Banking Crisis

European Commission Extends ELG Scheme

Today the European Commission announced that they are allowing the government’s new guarantee scheme, the Eligible Liability Guarantee, to be extended from including securities issued before June 1 (i.e. tomorrow) to securities issued up to the end of June.

Now the fact that the Commission had only allowed the scheme to cover bonds issued before June 1 seems pretty clear from this press release announcing its original approval on November 20 last year. It says “The instruments guaranteed under the scheme may be issued from 1 December 2009 until 1 June 2010.”

I have to admit that until now I had thought the ELG scheme covered securities issued up to the end of September. For instance, here’s the Department of Finance’s press release welcoming the November 20 decision from the Commission. It describes the new guarantee as follows: “It will apply to certain liabilities (including deposits) incurred by participating institutions during the period up to 29 September 2010.”

And here’s an FAQ about the scheme issued after it came into operation in December. It also mentions 29 September 2010 as the date up to which securities could be issued and covered by the scheme. On the face of it, this seems at odds with the European Commission’s statement about the scheme. It is possible that this statement from the FAQ reconciles the apparent contradiction:

The ELG Scheme is therefore scheduled for review by the European Commission in June 2010 and the references to 29 September 2010 below must therefore be read in that context.

But strictly speaking, this doesn’t seem enough to fully reconcile the two sets of statements. Realistically, it seems to me that the correct interpretation of the scheme was that it applied to debt issued up to June 1, at which point the Commission could assess the scheme and potentially extend it. (Of course, we’re into angels-on-pins legalistic territory here and there may be some complex sense in which government and Commission statements on the scheme were, in fact, consistent.)

In any case, it certainly seems as though September 29 is the government’s preferred end-date for the ELG. In that sense, today’s one month extension may be a disappointment to them. Perhaps there’s another extension coming next month. It will also be interesting to see if any debt securities get issued under the scheme during this month.

Banking Crisis

€2 Billion More for Anglo

From the Department of Finance:

The Minister for Finance, Mr. Brian Lenihan, TD has confirmed today that an additional €2 billion is being made available to Anglo Irish Bank to support the capital position of the bank. This capital injection is in line with the Minister’s statement to the Dáil on the 30th March 2010, when he pointed out that the bank would need further capital to cover future losses and accomplish the restructuring of the bank and its balance sheet. This capital contribution was also approved by the European Commission last March.

The capital requirement arises out of additional losses resulting from the level of the discount on the first tranche of Anglo’s loans transferred to NAMA and further impairments on the remaining loan book. The Minister has previously provided €4 billion in 2009 and €8.3 billion by way of a Promissory Note to the Bank on the 31st March 2010.

At that time the Minister indicated that additional capital could be of the order of a further €10 billion. The €2 billion announced today is part of that anticipated capital requirement. The amount of further capital that will be required is dependant on a number of factors including the discount applicable to future tranches of assets transferred to NAMA and further losses on the bank’s non-NAMA loan book

The capital support is being provided by the State in the form of a promissory note, payable over a number of years into the future. In essence this means the amount will be paid over a period of 10 to 15 years, thereby reducing the impact on the Exchequer this year and stretching the payments into the future.

Anglo’s restructuring plan is being submitted to the European Commission today. Discussions between the Commission, the Department and the Bank on the restructuring plan will continue and the future of the bank will be determined by those discussions. As the Minister stated last March the overriding objective of the Government is to minimise the cost to the taxpayer of the restructuring of Anglo Irish Bank.

In relation to the wonder of promissory notes (about which I’ll bet you’ll be reading in the business section of your newspapers tomorrow) I’m pretty sure this stuff about minimising impact on the Exchequer won’t fit in with the Eurostat people’s worldview. Most likely, this and any other promissory notes issued to Anglo, INBS or EBS will count towards this year’s General Government deficit.

