Anglo Chairman-designate Alan Dukes appeared on This Week on RTE Radio 1 yesterday. One aspect of the interview that worried me was Mr. Dukes’s comments on subordinated debt.
Morgan writes an overview of the Irish crisis at VOX: you can read it here.
There has been a fair amount of discussion on this blog about issues of constitutional reform. Some readers may be interested in a interdisciplinary conference to be held on Friday afternoon, 21st May, at the Clarion Hotel, IFSC which includes contributions from economists, political scientists and lawyers on the question ‘Does Ireland need Constitutional Reform. Programme below and further details from firstname.lastname@example.org.
The UCD Constitutional Studies Group presents a conference on
Does Ireland need constitutional reform?
with the support of the School of Law, UCD.
Clarion Hotel, IFSC
May 21st, 2010.
Session 1: Why constitutional reform?
1.00pm: An Iterative Constitution: dynamics of a rule-based legal system – Dr. Stephen Kinsella.
1.20pm: Re-placing the Constitution in the context of reform – Dr. Maria Cahill.
1.40pm: The problems of public understanding and constitutional reform – Dr. Oran Doyle.
2.00pm: Questions and discussion.
Session 2: Electoral and parliamentary reform
2.20pm: Reforming the Seanad – Senator Ivana Bacik.
2. 40pm: Is electoral reform the wrong answer to the right question? – Prof. David Farrell.
3.00pm: “Relaying the playing field – Implications of political reform for the constitutional law ground rules of political competition – Dr. John O’Dowd.
3.20pm: Questions and discussion.
3.45pm: Coffee break.
Session 3: Improving public governance
4.00pm: Sacred spaces and blurred boundaries: Administrative reform and constitutional governance – Muiris MacCarthaigh.
4.20pm: Enhancing government accountability to the Oireachtas – Eoin O’Malley
4.40pm: An accountability branch of government? – Dr. Eoin Carolan
5.00pm: The place of the media in the constitution – Dr. Carol Coulter.
5.20pm: Questions and discussion.
5.45pm: Close of conference.
The FT carries an article about the increased backing for the introduction of national fiscal rules across Europe: you can read it here.
Macro Theorist turned Fed president Kocherlakota writes on this topic here.
I’ve written before about being in favour of a common EU-wide approach to financial regulation and crisis management. So, on the face of it, one might imagine that I’d be happy about the news that EU finance ministers are about to approve a proposal for EU-level regulation for Alternative Investment Fund Managers (AIFMs) including hedge funds and private equity firms. However, looking at the proposals, I’m not too positive about them.
I’m all in favour of registering these firms and collecting statistical information on the exposure that banks have to them. But EU the proposals seem to go well beyond this, including bans on selling to retail investors, limits on selling non-EU-domiciled funds inside the EU, the enforcement of capital requirements etc. I’m not sure that these proposals will ultimately do much other than encourage funds to set up outside the EU, for instance in Switzerland.
The documents associated with the proposal admit at various points that hedge funds did not cause the financial crisis. But other material says stuff like “the crisis has underlined the extent to which AIFM are vulnerable to a wide range of risks.” There seems to be an element here of trying to have it both ways. There is most likely also an element of being seen to do something by picking on an area that, as the BBC news story puts it “many say played a part in the global financial collapse” – even if what many say isn’t particularly accurate.
The cover story in this weekend’s FT magazine reviews the Irish banking crisis and features several current and former IE bloggers: you can read it here.
The New York Times carries a profile of Ben Bernanke: you can read it here.
Here‘s an interesting report on the Irish residential property market prepared by Karl Deeter’s Irish Mortgage Brokers in association with PropertyWeek.ie & Frank Quinn (Senior College Dun Laoghaire). Its conclusion: “residential investment property is overvalued currently by an average of 37% in Dublin, 43% in Cork, and 39% in Galway.”
The UN will suspend Bulgaria as of June 30 from trading emission permits under the Kyoto Protocol, and hence in the EU ETS. The reason is that its accounts are intransparent and untrustworthy. See here and here.
This is good news and bad.
The good news is that the problem seems to be incompetence rather than dishonesty. If organized crime had taken over Bulgaria permit accounts, I would expect that they would not be caught out by maternity leave.
The bad news is that the suspension is not immediate. In the EU ETS, permits trade under “seller beware” liability. That is, if an Irish company buys a dodgy permit from Bulgaria, that is Bulgaria’s problem. Bulgarian companies have thus been given six weeks to sell permits, knowing that their government will not be able to verify their accounts.
