this massive figures being bandy-ed about to cater for a three year period for Greece. Whenever I read about the IMF or aid packages for sovereigns in the African continent or somewhere in Asia in the past, it always seemed so far away from me in terms of culture, economics, politics and so on. But it has come right home to roost this evening. It is the first time I ever watched the news with the IMF talking about some country where my friends would have gone on sun tour holidays for a week. What an extraordinarily sedate and peaceful time we have enjoyed in this part of the world for the last several decades. Notwithstanding the Yugoslavian conflict, the crumbling of the soviet system, Chernobyl accident and so forth. All big events, but not large enough to de-stabilise this part of the world.

@ Paul Quigley,

On this: ‘There was simply no plan or no blueprint for the amount of capital and funding available on this small island (either from public sources, private sources, pension funds or otherwise)’

This is probably something which Elaine Byrne and other political scientists out there need to focus on. I haven’t heard any of them approach their commentary from this particular angle as yet. The real trouble as I see it, (full credit to George Lee for pointing this out in a Pat Kenny interview a while back), we have people who talk about innovation. We have people who talk about bond spreads. We have an expert consultant or ‘voice’ for just about everything. Be it Colm McCarthy, Peter Bacon, Chris Horn, Michael Hennigan or whomever. The government loves having things that way. All of these specialists are neatly cordoned off from each other, toiling away like monks in their own little work cells. But realistically, the big issue for innovation at the moment is forming the right European wide blueprint to produce some level of growth. The big issue for European wide growth may involve much of what Colm McCarthy talks about. And so on. The things are all interlinked, and require thinking which is interlinked. But instead we have a vested interest in the middle, called a political class, which serves almost no function, irregardless of whether you pay it less, or pay it more. But then again, politicians create policy, create legislation. I was watching the news on registration or deaths of Irish citizens abroad this evening on the news. Clearly, there is where government fits into the equation, and is required. But in terms of management of the economy, I am dubious to say the least of how the ‘experts’ in the various areas are ‘managed’ by Brian Cowen or Brian Lenihan, and the FF/Green government in general. Even in the debate on the motion proposed by Fine Gael’s Simon Coveney to do with the green economy and energy security, Green TD Ciaran Cuffe had to raise the point, we are separating ‘energy security’ from climate change, and other dimensions of the same problem. I would fully expect Ciaran Cuffe to see that problem, his mind having been formed by the same training as myself in architecture. BOH.

@Michael Burke

BTW, I’ve been considering setting up a new political party. The key value proposition is mentioned in my excessively long post above (sorry).

I’m considering setting up the “The Magic Money Sock Party”.

This party is for high spending, full employment, low emigration, defined benefit pensions, increases in public sector pay, long holidays, perpetually growing house prices, the NDP being implemented in full, free health care for all, generous welfare benefits, free university education, flexible financial regulation, and steeply progressive taxes on the “rich”, since it has to pretend to have a funding plan.

The party is against saving, studying Maths for the Leaving Cert, having a competitive economy, strict financial regulation, application of the law equally to all residents, and leaving anything other than a wet and mossy pile of rubble to our children.

As an aside for Richard Tol, who may be on this thread, the Dutch could call it the “Partij van de TGS”. It sounds much more serious in Dutch.

@ Tull

dont be silly, that’ll never happen….however, lets at least try….from today’s Lex column….

“Ireland
Published: April 28 2010 09:33 | Last updated: April 28 2010 16:58

The injustice of it all! As fears of a Greek default escalate, Ireland’s 10-year borrowing cost rose above 5 per cent on Wednesday, a 2 percentage point premium over German Bunds.

Irish finance minister Brian Lenihan has led the way among ailing peripheral eurozone economies in taking the harsh fiscal measures needed to regain investor confidence. He set the example months ago that Athens should follow now, slashing public servants’ salaries, and welfare payments. Investors rewarded him: the yield spread over Bunds narrowed.

Now Dublin has given up those gains as Greece, the European Commission and the International Monetary Fund fail to agree on similar draconian measures for Athens.