This stuff suggests though that the NTMA, lacking the Department’s gift for PR, have been missing a few tricks in relation to promoting their activities. I suggest the following as a press release the next time they issue a ten-year bond:

The NTMA has today issued a new bond. To reduce the impact on the Exchequer, the state will only have to pay out about 5% of the face value of this bond over each of the next few years and the rest of the payment is stretched out way into the future. In fact, apart from that little interest payment, we don’t have to pay a cent back until 2020. We are exploring the idea of further helping the Exchequer by issuing lots more of these wonderful bonds.

Beyond the promissory note silliness, what else can you say at this point? Will the usual suspects be along tomorrow to explain to us how, in fact, there is no connection between the banking and budgetary crises, or have even the most hardcore loyalists thrown in the towel on that particular denial of reality?

Fiscal Policy Uncategorized

Spiegel Online Calculations of Irish Debt

A few weeks ago I posted a link to a presentation put together by Spiegel Online showing the maturity profile of the debt of Ireland and other European sovereigns with high deficits. The exact nature of the calculations for Ireland were questioned at the time in the comments. Last week, I received an email from someone who clarified two points for me in relation to the Irish information in this presentation.

First, the €8.6 billion shown as Irish bonds due this year are almost all Treasury bills even though the chart is labelled “When Irish bonds are due”.  Second, the Spiegel people  selected “Republic of Ireland” as opposed to “Ireland Government Bond” when performing their Bloomberg search. This means that their numbers for future years include, for example, the Dublin Airport Authority and the Housing Finance Agency.

Banking Crisis

Department of Finance’s Strong Responses?

Shane Coleman of the Sunday Tribune reckons that

It was extraordinary to hear commentators’ reaction to the spat between UCD’s Morgan Kelly and the Department of Finance. The latter was roundly criticised in some quarters for having the audacity to put up a strong opposing case to Kelly’s thesis that it was a matter of when, and not if, Ireland went bust.

I recall offering a pretty negative opinion on the media stories about the government’s reaction to Morgan Kelly’s piece last Sunday while on RTE radio last week. I’m not sure what others said but my negative reaction was not about people having the “audacity” to oppose Morgan Kelly. Rather my criticism was that the response did not at all put up “a strong opposing case”. Let’s look at one example from the many of these stories that were reported, the one reported by Coleman himself.

Let me point out three problems with this response.

First, it relies on anonymous sources. Frankly, my stomach churns every time I see people who have been brave enough to step up in public to say their piece being attacked by anonymous government sources. Let’s be honest here. This is a political game. If Minister Lenihan or other people in the government wish to respond to an opinion piece, they should do so in their own name rather than using the civil service.

Second, the “strong opposing case” includes stuff like this:

“Professor Kelly cites Uruguay as an example of how his policy works. Would Irish citizens, public servants and social welfare recipients be satisfied with Uruguayan levels of public services, pay and social welfare? I think not.”

Frankly, that’s not strong, it’s pathetic.

Third, the anonymous DoF source said the following:

The vast majority of bonds were so-called senior bonds – equivalent to deposits and on which no risk premium was paid.

Despite all the confusion about pari passu on windup, it is patently false to say that senior bonds are equivalent to deposits. Prior to September 2008, Irish bank deposits were insured up to a €20,000. Senior bonds had no such insurance offered by the government.

A carefully considered public response, authored by a named individual associated with the government, would have been a good idea. That is not what we got.

Banking Crisis

Morgan Kelly’s Bank Loss Calculations

There has been some debate on this website and elsewhere about the calculations underlying Morgan Kelly’s recent Irish Times article. Morgan has kindly agreed to provide a spreadsheet illustrating his calculations. You can find the spreadsheet here.

From Morgan’s email to me: “As you can see, my optimistic scenario is for a loss of 75 bn, offset by 25 bn equity, leaving the Irish Times figure of a 50 bn bill for John Taxpayer. My realistic scenario is for a loss of 105 Bn.

I also include a brief calculation of the post-nationalization value of AIB and BofI. Given their extraordinary operating costs of 4.5 Bn, the taxpayer is looking at an annual loss of 1.5 Bn, and that is before including the cost of tracker mortgages.”

