More on the Four-Year Plan

I give my view in this article in today’s Irish Times.

20 replies on “More on the Four-Year Plan”

Raising taxes and cutting welfare payments are the easy parts with the external overseers to pass the buck to. However, the people responsible for implementing glacial change in the public service are the same individuals who went with the comfortable flow in the good years while politicians have a poor record in facing down the mainly wealth interests in the protected private sector.

‘Competition in the professions will be promoted and overseen by an independent figure, reporting regularly to Government,’ can hardly be very reassuring.

Civil servants have been assured of job security while most of the revenue raising on pensions will also come from the private sector.

The only hope is that the IMF will push for reforms to help to create a fairer Irish society and set the base for a sustainable economy.


Your Irish Times piece is thoughtful and carefully argued, and makes a positive contribution to the debate. In terms of the procedural contribution of this type of plan, which you stress, the usual problem with such plans is that there is no reliable mechanism to monitor or enforce them through time. However, in Ireland’s case, the steadying hand of EU-IMF oversight could mean that this plan is actually implemented to a reasonable extent. The plan could provide a solid foundation for eventually returning the economy to a stable growth path, if the electorate and political elite can be convinced of its necessity. Economists need to help inform the Irish electorate that the type of harsh medicine described in this plan is exactly what the sick economy of Ireland needs to recover. That message was implicit in what you said in your article, but needs to be stated plainly.

@ Gregory Connor

Economists need to help inform the Irish electorate that the type of harsh medicine described in this plan is exactly what the sick economy of Ireland needs to recover.

The Examiner has a headline today: Cuts for all…except for politicians and top public servants

The levy on public staff pensions is not going to cause much concern; a hike of 9% was given from benchmarking in addition to all the other excess payments made during the decade.

If you were unemployed, eager for a job, your PRSI exhausted, would you listen to well-off economists?

Usually revolutions provide a cure that is worse than the disease but it’s easy to understand how they can be triggered.

There are 2 members of the Cabinet due 3 public pensions each, and many of them will be in clover with annual payments of up to €140k.

You may find this populist; I just think it’s disgusting.

Food and drink is one area where the cut in the minimum wage may have a significant positive impact. Ireland has been pricing itself out of labour intensive activities, such as manual food assembly, that require substantial numbers of people working at relatively low rates of pay. Cutting the minimum wage opens up improved oppotunities for firms to retain and even grow employment.

@Philip Lane,

You say that the Government recognises the importance of reducing the domestic cost base in particular in relation to rents and utilities. Apart from some arm-waving about the apparent commitment of the NPRF to finance the roll-out of water maters, do you see anything else that will improve the efficiency of service provision and reduce costs in the infrastructure and utility areas?

I realise that as a rule you do not engage with the hoi polloi on the threads you initiate. I recognise that you are busy and, like many here, I am extremely grateful to you and your colleagues and establishing this board, but some engagement occasionally would help.

@Michael Hennigan

“Cuts for all…except for politicians and top public servants”

This says it all – nothing has changed! We are half-way in the coffin and nothing has changed.

I am speechless!


you argue in the piece that the fiscal position does not allow for measures to boost short-term demand, and that the supply-side measures will not in themselves restore growth. You are also critical of the incremental rise in VAT, as it will not produce a one-off increase in consumption, but that is, as you say, only to bring forward demand and therefore could not be the centrepiece of a 4-year ‘recovery plan’.

In effect, there are no measures to foster a recovery, and the government’s reluctance to produce any impact assessment of its own withdrawal of demand is understandable, if not forgiveable.

The plan is solely for the recovery of assets by the bondholders.

The question I would put is this, why will €15bn work, when €14.6bn patently hasn’t?

@ Michael H’

I would guess that the UK F&D sector has lots of really low wages. Other costs may be more favourable too. The UK dominance in our food retail sector is also growing. No wonder irish producers are getting it tough. Its hard to win a race to the bottom.

‘If you were unemployed, eager for a job, your PRSI exhausted, would you listen to well-off economists?’

In fairness, I wouldn’t target economists as the most comfortably placed professionals in Ireland. Lawyers, doctors and accountants etc have the biggest slice of the pie.