Ireland is no saint. Like other peripheral economies it became uncompetitive, paying itself too much and producing too little. And unfettered bank lending and limp regulation during its property boom brought deep recession when the bubble burst. The 12.5 per cent contraction in Ireland’s gross domestic product since the end of 2007 is the eurozone’s worst. Output could shrink 1.3 per cent this year. Furthermore, Ireland’s budget deficit, at 14.3 per cent of GDP, is higher than Greece’s. Its banks need to raise another €45bn this year, Deutsche Bank estimates.

But Ireland is not in the same league as Greece: the former Celtic Tiger has a credible recovery plan and has bounced back before. Its public debt, now at 64.5 per cent of output, from 25.2 per cent pre-crisis, is certainly more manageable than Greece’s ruinous 110 per cent, not least because Dublin – unlike Athens – has completed its funding requirements for this year.

As Athens forces the eurozone to confront its principal defect – one currency, one central bank governor, but no single finance minister – investors should not forget Mr Lenihan’s first-mover advantage. He is at least 18 months ahead of his peers.”

Maybe dodging bulletts here…

11:02 RTRS-MOODY’S SAYS IRISH ECON REFORMS THE RIGHT APPROACH, FUNDAMENTALLY REASSURED BY THIS PROGRESS
11:02 RTRS-MOODY’S SAYS RISING FUNDING COSTS A RISK FOR IRELAND BUT IRISH CHARACTERISTICS DIFFERENT FROM OTHER EURO ZONE PERIPHERALS
11:02 RTRS-MOODY’S SAYS FUNDAMENTAL ASSESSMENT OF IRISH RATINGS NOT CHANGED BY RECENT NERVOUS MARKETS

@Michael Burke,

“Why use a (very poor) proxy for GDP when GDP is available?”

Very simple. Irish GDP is special. Other posters have identified reasons why it’s not a great measure. I don’t believe there is a linear relationship between the increases in our GDP and the amount of taxes we can raise.

Current expenditure mostly pays for services to the population. So step 1 is to use the CPI to index the level of service provided in 1997 to current prices. Step 2 recognises that there is a greater for government services. As most of these services are to individuals, I increase the current price by the change in population. If you want to say the 1997 level of service was inadequate, then fair enough but it’s not what I’m addressing.

@ Tull

I’d prefer if you operated as a running ticker with 30 secs updates, but decent chance the moderators would boot you out for over-posting… 😀

@ DE

10yr is actually tighter by 7bps and the 2yr is massively tighter by 65bps. 5yr CDS is also tighter by around 30bps. Not sure how you can spin that as a negative. Unless thats your sole intention?

@Eoin

No my intention isn’t to spin what I see as a negative.

The point I was trying to make is despite all the good work and positive commentary Ireland is still regarded as among the very bad boys of Europe.

Rather than talk of Ireland leaving the PIIGS, the PIIGS has become the PIG. With the Italy and Spain (despite the downgrade) are now trading significantly below us.

@ Hugh Sheehy

“As I already said, I’d love to have a meaningful discussion about multipliers, etc,. but it’s simply not meaningful to have it. Our deficit would have to be pushed too high to be fundable. Also, I’m afraid I simply do not believe that the multipliers would be high and NDP estimates for the DoF from 2006 might as well have been written in NeverNever Land for all the credibility or meaning they have today, but it’s still a moot point. ”

If we can move on from beliefs and assertions, and perhaps return to evidence.

One fiscal approach has been tried in Ireland, and clearly failed. Growth is weaker and the deficit and bond yields are higher. Another iscal approach has been tried elsewhere in Europe, and gorw is recovering, deficits have stabilised and bond yields are lower.

Yet we are invited to believe not only that no other course of actio is or was available, but there threats to repeat the dose if (when?) things do not turn out to goverment plan.

I think it was Einstein who argued that madness was repeating an experiment and expecting to get a different result.

I note that all objections to stimlus have revolved around the alleged impossibility of borrowing, even though in my origianl post borrowing was only the last option on a list that includes NTMA’s pre-funding, NPRF funds and adjustments to the tax regime that would amount to targeted transfers to the poor. None of these would require additional borrowing. We could also include the balances at the semi-states, accessing EU ‘Green’ subsidies, etc.