Update: Note this is a slightly updated version of the spreadsheet put up Sunday night, fixing a typo. The “realistic loss” scenario should have been 105bn not 115bn.

Banking Crisis

John McHale on the Irish Banks

Today’s Irish Times carries an extensive essay by John McHale on the Irish banks: you can read it here.


Euro Debate

The Economist website is currently featuring a debate among a number of well-known economists on the future of the euro – you can find it here.

Economic Performance


David McWilliams

Directed by Conall Morrison.

The Peacock Theatre
16 June-3 July
Previews 9-15 June

OUTSIDERS is a characteristically vivid, humorous and uncompromising account of what is going on in Ireland. In a unique theatre piece, McWilliams offers a narrative of the recent collusion between the insiders of the Irish political system and the financial sector.

McWilliams believes Ireland’s political and social divide is not so much about rich and poor, young and old, urban and rural, but about Insiders and Outsiders. The Insiders – found in every village, town and city – are those with a stake in our country who believe that today’s status quo must be preserved at all costs. The Outsiders – who might live next door – are those who realise that the status quo is part of the problem.

In Ireland every time there is a crisis, the Insiders get stronger, not weaker. Far from losing power and paying for the chaos they caused, they tighten their grip on the country. In contrast, the Outsiders are excluded and left to fend for themselves. That is what happened in the 1950s and the 1980s and it is happening again now. But there is an alternative. OUTSIDERS is about the alternative.

While the others cheered the boom, only one economist accurately predicted the collapse and mess we find ourselves in. He told you the truth then; he’s telling you the truth now.

Tickets: €14 – €22; 8pm, Saturday matinee 2.30pm

For more information please call the Abbey Box Office 01 87 87 2222

Abbey Theatre

Banking Crisis

Mortgage Arrears: March 2010

The financial regulator has released the latest summary data on mortgage arrears here. The data show a 13% increase in accounts more than 90 days in arrears. In total, 4.1 percent of mortgages are in arrears over 90 days, with 2.8 percent of these being over 180 days.

Balances on past due mortgages are higher on average than those not past due: The average balance for mortgages not past due is about 147,600 while the average balance for mortgages in arrears is 188,800. This means that past due mortgages account for 5.2 percent of the total balance of mortgages outstanding. Those mortgages past due over 180 days already have approximately 10 percent of the balance in arrears.

These calculations do not include people who are not in arrears because they have come to an agreement with their bank on a different repayment schedule.

These figures suggest to me that the Central Bank Prudential Capital Assessment Review’s “stress scenario” assumption of 5 percent looks more and more like a reasonable baseline. This is also the number the Morgan Kelly mentioned in his recent article as a conservative estimate.

How could this number come about? For instance, if the mortgages that need to be foreclosed on or restructured end up accounting for 10 percent of the total balance and the loss given default is 50 percent, then this would imply a five percent loss on the mortgage book. One could imagine more stressful scenarios than this.

Banking Crisis

Cowen on Ireland Defaulting

An Taoiseach has said the following in relation to Morgan Kelly’s article:

“Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

Let’s compare this with the following passage from Morgan’s article:

We need to explain that the Irish State has always honoured its debts in the past, and will continue to do so. However, the State is a distinct entity from its banks and, having learned the extent of the banks’ recklessness, we now have no choice but to allow the bank guarantee to lapse and to share the banks’ losses with their bondholders. It must be remembered that when these bonds were issued they had no government guarantee, and the institutions that bought them did so in full knowledge that they could default, and charged an appropriate rate of interest to compensate themselves for this risk.

So here’s a question. When Mr. Cowen says “Ireland”, does he mean “Irish banks”? If so, it would be nice if he was clearer about this matter in the future.


Hendry on climate change

David Hendry weighs in on climate change, citing me out of context, but otherwise in his usual sound way.

Economic history

Keynes in Ireland

Keynes’ famous lecture on economic experimentation, delivered at UCD in April 1933, has recently become available online.