On the 28th May, the Geary Institute will hold a major event on “Behavioural Economics, Policy and Business” in Dublin City Centre.
The currently confirmed panelists include Liam Delaney and Colm Harmon of the UCD Geary Institute, Peter Lunn of the ESRI and author of the well-known behavioural economics book Basic Instincts, and Gerard O’Neill, Director of Amarach Research. The event begins at 2pm and ends at 4pm, and will be followed by coffee. The venue is the Institute of Bankers building on North Wall Quay.
The session will begin with a short introduction to the field of behavioural economics. This short introduction will provide a working definition of behavioural economics; a short history of the field; an overview of the major global centres and projects in the area; a description of the most widely cited applications of behavioural economics ideas to real-world problems; and a brief overview of potential applications in the Irish business and policy context.
A wide ranging panel discussion will follow, addressing such questions as:
– What aspects of behavioural economics should particularly interest business people? For example, how is behavioural economics relevant to product development, advertising and marketing? What are the potential regulatory changes emerging from this literature?
– Why should policymakers care about behavioural economics? What is the relevance of behavioural economics to such questions as how we should design taxation and regulation? Is there any role for government to protect citizens from themselves in areas such as financial services?
– What has this new literature to say about economic renewal in Ireland including its relevance to major strategic initiatives such as the Smart Economy and the Strategy for Science Technology and Innovation?
We welcome suggestions for other questions to pose during the panel discussion. There will also be ample opportunity for audience participation.
In order to help us plan the event and print registration details, we would be very grateful if people could RSVP to Emma.Barron@ucd.ie at their earliest possible convenience if they intend attending the event.
The current issue of the New Yorker has a profile of Esther Duflo. In the article, the views of Angus Deaton on the limitations of randomised controlled trials are assessed as wondering if “someone put sand in Angus’s toothpaste”. Readers will find the offending substance here.
You will undoubtedly make your own assessment of the following direct quote from Duflo in the New Yorker piece: “I want a baby goat” she mused. “I’ll take good care of it”.
The World Tonight programme is running a series on fiscal adjustment in Europe, with the attendant lessons for the UK. Last night’s programme includes a report from Ireland plus an interview with Kevin Daly (minutes 07:30 to 17:00); tonight’s programme will report from Greece.
An Taoiseach gives his views on the Irish Banking Crisis in this speech.
[This month will see much more on this topic, with the two scoping inquiries on the banking crisis due at the end of May.]
AIB have released an interim management statement. As expected, the bank has not been able to pay the state its cash dividend of €280 million, so they are issuing shares for this amount instead. The NAMA bonds are referred to “enhancing our contingent liquidity resources.”
As an aside—and sorry to bring up Frank Fahey twice in two days—I’d note when I appeared on the radio with Deputy Fahey in February, he told listeners that the government would definitely be getting its cash dividend from AIB in May. I noted at the time that the coupon stopper was in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements” and so this was highly unlikely. To my mind, the fact that government politicians are sent out to continuously over-promise in relation to their banking strategy ultimately ends up just undermining their credibility.
Update: I just noticed that the Department of Finance press release contains the following:
The Minister explained:
“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”
I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother.
There is still one day left to late-register for the upcoming conference, “Regulating Financial Market Liquidity and Stability,” taking place tomorrow, Friday, May 14th , 5 pm – 7 pm, at the Irish Institute of Bankers in the IFSC. The recent chaotic response of EU policymakers to the Greek debt crisis highlights the importance of the conference’s theme.
REGISTRATION: The event is free, but delegates must pre-register by emailing Irene Moore (email@example.com), by the end of the day today (Thursday 13th May).
Registration begins at 4:45 p.m. and the talks begin promptly at 5 p.m. (You must register and pick up a name tag in order to enter the Institute of Bankers hall.)
Governor Honohan reviews the current situation in relation to the Irish banking system and the Irish sovereign in a speech to the Small Firms Association: you can read it here.
Northern Irish economists and politicians were delighted to have secured a commitment in the Conservative Party election manifesto (here) to “produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland”. There is cross-party agreement in the Assemby for adoption of the Republic’s 12.5% rate. An interesting paper by the Northern Ireland Economic Reform Group (here) explores the legal issues, drawing heart from the European Court of Justice’s “Azores Judgement”.
The European Commission’s proposals are laid out here.