Maybe you should tell Mr Lenihan about your prohibition on further borrowing. He is ignoring you, repeatedly. Yet any investor, in sovereign debt or otherwise, is more likely to lend money where there is an incom-stream to support it such as taxes, rather than to a zombie like Anglo.

@Eoin
I accept that liquidity is an issue. But I don’t think it would explain a 110bps spread on the Irish 10 year bonds vs the Spanish or Italian?

Especially when the spread was only 50 to 60bps 2 weeks ago.

@Michael Burke.
Here’s your proposed list of things we could do “NTMA’s pre-funding, the surpluses of the NPRF, tax hikes in areas that will not hit domestic demand combined with targeted transfers to the poor, abandoning bank bailouts and endng NAMA, and borrowing on the international markets could all provide a surfeit of funds for fiscal stimulus.”

I note that “borrowing on international markets” is indeed placed last in your list, but I doubt that it would be last in importance or in size.

I’ll add one more potential option. If we use the magic money sock in addition to all the other proposals then we’ll have a perfect suite of funding solutions.

As for the government’s current and historical actions, it’s hard to know where to start.

It may well be too late to undo the damage caused by guaranteeing Anglo, but I’d love to see how the government’s income, expenditure, taxation and net debt balances would look under your proposed fiscal stimulus.

I suspect it wouldn’t be a pretty picture, but go right ahead and provide the evidence that it would.

@MB

“One fiscal approach has been tried in Ireland, and clearly failed. Growth is weaker and the deficit and bond yields are higher. Another iscal approach has been tried elsewhere in Europe, and gorw is recovering, deficits have stabilised and bond yields are lower.”

The preformance of countries like belguim is not a good basis of comparison – for clear reasons. This evidence is not persuasive. I would ask you, to play devil’s advocate for a minute, and try to consider whether there are any problems with using this evidence as a guide to the likely reaction of bond markets to a stimulus package in Ireland especially in circumstances where your view about how market participants welll react is in direct contrast to the expressed views of the very market participants whose behaviour you are predicting.

In fairness, your original post does attempt to address the funding issue. Trying to take your case at its height, it could be argued that all existing and potential resources be deployed to boost aggregate demand straight away – that this effort will be succesful before these domestic resources are depleted and tax revenues and GDP figures will improve quickly enough for us to attract interest from foreign lenders to enable us to fund future deficts.

However, there is, I hope you would accept, a different view of how that course of action would in fact pan out. First, when the program is announced, yields will rise and substantially on Irish debt, and this will happen immediately.

What happens next is obviously less clear cut. But I would suggest various potential consequences.

1 Downgrade of irish soverign debt and perhaps bank and other corporate debt. perhaps stock market falls (wealth effects here perhaps)

2 The cost of funding for Irish banks could rise, and interest rates to customers could rise – this may offset potential increases in aggregate demand brought about by the policy (and could happen before stinulas
has effect)

3 EU/Eurozone seriously pissed off – implied bail out support removed or reduced – further increase in yields and downgrades – further problems in private repos of governemnt debt for the banks – further funding problems for banks. Solvency of banks once more a clear issue, but now no soverign backstop. Bank runs.

would irish banks need to mark to market paper losses on the value of irish government debt? How would Bank of Irelands capital raising be affected by this decison?

I for one would move any asets i had out of irish banks immediately on the announcement of such a policy

paul quigley
Correct! +1

However, the gombeen rentseeker type is still cocky. Only when they have been humbled will we rise again. In the meantime, we all suffer. The weakest suffer most of all. Suicide rates, murder rates of families will increase.

christy

You appear to be a saint, in the degree of patience you are willing to show. Great refutation!

Christy

I am indebted to you for actually engaging with the points raised.

There is one assumption in your argument I would like to highlight, though.

“However, there is, I hope you would accept, a different view of how that course of action would in fact pan out. First, when the program is announced, yields will rise and substantially on Irish debt, and this will happen immediately.”

There is indeed a different view to mine and one that frequently finds robust expression here. But I want pose a question to you.

Are you sure that the initial bond market reaction would be so negative?