It’s still 20%

The European Union aims to reduce its greenhouse gas emissions to 80% of their 1990 levels by 2020, and to 70% if there is a meaningful international treaty on climate policy.

These targets were set well in advance of Copenhagen, and the EU thus excluded itself from the negotiations. If you know what someone is going to say, why talk to them?

So as to underline the point that environmentalists do not understand much about negotiations, there is now a push for the 30% reduction target anyway. It’s as if someone walks into your shop, sees something they like but decide it’s too expensive, and then you decide to give it away for free! What a brilliant strategy to further undermine Europe’s standing in the world.

Fortunately, the 30% plan has been shelved again — for the time being.

World Economy

Ants, grasshoppers and the London Underground

Martin Wolf has a really nice column here. For those of you who can’t access the article, the bottom line is that German and Asian savers have (via their banks) invested their savings in an exceptionally foolish manner — that is, by lending to the likes of us, to finance our excessive consumption habits. There is a clear possibility that they are, sooner or later, going to lose a lot of money as a result.

This brings to mind Keynes’ famous line that

“If the Grand Trunk Railway of Canada fails its shareholders by reason of legal restriction of the rates chargeable or for any other cause, we have nothing. If the underground system of London fails its shareholders, Londoners still have their underground system.”

At least 19th century Britain was investing in overseas railways, rather than in overseas housing bubbles!

One wonders whether the threat of ‘restructuring’ will eventually prompt the ants of Germany and Asia to start investing more of their savings in domestic investment projects, which might provide them with the foundations of sustainable growth.

Banking Crisis

TARP Costs

Morgan Kelly’s recent Irish Times article covers a lot of ground; this post is just about a single dimension of his contribution.

One point he makes is to look at the US TARP:

We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.

The estimated cost of TARP has fluctuated quite a bit over time  (the US Treasury helpfully releases valuation updates four times a year).   The most recent release is from last Friday, with the current estimated cost at $105.4 billion.  It is especially noteworthy that the TARP components related to the banking sector per se are projected to make a profit, while the main losses relate to AIG, assistance to homeowners and assistance to the US automobile industry.

The release is here (see also the links there to the underlying calculations).

Of course, the realised fiscal cost of TARP does not provide sufficient information to judge the overall effectiveness of TARP, since it is important to take into account the impact of early repayment of TARP funds on the behaviour of US banks, plus other broader factors.

Finally, the main point remains – the size of the Irish banking intervention (relative to the size of the economy) is much larger than the TARP, reflecting the much more generalised banking crisis here.

Banking Crisis

Maturity of Irish Bank Debt

Following on from John McHale’s post over the weekend, here‘s an expanded version of the document I sent to John. There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.

This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.

The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated.

The very significant figure for bonds due this year shows that conjectures that the need to roll over bank debt could lead to a serious problem for the Irish government are essentially correct. Whether this scenario will actually happen, we don’t know, but one should be careful to dismiss those who say it could.

Update: The document had tables splitting debt securities into subordinated and senior debt. Because the total includes commercial paper and certificate of deposits, this might cause some confusion. I’ve edited the document to list the split as subordinated and other.

Banking Crisis

Learning to Say No

The IMF has released a new Staff Position Note that addresses the challenges in establishing a financial supervisory system that is capable of saying ‘No’.  You can download it here.

Economic Performance Economics

As Science Evolves, How Can Science Policy?

Benjamin Jones of Northwestern University has written an interesting article on how the changes in the nature of scientific research pose challenges for science policy.  You can read it here.