Economics has been weak in Ireland, and very much subordinated to politicial influences. Of course bigger and more poweful economics faculties have made horrific errors internationally fior the same reason. There are a few industry economics jobs in Ireland, a few media jobs and a good few academic jobs. At least that’s my sense as a non economist.

Insofar as the academics are cozy, it’s just a reflection of the general conditions pertaining in the sector. Which same conditions were mostly produced by the other professional monopolies and trade unions. The ‘gown’ mentality is of course a pain, and fair play to those who don’t take the funny hats seriously.

This is posted with the permission of the author. There is an embedded chart which did not copy/paste.


How To Restructure PIGS Debt – A Modest Proposal

With Ireland in political turmoil over its application to receive bailout funds, it is becoming obvious that we are getting caught between a rock and a hard place: on one side, markets (a euphemism for the unholy alliance of public pension money and the private money of the ultra-rich) are no longer willing to roll over the existing debt of the over-indebted, never mind increasing their exposure, at anything approaching reasonable interest rates. On the other, austerity programs attached to bailouts are causing high unemployment, pay and benefit cuts, tax increases and service cuts.

How long can this go on before things get seriously crushed, resulting in one or more massive unplanned defaults by sovereign borrowers, or massive social upheavals? Or both? It is my opinion that time is running out.

A solution must be found, and the sooner the better.

Let’s lay some ground rules:

1. A solution should include structural reforms, where appropriate. For example, Greece must radically reform its public governance which is shot through with graft, corruption and ridiculous inefficiencies and raise the competitiveness of its economy so that it can produce goods and services attractive and attractively priced to the global marketplace. Ireland should re-think its corporate tax policy and start generating significant domestic savings to fund itself locally, instead of relying on foreign portfolio investors who can – and do – disappear at the first hint of trouble (Ireland sports an external debt of 1,000% of GDP).

2. A solution should not trigger a credit event for credit default swaps (CDS). Apart from not rewarding vulture speculators who bear significant onus for the current mess in sovereign bond markets, there is a systemic reason for avoiding a credit event. Before the explosion of the CDS market a default would result in well-defined losses: debt outstanding minus recoveries. For example, a “haircut” of 50% meant that lenders lost half their capital.

Today, however, there is at least $2.4 trillion outstanding in sovereign CDS, $2.2 trillion of which is sold by dealers, i.e. big global banks. If a credit event is triggered no one knows who will be pushed over the cliff by the tumbling dominoes, all happening in a matter of days (remember AIG?). Most positions are “offset” in dealers’ books, of course, but no one gives a damn about offsetting when counterparty risk enters the equation in times of crisis (remember Lehman? or Bear? or Merrill? or Citi?). Here’s what it is: under no circumstances is Goldman going to offset positions with Deutsche today if it thinks there’s a risk of the latter filing for bankruptcy tomorrow, and vice versa.

CDS Prices For PIIGS

By allowing unrestricted CDS activity on sovereign debt we have increased credit exposure (more “debt” outstanding) and we also included more participants on the possible default list (the issuers of CDS). Oh, and if sovereign CDS comes second in amounts outstanding with $2.4 trillion, guess who is first? Oh yes, financial institutions, with $3.3 trillion. The systemic collapse that will follow a large sovereign default is too scary to contemplate.

3. A solution should provide for meaningful debt relief, i.e. result in the cancellation of 30% to 50% of debt outstanding and, soon thereafter, resumption of borrowing from free markets at reasonable rates.

How is this to be accomplished?

Step One: The European Central Bank (ECB) purchases in the open market sovereign bonds of the countries most at risk. Right now, this means Greece and probably Ireland. Depending on maturity, Greek Government Bonds (GGBs) are trading around 55 to 75 cents on the euro.

Step Two: ECB returns the bonds to the issuing country at cost and accepts as replacement new bonds of face amount equal to the ECB’s cost. Maturity and interest rates remain the same.

Example: ECB buys 10 billion face amount of 30 year GGBs with a coupon of 4.60% at the current market price of 53, for a cost of 5.3 billion euro. It returns them to the Greek state and gets 5.3 billion face of new 30 year bonds bearing a coupon of 4.6%. Resulting debt reduction: 4.7 billion euro.

The operation is entirely voluntary for original bond holders, who don’t have to sell. However, given that the ECB is going to be in the market all the time, bond dealers will have to sell, or raise their offers in order not to be lifted. Either way, the market will achieve a balance consisting of part debt reduction, part higher bond prices.