Of course, certain bond market participants tend to make it onto the airwaves, some every day. But in general, these tend to be on the sell side, not the very large buyers. Bill Gross is so well-known precisely becasue he is the exception. Gauging what the buyers do, or anyone in financial markets, in aggregate, is best discovered by prices.

I wouldn’t possibly claim to have followed the daily or longer gyrations in the bond market prices of all Euro Area economies, with particualr reference to the reactions to their fiscal packages. Perhaps others here have. But general trends are readily availale from charts, and they offer a clear vedict of who’s policy is in favour (or, more precisely, the consequences of whose policy is in favour). And who is not.

I do recall 4 fiscal events, though, the stimulus packages of Germany, France and the much-reviled comparator Belgium. German yields fell in the wake of the post-election fiscal stimulus anouncement late last year. And both Belgian and French yeild spreads were stable/lower after their respctive announcements. I don’t know of any major sell-off occasioned by announcement of a fiscal stimulus.

There was too a sell-off in British govt. debt late last year, which was widely reported as being in response to ‘lack of a plan’ to reduce the deficit in the Pre-Budget Report. But the strange thing is, Darling announced there would be no more stimlus in 2010, and gilts sold off. Yet in 2009, yields had fallen when he was trying to stimuate the economy, with moderate success.

But I am open to further information on this point. Can anyone show a country-specific sell-off in a Euro Area govt. bond market as a consequence of announcing fiscal stimlus?

On the rock/hard place position- the government has thrown itself on the rock, wholly voluntarily, unlike Greece and Portugal but with the same consequence. It is conceiveable that it will dust itself off and do it all again.

@Michael Burke
From IMF, May 2009. Now I don’t always agree with the IMF, but I won’t disagree with this paragraph.

“A rule of thumb is a multiplier (using the definition ∆Y/∆G and assuming a constant interest rate) of 1.5 to 1 for spending multipliers in large countries, 1 to 0.5 for medium sized countries, and 0.5 or less for small open countries. Smaller multipliers (about half of the above values) are likely for revenue and transfers while slightly larger multipliers might be expected from investment spending. Negative multipliers are possible, especially if the fiscal stimulus weakens (or is perceived to weaken) fiscal sustainability.”

So, for Ireland we should expect a multiplier of 0.5 or less…since we’re a small open country…whatever the DoF claimed in 2006.

For every €2 that the Irish government borrowed in addition to the €400 million we’re already borrowing per week, we’d see a €1 increase in output…and that’s at best.

We might even expect a negative multiplier since it’s reasonable to say that a fiscal stimulus would be widely expected to weaken Ireland’s “fiscal sustainability”.

This is also interesting, and related, and isn’t from as authoritative a source as the Irish DoF in 2006. It’s from the San Francisco Federal Reserve, in 2009.

https://docs.google.com/viewer?url=http://www.frbsf.org/publications/economics/letter/2009/el2009-20.pdf

Praise from the FT (whoppee!!!!). We must be on the right track!!!!
In fact it only praises Ireland to criticise Europe (especially the Germans) and, in fact, it later goes on to criticise Ireland for it’s slack regulation. (Hardly taking the lead from London were we!?)
That old superiority complex coming out again – ah well – plus que ca change!

@Michael Burke.
Sorry, I had forgotten your connection with TASC. We’ve been over this ground before when the TASC letter was published a couple of months ago.

As for expecting me to believe that Ireland has a multiplier of 3, ehm, how should I put it? Let’s just say that I’ll pass on trying to believe that. It would hurt my imagination too much.

Similarly, reading the ESRI report referenced on the website is actually difficult. If those conclusions are what comes out of the HERMES model, then I have a slightly tapered conical device with one open and one closed end in which the model’s disks should be placed, and I do not believe that Ireland is so exceptional that it can have an economy that reacts so diametrically opposite to what common sense and the IMF study think.

As for the Moody’s report also referenced in the article, its conclusions are pretty clearly rubbished by the later San Fran Federal Reserve article.

If you ask me to believe that Ireland’s economy can be saved by the government borrowing even more money and giving it to public servants or welfare recipients, which is what you’re saying the HERMES simulations argue, then I simply cannot oblige. Nope, no way, not going to happen.

