Via Michael Hennigan:
Philip is quoted in Europeans Fear Greek Debt Crisis Will Spread from today’s New York Times:
“It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008. “It is not so much the fundamentals as it is the unwillingness of the market to fund you.”
Also noteworthy from the same article:
Officials from Standard & Poor’s said the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.
It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts. As part of the euro zone, these countries do not have the ability to print their own money to stimulate growth and bolster exports, so increasing debt and an increasing prospect of default result.
23 replies on “Philip Lane in the New York Times”
This is a rolling trainwreck that we cannot really avoid unless Spain appears in the firing line before we do. Other than that it is beyond our control.
“the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.
It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts.”
Glad we don’t have to worry about that here..
Martin Wolf had a nice line some time back about how some people seem to assume that there is a free lunch to be had here: you can cut deficits without cutting GDP. If aggregate supply really were vertical, life would be so much easier, but it ain’t.
Given what is happening on debt markets, I don’t think Ireland has much of a choice right now, but we are really in a situation where what may be rational from the perspective of one country can be collectively self-defeating. (The same goes for the strategy of internal devaluation: we have no choice, but if everyone does it then it again becomes self-defeating.) In my view this is a systemic European crisis which requires a systemic European solution, which requires real political leadership in Europe — but that is entirely lacking.
Kevin,
if by a ‘systemic European solution’ you mean bail-outs for all, including Ireland, I think that is simply not going to happen. Zu teuer.
‘It is not so much the fundamentals as it is the unwillingness of the market to fund you’ says Philip.
Trouble is, the unwillingness of the market to fund you is fundamental, ask Greece. The Irish bond spread is now (ten years) back up to 200bp, and ominously has risen sharply at the shorter end too.
A Greek default (‘re-structuring’) looks increasingly inevitable, and things are going to get very sweaty for Portugal, Ireland and others.
But not to worry, the Higher Education Authority is on the case. This morning’s Irish Times reports a demand for €4 billion from the HEA to renovate university buildings and to build new ones. You can’t beat a bit of leadership from the top.
@Colm: letting the Greeks default is also going to be expensive, especially given the contagion risks:
“Eurobank exposure to Greece is over $190 billion, and total periphery country exposure is roughly $900 billion.”
(from http://www.nakedcapitalism.com/2010/04/greece-downgrade-what-shoes-will-drop-next.html)
Now, a series of sovereign defaults would no doubt be highly educational for the banks that underpriced risk for a decade, and perhaps such a lesson is what is required if the Eurozone is not going to move towards some sort of closer fiscal cooperation, but I think it is a lesson that could be highly costly for Ireland unless we are very lucky.
Even if we cut our cloth, honour our debts and take our medecine the situation may be beyond our control. No matter how much we blame ourselves for our fate, there is no point in exaggerating our current options to save ourselves. If we consider it a possibility that we will get nuked no matter how we address our catch-22 debt burden then the focus must switch to Europe.
One problem for the Eurozone is that our super-bubble arose in part from structural flaws in EMU. A second problem is the crisis is showing that the euro currency is built upon a fatally fractured fiscal structure. A third problem for the Eurozone is that the unity of the Union caould be fatally dented by letting some countries swing in the wind. A fourth problem is that many eurozone banks are up to their neck in the debt of eurozone countries. Contagion could affect all those banks’ assets. The knock on effect for the real economy could be horrendous.
The fact that bail-outs for all might not save the day even if they were available only serves to underline the systemic nature of a crisis of contagion. This is one reason why we might see an even more massive bail-out for Greece with substantial assistance from the USA.
Beyond that, I think the EU might consider directing Ireland to withdraw the Guarantee for Anglo as it is illegal and therefore ineffective. The systemic importance of our banks to the EU is likely to be less than the systemic importance of our sovereign debt.
If the world turns turk on the EU and USA then we can redevelop the market in terms of commodities, labour, weaponry and violence. The carbon standard will have to be put on hold.
@zhou: I have also wondered about this: if we were forced by the EU to withdraw certain guarantees then how on earth could anyone argue that this would affect our credit-worthiness in the eyes of the markets (a claim I am dubious about anyway)?
@Zhou
“Beyond that, I think the EU might consider directing Ireland to withdraw the Guarantee for Anglo as it is illegal and therefore ineffective.”
On what do you base the illegality claim? A qustion was raised a long time back on this site, about the validity of the guarantee for Anglo, in view of the fact that they patently withheld relevant information from the government, in advance of the guarantee. In normal insurance contracts there are clauses regarding disclosures which safeguard the issuers. In this case it seems there were none.
