Just the One: Time Inconsistency and the Greek Bailout(s)

As EU decision-makers grapple with their response to an imminent Greek debt default or bailout, they need to consider not only their current decisions but also their likely future decisions. It is critically important that they not deceive themselves into thinking that they (or the Greek government) can commit to making all their future decisions now. There are strong grounds for positing time-inconsistency in EU and Greek government decision-making concerning the Greek bailout. This is a simple point, but critically important to good policy planning in this situation. Acknowledging time-inconsistency does not proscribe any particular policy choice, but it encourages policy makers to act cautiously.

AIB “too smart to buy this junk”

The AIB Chairman apologised today at the bank’s AGM for the self-inflicted problems caused by excessive lending to the property and construction sectors. At least, AIB avoided major losses in the US toxic securities sector  – as revealed in the Congressional hearings on Goldman Sachs, the GS view was that AIB was “too smart to buy this junk”.

See this report on the hearings and this extract featruing the committee chair Senator Carl Levin:

Levin chides Sparks for selling “junk”: In his second jousting session with Sparks, Sen. Levin questioned the former executive about the bank’s Hudson Mezzanine deal, reading an email from a Goldman salesperson in which she said that the client, Allied Irish Bank, was “too smart to buy this junk.”

“I didn’t believe it was junk. We didn’t believe it was a junk. A sales person said that,” Sparks said.

“Yes, if a sales person believed it was junk, you were selling junk,” Levin replied.

A little bit of good news

Given all the worries concerning the Eurozone right now, I thought it might be appropriate to post a link to this.

Philip Lane in the New York Times

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.

Irish Bond Spreads Up Sharply

S&P downgraded Greek government bonds to junk status today and also downgraded Portugal’s debt. Meanwhile, in Germany, there appears to be continued prevarication about whether\how to help Greece.  To be honest, I’m not willing to spend that much of my time following the whole Germany\Greece soap opera.

What’s more concerning, however, is that the yield on Irish government debt has jumped dramatically over the past week, with today being the worst day (chart here). The yield on ten year Irish government bond yields rose to 5.25% today with the spread relative to German bonds rising 42 basis points. At 2.3%, this spread is now not too far off the highs of about 2.5% seen last summer.