Getting science policy right is a core objective of government that bears on scientific advance, economic growth, health, and longevity. Yet the process of science is changing. As science advances and knowledge accumulates, ensuing generations of innovators spend longer in training and become more narrowly expert, shifting key innovations (i) later in the life cycle and (ii) from solo researchers toward teams. This paper summarizes the evidence that science has evolved – and continues to evolve – on both dimensions. The paper then considers science policy. The ongoing shift away from younger scholars and toward teamwork raises serious policy challenges. Central issues involve (a) maintaining incentives for entry into scientific careers as the training phase extends, (b) ensuring effective evaluation of ideas (including decisions on patent rights and research grants) as evaluator expertise narrows, and (c) providing appropriate effort incentives as scientists increasingly work in teams. Institutions such as government grant agencies, the patent office, the science education system, and the Nobel Prize come under a unified focus in this paper. In all cases, the question is how these institutions can change. As science evolves, science policy may become increasingly misaligned with science itself – unless science policy evolves in tandem.

Higher education

Kevin Denny: The Effect of Abolishing University Fees

Kevin Denny’s working paper on the effect of abolishing university fees in Ireland is available on this link


University tuition fees for undergraduates were abolished in Ireland in 1996. This paper examines the effect of this reform on the socioeconomic gradient (SES) to determine whether the reform was successful in achieving its objective of promoting educational equality. It finds that the reform clearly did not have that effect. It is also shown that the university/SES gradient can be explained by differential performance at second level which also explains the gap between the sexes. Students from white collar backgrounds do significantly better in their final second level exams than the children of blue-collar workers. The results are very similar to recent findings for the UK. I also find that certain demographic characteristics have large negative effects on school performance i.e. having a disabled or deceased parent. The results show that the effect of SES on school performance is generally stronger for those at the lower end of the conditional distribution of academic attainment.

Higher education

Coleman: Obsession with PhD Economists

Marc Coleman continues to fight the good fight against the evil that is economists with PhDs. Coleman seems to be taking his campaign to a new level with his latest claim:

Academia must also change. The obsession with producing only PhDs is the main reason the crisis happened.

I read the last sentence and then started thinking of the number of ways in which it seemed to be wrong. I lost count at about five and then decided to go back to plotting the downfall of the Irish economy along with my other PhD-qualified co-conspirators.

Banking Crisis

The 65 Billion Euro Question

In an Irish Times article that must have much of the country talking, Morgan Kelly calls for a Special Resolution authority to force bank creditors to swap 65 billion of debt for equity (link in Greg’s post below).     The number is €50 billion less than called for in his V0X article earlier in the week, and critically calls for the losses to be imposed after the original guarantee expires in September.   He is thus, as far as I understand, not calling for default on the “quasi-sovereign” guarantee. 

I am sympathetic to the idea of forcing the funders of Ireland’s banking binge to bear a fair share of the resulting losses (some thoughts here).   But if Morgan’s policy suggestion is not to be dismissed, we need more specificity on the source of the €65 billion.   The Anglo accounts revealed that roughly €7 billion of bonds will mature post September.   He must have the big two in his sights. 

Even with Special Resolution authority in place, the proposed debt-equity swap could only be triggered if capital adequacy falls below some critical threshold.   But the two “technocrats” Morgan lauds appear to believe that Bank of Ireland and AIB are on course to reach the new capital adequacy requirements.   Patrick Honohan had this to say in a recent speech:

Over the previous few months, we at the Central Bank have been making a careful assessment of the likely bank loan-losses that are in prospect over the next few years. This is over and above the valuation work being carried out by NAMA, and which gives us a good fix on the likely recoverable value of the larger property loans.  We have been working on the non-NAMA loans and figuring out their likely performance as they suffer from the impact of the overall economic downturn – part of it of course attributable to the global crisis, and not just to the bursting of our own bubble.  This exercise involved working with the banks, but challenging their estimates of loan-loss based on our own more realistic – some may say pessimistic – credit analysis. (I am over-simplifying the exercise, as it also looked at other elements of the profit and loss account over the coming years).  The conclusions of this exercise are worth emphasizing. 

To my relief, and slight surprise, it turns out that most of the banks started the boom with such a comfortable cushion of shareholders’ funds that they would be able to repay their debts on the basis of their own resources.  This includes the two big banks.  It is because of this fact – that their shareholders’ funds will remain positive through the cycle – that one of them, Bank of Ireland, has already been able to tap the private market for an additional equity injection.  Of course they do need additional capital to move forward, but, as has happened in the US and elsewhere, the Government’s capital injections of last year into these two institutions looks like being well-remunerated.