Reinforcing compliance with the Stability and Growth Pact and deeper fiscal policy coordination
Reinforcing the preventive dimension of budgetary surveillance, in particular in good times, must be an integral part of closer coordination of fiscal policy. Also, compliance with the rules needs to be improved and more focus needs to be given to public debt to ensure the long-term sustainability of public finances. Member States should make sure having in place effective national fiscal frameworks. Recurrent breaches of the Pact should be subjected to a more expeditious treatment.
Broaden economic surveillance to prevent and correct macroeconomic and competitiveness imbalances
To prevent the occurrence of severe imbalances it is therefore important to expand economic surveillance beyond the budgetary dimension to address other macroeconomic imbalances, including competitiveness developments and underlying structural challenges. It is proposed to upgrade the peer review of macroeconomic imbalances now carried out by the Eurogroup into a structured surveillance framework for euro-area Member States by making use of Article 136 TFEU.
A European Semester to synchronise the assessment of fiscal and structural policies of EU Member States
Specifying the proposals in Europe2020 to better align economic surveillance, every year a “European Semester” would encapsulate the surveillance cycle of budgetary and structural policies so that Member States would benefit from early coordination at European level as they prepare their national budgets and national reform programmes.
Early guidance at the beginning of each year from the European Council on economic policies would facilitate the preparation of Stability and Convergence Programmes and National Reform Programmes. For the euro area a horizontal assessment of the fiscal stance should be carried out on the basis of the national Stability Programmes and the Commission forecasts.
Beyond emergency support, moving towards a permanent crisis prevention mechanism
Financial distress in one Member State can jeopardise the macro-financial stability of the euro area as a whole. Beyond urgent action that was taken earlier in May, a clear and credible set of procedures for the provision of financial support to euro area Member States in financial distress is necessary to preserve the financial stability of the euro area in the medium and long term.
When crisis prevention fails, financial assistance should be provided by the euro area in the form of lending, while the associated policy programme and conditionality should be set within Article 136 TFEU. To raise the necessary funds, the Commission would issue debt instruments when the need occurs, as is the case for balance of payment support to non-euro-area Member States.
The way forward
The Commission stands ready to follow-up swiftly with legislative proposals, including amending the regulations underpinning the Stability and Growth Pact, to enhance the prevention and correction of macroeconomic imbalances within the euro area, and to establish a more permanent framework for crisis management.
Gillian Tett’s Financial Times column today praising the Irish government’s approach to fiscal adjustment relative to that of Greece, Spain or Portugal is welcome. Without doubt, the government has taken a brave approach to fiscal adjustment and the public reaction to it has been one of remarkable tolerance. However, I think we need to be careful about overdosing on external and self-praise and concluding that we’re somehow out of the woods on the fiscal front.
I previously argued that wave power would, if anywhere, be commercialised first in Ireland — because our waves are second to none (in the populated world) — but that there is no reason to assume that it would be an Irish company that does the commercialisation.
Indeed, Ocean Power Technologies of Pennington, New Jersey, has kindly offered to accept the generous subsidies for wave power offered by the Irish government (see Irish Times).
As is customary these days, OPT promised to create “ten of thousands” of jobs. The jobs are in construction and therefore temporary.
OPT also called for a streamlined approval process.
Here‘s an interesting set of charts from Spiegel Online describing the debt problems of the countries who make up a certain animal-related acronymn. The graphs on the maturity profiles of the debts for each country provide a useful perspective on the stabilisation deal.
After the excitement of the weekend’s EU announcement, the question most people will ask is “will it work?” I think the answer to this question depends on what we mean by “work”.
There are obvious parallels here with the banking crisis. As markets began to doubt the solvency of many institutions, including the Irish banks, access to short term liquidity dried up for these institutions. Governments provided various liability guarantees to help these banks regain access to markets (ours being the most extensive) but these guarantees did not change the underlying solvency picture. Ultimately, the problem of insolvent banks had to be dealt with via costly recapitalisation measures, a process that we in Ireland have yet to complete.
The size of the funds announced in the EU deal are large enough to most likely ensure that, for a while, no EU country will fail to roll over its sovereign debt. In that sense it will most likely work. But it doesn’t change the fiscal reality.
Last week’s €110 billion Greek deal wasn’t well received by the markets because it still seemed to imply a Greek default was on the way. Last night’s announcement is being well received but then it doesn’t actually come with a concrete fiscal restructuring plan for Portugal, Spain or Ireland, so the plan can be taken good news without having to question any dubious underlying assumptions about fiscal sustainability. If the time comes when this fund is tapped but the markets don’t buy the stabilisation plan announced, the situation could unravel again.