Now this was an astonishing omission from the guarantee – but it did seem to let Anglo off the hook. Is ther something new?
Kevin,
Ireland’s exit gross debt/GDP ratio in 2014, as per the SGP update released in December, is to be around 80%, before future bank bail-out costs or NAMA shortfall, should there be one. Add 15% for these, deduct 10% for what’s left of State financial assets (NPRF etc) and convert to net debt/GNP ratio terms. The answer is over 105%, and that’s assuming the fairly benign macro outcome of the SGP update, containment of bank bailout costs, and whatever borrowing spread was built into the DOF calculations. The actual outcome gets worse by tweaking the assumptios about nominal tax-base growth and borrowing costs in negative directions by small amounts.
Dealing with this will be costly for Ireland come what may.
Whether the Greeks default, and whether that sparks further contagion in spreads is out of our hands. As is European leadership. Best we can do, in any scenario, is stop spending money we don’t have, plus novenas.
if it is as serious as you say it is
why then is the main item on the 8am news on RTE1 about some non entity of a gombeen politician giving up his “entitlement” to a pension which in the grand scheme of things is buttons
how long have we got then?
anyone put a timeframe on it before we are in the firing line?
@Kevin O’R
I think the EU Commisssion imprimateur is critical to our future. They might want to help us help them.
@AMcG – Nothing new. Where there is a will there is a way – state aid and all that. It’s not a court challenge but an edict made by those who need it.
@Colm McC
“Best we can do, in any scenario, is stop spending money we don’t have, plus novenas.”
That seems to sum up the domestic situation. However, our leaders are leaders in Europe too. Hopefully they will be able to outline our common interests and incentives at EU meetings and not just intermittently laugh, cry and pray.
@zhou: “However, our leaders are leaders in Europe too. Hopefully they will be able to outline our common interests and incentives at EU meetings and not just intermittently laugh, cry and pray.” Well said.
@ C McC,
if by a ’systemic European solution’ you mean bail-outs for all, including Ireland, I think that is simply not going to happen. Zu teuer.
I think what it requires is an investment plan, so that money can chase something other than debts, and we all wasting our efforts in speculation over impending defaults, instead of doing something more useful. There are opportunities for countries such as Greece, Italy, Spain and Portugal to export their human resources around the European region, instead of sending the best of what we have to Canada or Australia. Bearing in mind, that human resources expensively educated in the EU are being pretty much under utilised in places such as Canada or Australia.
We should be wholly ashamed of ourselves in Europe in my opinion, having spent a fortune to set up our little project, and gain so little in return. I have heard today, that Dell in Poland cannot operate and now has to up root again and move its operations to South Africa. I am not surprised either. Per head of person, no other people in Europe could take the grind, like the Dell workforce at Raheen could. And yet, we have no official plan for the Raheen Dell workforce of thousands either, except to turn them into web designers and welders. It appears to me, that after all of the technological revolution of the past couple of decades, we still only have parts of the necessary system of infrastructure, and much of it is not connected in the way it needs to be, to provide the employment and generate the necessary growth to manage debts. That kind of leadership isn’t coming from Germany and it isn’t going to come from Máire Geoghegan-Quinn either. BOH.
http://designcomment.blogspot.com/2010/04/corinth-canal.html
We are in the firing line in June or July unless a larger object such as Spain appears.
Taking on so much debt and contracting the economy at the same time. Hmmm. Tough one. Follow the Yanks, or septics as we call em here: devalue like billyo!
Do like the Greeks when it comes to be our time: anger the Germans, French and Italians as much as possible. Draw out the rescue package; insult the benefactors; point out how weak they are!
If we can drive the euro down 5% then Ireland will have done its part very well!
I just hope the ECB can deal with the increase in import prices and the effect on inflation. Wouldn’t do, to increase interest rates …….
Kevin, Zhou:
Do our ‘common interests in Europe’ include stabilising the external value of the Euro? One of the fault lines emerging now is that the Eurozone is not quite an optimal currency area for everyone. A weaker Euro would suit Ireland particularly nicely.
There were certainly flaws in the EMU plan and the political imperative of including Italy, meant that countries with weak governance systems like Ireland and Greece couldn’t be excluded.
In countries used of holding the begging bowl out to Brussels, it is easy to have difficulty in appreciating the German viewpoint.