The €65 billion number needs more explanation. 

Update (Sunday, May 23)

In correspondence, Karl Whelan has provided maturity information for the outstanding bonds of the major banks.   The information is drawn from the 2009 accounts, and is based on bonds that mature more than one year after December 31, 2009.   Thus, it does not include bonds that mature in the last quarter of this year.   (It is not clear what fraction of the bonds were issued based on the extended guarantee.)

The numbers are as follows (billions of euro):

BOI:       Senior, 18.5;  Subordinated, 5.3;    Total, 23.8

AIB:       Senior, 8.5;    Subordinated, 4.6;    Total, 13.1

Anglo:    Senior, 4.1;    Subordinated, 2.7;    Total, 6.8

INBS:     Senior, 1.2;    Subordinated, 0.2;    Total, 1.4

ILP:       Senior, 5.1;    Subordinated, 1.6;    Total, 6.7

Totals:   Senior, 37.4;  Subordinated, 14.4;   Total, 51.8

These numbers suggest that Morgan’s €65 billion is in the right ballpark.   But they also highlight the extent to which the money relates to the big two, and especially Bank of Ireland.   The most natural sequence for implementing the loss imposition strategy that Morgan proposes would be: (1) legislate a resolution regime; (2) apply comprehensive stress tests to determine capital adequacy; and (3) trigger resolution tools as required.  Based on the stress tests that have been done so far, which we are told have been quite comprehensive and conservative, the big two would not be put into resolution.   Of course, it is evident that Morgan does not believe these tests were comprehensive or conservative enough, with AIB probably being more suspect than BOI.   Even so, I think it is important not to expect too much in the way of loss imposition on creditors from a resolution regime.  Yet it is still worthwhile to pursue a regime even if the savings to the taxpayer are just a fraction of the €65 billion. 


Morgan Kelly: Burden of Irish Debt Could Yet Eclipse Greece

Morgan Kelly has published a downbeat assessment of Ireland’s prospects for debt stabilisation in today’s Irish Times. As part of this, he provides a very powerful indictment of the Irish bank loan guarantee and Anglo bailout.

Economic Performance

The Very Bad Luck of the Irish / Irish Miracle – or Mirage?

Peter Boone and Simon Johnson turn their attention to the Irish economy in this Baseline Scenario article (also published in an edited form as “Irish Miracle – or Mirage?” on the NYT Economix blog).


Climategate (ctd)

Frank McDonald at last admits that all is not well in climate land, but fails to find fault with the advocates of climate policy. Anne Jolis is more strident.


INFINITI 2010 Conference at TCD: International Credit and Finance Markets: After the Storm?

The largest finance conference in Ireland returns for its eight year; The INFINITI Conference on International Finance will be held at TCD from 14th-15th June.

In addition to the keynote and special sessions, there are over 166 papers being presented. Full details including registration are available here.

Highlights of the conference include

  • Opening address by Professor Patrick Honohan, Governor of the Central Bank of Ireland (Monday 14 June)
  • Roundtable on Property and Real Estate Investment, Monday 14 June, afternoon with lead speaker Professor Simon Stevenson, Director of Center for Real Estate Studies, City University Business School, London, and panel members Derek Brawn, Constantin Gurdgiev, and Peter Matthews.
  • Roundtable on Investment in a Post Crisis World, Tuesday 15 June, Afternoon. Sponsored by the CFA Institute Ireland, this roundtable features: “An Update on Latest Trends in Fund Offerings” by David Hammond, CFA, Bridge Consulting,  “Major Challenges in Allocations to Irish and Emerging Markets’ Equities, Liquidity Risk and Product Innovation: The Perspective of a Pension Fund Trust” by Stephanie Condra, CFA,  Invesco Pension Consultants,   “An Update on Current Issues in the EU Government Bond Market” by Catherine McLaughlin, CFA, Irish Life and “Role of the CFA Institute and CFA Ireland in the Changing World” by Oliver McClure, CFA
  • Roundtable on The Structure of the Emerging Bond Market, organized by the OECD Development Centre in collaboration with the Pontifical Catholic University of Argentina Graduate Business School. It will bring together three recent papers on the micro-structure and pricing of emerging bond markets.