Most of the thoughtful reaction elsewhere points to it being a long and complicated road ahead. The Baseline Scenario guys give their reaction to the plan here. Arthur Beesley also has a nice piece in the Irish times here.
On the 28th of April InterTrade Ireland held their second Economic Forum entitled Shaping Recovery. Speakers included Barry Eichengreen (Berkley), Linda Yueh (Oxford), Will Hutton (Work Foundation) and Michael O’Sullivan (Credit Suisse). The presentations have now been put on the web and can be found here. As the speakers took a wider perspective the presentations are still relevant.
Barry Eichengreen argued that Zarnowitz’s Law – the deeper the recession the stronger the recovery – would not hold this time. While he argued that the US won’t experience a double dip, he also thinks that current projections are to optimistic. He believes that Europe will underperform relative to the US. He also had a few words on Greece.
Linda Yueh focused on Asia. She was upbeat but also highlighted the issue of global rebalancing. She pointed out that as China has a very poorly developed financial system the exposure to the financial crisis had been minimal. However, internal rebalancing and re-orientation of the economy towards domestic consumption were important challenges. She highlighted that China is becoming a capital exporter particularly in relation to energy, minerals and other raw materials (this has implications for Europe).
Will Hutton focused on innovation. He also commented on the economic problems in the UK and Ireland (he made a few comments that might provoke some debate – unfortunately he had to leave the discussion early). In general he argued that since innovation depends on the cumulative stock of scientific and technological knowledge most innovation will continue to take place in the EU, US and Japan but that it was important to put the appropriate structures in place.
Michael O’Sullivan took a closer look at Ireland, outlining achievements, comparing the latest crash with previous ones and argued for institutional reform He also had a very interesting quote about the Irish by Fridrich Engels that I had not heard before. His graph on the growth of Irish golf clubs also caught attention!
All in all there was plenty of food for thought including lots of interesting graphs and I suggest you have a look yourself. You can also listen to the presentations.
Ben Bernanke’s speech this weekend focuses on this highly-popular area of research: you can read it here.
The European Union has announced an agreement among heads of state to address the mounting sovereign debt crisis. Here’s Commission President Barroso’s statement. The meat of the announcement is the following:
First the Commission will present a concrete proposal for a European Stabilisation Mechanism to preserve financial stability in Europe. This proposal the Commission will make will be presented to the ECOFIN meeting next Sunday, the day after tomorrow (9 May).
Much of the speculation about the content of this proposal revolves around the ECB. Some media stories (such as this one) are discussing an extension of the ECB’s liquidity operations, which is fine but doesn’t go to the heart of the soverign debt problems.
Other stories (such as this Reuters story carried by the Irish Times) point to the ECB purchasing sovereign bonds.
“You have this ‘no monetary financing’, but you are allowed to buy in the secondary market, so what’s the difference?” an official involved in European banking supervision told Reuters. “Buying in the secondary market, you take the pressure, and so you push people in the primary market.”
Analysts have estimated the ECB might buy some €200 to €300 billion of bonds, about 20 to 30 per cent of estimated annual new issuance in the euro zone.
This point that the ECB can actually do this is correct. The wording of the no monetary financing clause (article 123 clause 1 of the current version of the consolidated Treaty on the functioning of the EU) is as follows:
Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
I suspect the direct purchase phrase was put in to make it clear that public debt instruments were fine for use in ECB repurchase agreements with banks. But the wording does not rule out secondary market purchases.
Exactly what effect this type of intervention would have would depend on how it was implemented. If it was simply a once off purchase of a load of Spanish, Portuguese or Irish debt, I can’t see how this would have much effect since the underlying stock of debt would remain the same.
If, however, the operation took the form of secondary market interventions right after primary market issues, then it would have an effect. For example, the Irish government could issue debt to some banks who could then immediately sell these bonds on to the ECB, perhaps for a small profit. the only risk for the banks being the small probability of being left with the hot potato at the moment of a default.
This would pretty much be breaking the spirit, if not the letter, of the Treaty. But, we’re in this territory already. The existing Greek bailout is being legally justified on the basis of this clause in Article 122:
Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned.
Note the rumoured scale of this operation. If the rule of thumb relating to ECB capital subscription is applied again, Ireland would have to supply over €4 billion to this fund.
The FT profiles ‘Dr Realist’ – you can read it here.