@hugh

I share your scepticism based on past experience with this policy. It took us a decade to work our way out of the 1977-81 period.

Howwever, it really does not matter what HERMES spits out. We are under an “edict” from Bruessels tighten fiscal policy over the medium term whiel Greece is under pressure to do it in an even shorter time frame.

I am also quite sure that if we announced the policy favoured by TASC our access to the bond markets would be closed in about 48 hours.

Michael,
As a matter of interest, why are the ESRI not advocates of a more expansionary fiscal policy?

I note also, you did not address the 2nd point about the possibility of implementing such a policy given a) our medium term agreement with Brussels b) the constraint imposed by bond markets.

Also, perhaps your contention is that an expansion in the deficit would bring down interest rates. Yet the evidence from Greece is the opposite.

tull, hugh

Ireland’s ‘medium-term agreement with Brussels’ by which I assume you mean the comitment to the stability and growth pact, is exactly the same as everyone else’s commitment. They adopted fiscal stimulus and and are now much closer to meeting that comitment. Ireland is the furthest away on the deficit and, if that should persist, will ultimately be the furthest away on debt.

Whatever bond market constraint against borrowing for stimulus you imagine does not seem to have applied to the many countries which adopted it. However, there is a growing (yield) constraint against Irish borrowing, based on fiscal contraction.

I agree that an expansion in the deficit pushes yields higher, as Ireland amply proves. However a temporary expansion in government investment produces a return, known in business circles as a profit. This lowers the deficit. As has happened in the rest of Europe.

On IMF research, the most recent, but by no means the sole research I would cite is the March 2010 IMF WP/73 Effects of Stimulus in Structural Models, where the highest multiplier is attached to government investment and is 3 over 5 years.

Hugh

the charts you cite are world bank representations of exports and imports as a percentage of GDP. These are not news.

However, returning to the IMF research I am accused of not reading, they rely on2 models from the Fed and each from the IMF, ECB, OECD, EU and Bankf of Canada. They do indeed estimate the multipliers at a cumulatitve 3.

And, as I am sure you have read it, I am surprised you didn’t address the researchers’ enquiry into the apparent I am guessing issue you allude to, namely Ireland’s openness. The researchers examined this issue, and found it to have only a marginal impact. Other more nuanced research suggests a large, balanced external sectorsuch as Ireland’s increases the efficiency of all investment- as one would expect- and therefore increasesthe effects of multipliers.

But it is not necessary to pursue that point, as it it is self-evident that any investment with a multiplier of 3 will of course be more than self-financing.

@ Michael Burke,

Re GDP/GNP – it suits some agendas to quote as % of these measures. And to be fair, it doesn’t suit my agenda/ the point I’m making. To set my logic in a different context, how would you project the cost of a retail outlet five years from now? I would use an inflation measure and adjust for increased volume. I wouldn’t use GNP or GDP. I think this is a reasonable approach to use on gov current expenditure.

@Michael.
Tell ya what. Off to London with you and convince the lenders that we should run an even bigger deficit. Then, you know something, I’d pay attention to your arguments.

Meantime, I’ll just have to continue to live in the less optimistic world where the multiplier for an economy like Ireland isn’t 3, where the DoF/NDP bull*** analyses from 2006 aren’t taken seriously, and where economies being 400% more open than the model is cause to doubt the applicability of the modelled outputs.

Oh, the Greek government could probably use your skills of persuasion about now. They seem to be struggling.

@Michael Burke.
You’re absolutely correct when you say “convincing them, or even the dullards in London, that investing in anything which trebles your money over 5 years should be easy.”

We’ll just have to mark it up as odd that people don’t seem to believe that lending money to an Irish government which proposed to engage in a debt financed stimulus under current circumstances would be a good bet.

They must be particularly dull. Well, someone must be.

“people don’t seem to believe that lending money to an Irish government which proposed to engage in a debt financed stimulus under current circumstances would be a good bet.”

What we are witnessing is an increasing reluctance to lend to an Irish government whose taxes continue to plummet on the foot of weak activity, to which its own cuts have contributed, and yet is willing to borrow huge sums to hand over to zombie banks.