Benefits: debt reduction, bond market stabilization, CDS market coming back to earth, lower borrowing costs (eventually) for troubled countries, minimum political wrangling amongst EU nations, fast action.


* Troubled countries may rely on ECB interventions and not implement needed structural reforms. That’s why the ECB should act only in conjunction with requirements already in place, moving deliberately and stepwise as reforms are enacted.
* Bond prices may jump inordinately under ECB’s buying program. If this happens then ECB just doesn’t buy, leaving the market to function on its own. Some patience and lots of market savvy are definite requirements for this plan (but not much money!).
* The ECB’s balance sheet will expand, at least initially. But it already boasts 1.9 trillion euro in assets, so even if it bought half of all GGBs and Irish Government bonds outstanding at a discount, it would only have to spend some 100 billion euro. With markets being what they are, I doubt it would even have to be that much.


* It’s not ECB’s business to bail out nations. Oh really? Is it its business to bail out only financial institutions, then? Let’s keep in mind that central banks are, above all else, public institutions working for the benefit of the people. And in such a plan the ECB is not really performing a bailout but a financial intermediation.
* ECB may be stuck with too many sovereign bonds for too long. This will happen only if nations themselves don’t quickly put their finances in order. Reforms being a necessary condition for participation in the solution, this should not be a serious problem. Once primary budgets are balanced and markets work smoothly, ECB will be able to sell the bonds – perhaps even at a profit.

One final point from the market-participants’ point of view: CDSs are wasting assets, i.e. if a credit event doesn’t happen within the period specified in the contract (typically 5 years) holders will lose their entire investment. By today’s prices of Greek sovereign CDSs, that’s $5,000,000 (five annual $1 million payments), paid for covering $10 million face amount of bonds. If ECB adopts this plan it is certain that CDS prices will collapse as dealers try to get out of positions as quickly as possible, further normalizing bond markets.



Is it correct that NPRF will now buying Irish sovereign debt? In addition private pension funds are allowed to now also?

@Michael Burke

How do you see this ending? It is very clear that bank bondholders are being protected at the expense of taxpayers.- I imagine this is linked to the lobbying power of the banks and the capitulation of politics to capital as well as a general fear amongst the political class of standing up to capital. The attempts to put a floor under asset prices do not appear to be working.

It does now seem that the greed and shortsightedness of “the markets” are now threatening the whole edifice of sovereign debt. And while the politicians may have bent over for the bondwallahs they depend on the support of their taxpaying voters for ongoing control of the situation. It looks as though the scenario is going to develop beyond the capacity of the cosy compact between politics and capital to control it. Ending in some sort of debt restructuring.

@Michael H

Agree with you. Contrast the Irish approach to wrongdoing politics (the amnesia defence) with this Guardian report from the US.

@Gregory O’Connor

Policy based around FDI and more recently ‘smart’ economy dreams have infected all areas of public life to the extent that TINA seems to have triumphed. Irish indigenous failures to develop a sufficiency in exporting industries won’t be remedied by the ‘plan’. If higher education is the engine of private sector growth through ‘innovation’ then all those in there that apparently are doing so much to drive the smart economy should be offered redundancy so they can contribute directly to the recovery of the private sector. Better for them and better for the country a.k.a. national recovery?

@ Pa Bandit. Do not Know answer. Not my line of expertise. The author knows what he is writing about. Go to his site and ask. You will get a prompt – and succinct reply.



On the assumption that you cannot correct a debt problem by doubling the debt and reducing incomes (via austerity) then the only conceiveable outcome is default, partial or otherwise.

This is already reflected in Greek government bond prices after their creditors have been similarly rescued.

In my view, the issue then becomes one of minimising the economic distress caused.

LCH.Clearnet on Thursday increased the charges or margins from 30 per cent to 45 per cent above normal requirements to trade Irish bonds in a move that will make Ireland’s banks, which use sovereign bonds to raise money for funding, even more dependent on the European Central Bank.

The Irish banks are likely to increase their reliance on the ECB, which charges much lower margins. The ECB lent €130bn to Irish banks in October, a 60 per cent increase since March when they borrowed €82.5bn.

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