166 research papers on a vast array of international financial topics. Highlights include


Ireland’s trade performance

Floyd Norris in the New York Times last weekend put together some interesting comparative charts for twelve countries including Ireland showing trends in their trade up to the beginning of this year. The relatively small dip in Irish exports during the recession comes through clearly. He draws attention to the welcome rebound in trade globally, but classes Ireland among the four Euro laggards including Greece, Portugal and Spain. However, the data for Ireland only go to the end of 2009, whereas for other countries the data includes the first three months of 2010. As all of the rebound in the other countries has occurred in this first quarter of 2010, the charts give an unfavourable, but misleading, impression of Ireland’s comparative trade performance.

Banking Crisis

Love Letters

At VoxEU, Anne Sibert writes on “… how Icelandic banks issued “love letters” to each other – swapping their debt securities and using the other bank’s debt as collateral. This ruse ensnared not just the Icelandic Central Bank, but also the ECB – a fact that has only recently come to light. The ECB’s lack of transparency on this is a serious problem.”

The article is here.

EMU European economy

Merkel Proposing Orderly Default Framework

Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”.  In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows: 

“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”

It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.

Banking Crisis European economy

Germans Restrict CDS and Short Selling

Coming hot on the heels of the EU’s restriction on hedge funds because of the role they played in the financial crisis (though this role was in fact pretty minimal) comes the latest European attempt to deal with nasty financial market participants. The German government has released the following statement, translation thanks to the FT’s Alphaville column:

The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).

In addition, BaFin has banned naked short sales in the following financial sector companies: 











These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.

BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.

Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.

The FT notes that “BaFin had previously introduced a ‘transparency system for net short selling positions‘, and found ‘no evidence of massive speculation against Greek bonds‘ in the CDS market.”

Let’s be clear about this. Short sellers are not the cause of the European sovereign debt crisis anymore than they were the cause of the Irish banking crisis.

As an aside, it’s worth noting that this announcement appears to have triggered a pretty serious downward run on the euro. Now I happen to think that this is a good thing in our current economic circumstances but perhaps the “ve must protect ze currency” crowd might remember that much of the demand for the currency comes from people who use it to purchase financial assets. If you keep mucking around with the rules of the games for financial assets denominated in euro, eventually investors pack it in and your currency loses value.

This shouldn’t be too complicated a point to understand. For example, I teach my undergraduates about how a currency’s value depends on the supply and demand for the assets denominated in that currency.



Germany has been one of the main drivers of international and EU policy on climate change, and hence one of the key drivers of Irish climate policy.

Until recently, there was political disagreement about whether draconian greenhouse gas emissions where needed, or drastic cuts would be enough.

In the last few months, two documents have appeared that suggest that this is changing. Both are available in German only.

The first paper, by a relatively junior researcher at think tank close to the Chancellery, suggest that (whisper it) the sacred two degrees target is perhaps infeasible, that (a few odd but not entirely crazy people have argued that) there is nothing special about two degrees anyway, and that we should perhaps keep in the back of our minds that one day we may need to consider whether a Plan B might be required. The extremely cautious tone of the paper is indicative of the scale of the heresy.

The second paper does not mince words. It is by the Scientific Advisory Council of the Federal Ministry for Finance, a body of 29 professors. The Council argues that climate change is not as big a problem it is made out to be, but that it can be solved at a relatively low cost with clever policy intervention. It further argues that the first-mover advantage in technological progress is a myth (the second mover is often better off) and that Germany should stop taking the lead as nobody else is prepared to follow.

Harbingers of change to come? Time will tell.