Greek PM George Papandreou spoke last week of the forces of conservatism (i.e. Angela Merkel) but last month he said at the top of his list of priorities was tax evasion. “To give you just one measure of the scope of that problem, fewer than 5,000 Greeks declare incomes of €100,000 or more (in a developed country of 11m people), and that pattern must end, and it will end. We will be prosecuting offenders, no matter how rich or powerful, to show that we mean business. The rule of law means that the law applies to all. Such changes, we are sure, will bring in billions of unpaid taxes and help underpin our return to fiscal health,” he said in a speech to the Brookings Institution.
Germany went through the painful Hartz labour and welfare reforms, which cost Gerhard Schröder his job.
There was however a payback for the reforms during the recession and despite a 5% GDP contraction, only 200,000 jobs were lost from the dip in unemployment in Oct 2008.
Collective agreements allowed for flexibility when orders fell and workers in the part-time Kurzarbeit scheme, have fallen from 1.5m at the peak in 2009 to 900K currently.
With wage rises low over a decade, and having financed billions worth of structural grants in Ireland and the other PIG countries, it is understandable that Germans are not eager to have the tin ponny rattled again.
Prof. Hans-Werner Sinn, head of the Ifo institute asked in a radio interview today if Germany would ever get its €8.4bn in loans back : “To tell you the truth, no.”
Greece “”will not be in a position to carry out the necessary budgetary rigour” and will eventually have “to ask for Germany to waive the debt,” “he said.
“”It would be understandable if the Italians or the Spanish put pressure on us to pay up now because it is an important precedent for them,” ” added the economist
Angela Merkel does not have an easy task as she insists on fiscal responsibility.
Even the much lauded fiscal adjustment in Ireland, for public staff, only offset the the fraudulent benchmarking payment of 9%!
@Michael H
“Even the much lauded fiscal adjustment in Ireland, for public staff, only offset the the fraudulent benchmarking payment of 9%!”
It may have offset the 9% – but it was anything but a reroll of benchmarking – which was top heavy in favour of the already higher paid, whereas the cuts were mainly at the lower end of the scales.
@Colm: I suspect the Germans will be happy with a weakening euro also since they like everyone else want to export their way to recovery.
@Colm McCarthy
Whereas Germans have a deep-rooted aversion to inflation it is not entirely clear that they would not entertain a degree of Euro devaluation to avoid contagious sovereign default within the Eurozone.
@ C McC,
Do our ‘common interests in Europe’ include stabilising the external value of the Euro? One of the fault lines emerging now is that the Eurozone is not quite an optimal currency area for everyone. A weaker Euro would suit Ireland particularly nicely.
To bring in a couple of things with that. In fairness, something else that would suit Ireland particularly nicely, is to keep the base ECB rate close to the floor, where it currently is. That point was neatly summed up by Goodbody economist Dermot O’Leary in his February 19th 2010 column, Access to new credit crucial for turnaround. O’Leary of course is referring to the fact that Ireland’s household debt is larger than anywhere else in the EU region, so we ‘benefit’ the most from lower rates on personal borrowings because of our excess leverage. But the other side of that coin is, when rates were kept too low during the period of the boom in Ireland, it left us in the situation, where we allowed ourselves to accumulate the massive amount of personal debt. O’Leary in his piece talks about the interest payments aggregated for all households in the Irish republic to have fallen from €10 billion to €5.5 billion. At the time in the construction industry (when we all thought it could continue), Jean Claude Trichets slashing of the rate was greeted with whoopie’s from developers. Of course now, we understand the Japanese style of problem we are in, with rates on the floor and nowhere else to go, and still no growth in the economy. As Krugman would say, we need 5 to 6% of inflation rates to make real interest rates fall lower, to allow money supply tactics to do anything. BOH.
http://www.irishtimes.com/newspaper/finance/2010/0219/1224264787394.html
O’Leary in his piece talks about the interest payments aggregated for all households in the Irish republic to have fallen from €10 billion to €5.5 billion.
And that is an annual interest bill for households in Ireland aggregates. So in other words, Irelands fiscal debt and personal debt are about neck and neck. If anything, the personal debt crisis might overtake the fiscal debt interest bill in the shorter term. The fiscal could end up over shadowing everything else though in the medium to long term, unless we find a way to de-leverage. I am skeptical that the personal debt amount is being added to, in the same way the fiscal one is piling up. BOH.
@Various.
The “common interests” idea only goes so far. At some level the divergence will become clear.
Others – often Germans – want Irish people, banks, govt etc., to pay back the money that they’ve borrowed, and are borrowing.
Irish people, banks, govt etc., would be happier if they didn’t have to pay the money back.
Meantime, no-one is worried that the Germans won’t pay up on the money they owe to others.
That’s a pretty clear difference of interests. Add Germany’s visceral dislike of inflation and you get to potentially difficult conversations at the European table.