A simple question

What will have to happen before the powers that be decide that the strategy of making Ireland fall on its sword in order to prevent contagion isn’t working?

101 thoughts on “A simple question”

  1. €15bn of Spanish sovereign & bank debt to be rolled in January, €20bn in March, €35bn in April

    Failed auctions or ECB funding only source open to the banks?

  2. A large banking system/sovereign will have to fail. While it is the smaller countries, it is too easy to brush off as “nothing to do with us”.

    As there is no clear water between banks and sovereigns, damage to one damages the other. The contagion effects are thus multiplied.

  3. Reposting from another thread:

    As Roger Waters said

    “Forward he cried from the rear/and the front rank died’

    I’m hearing the penny might have dropped in certain circles and that a rethink is in process. Rather than offering us and other PIIGS as canon fodder there may have to be a regrouping. If there is too much debt there is too much debt; so there has to be less debt IN THE SYSTEM. Forced debt/equity swaps coming to a town near you…

    This is just a rerun of TARP 1 in the US: remember the collapse in asset prices after the initial bn750 was called a liquidity injection? They markets forced them to realise it was solvency, not liquidity.

    It’s now pure politics: does Mrs Merkel want the Euro to survive? If yes, the ECB has to be told to buy every crappy piece of paper out there, just as the Fed did. It’s called central banking in case anybody asks.

    If no….just watch the serried ranks of PIIGS (and others) get mowed down in turn.

    It’s pure car crash entertainment.

  4. Markets puked at the US open in terms of fear trades.

    Sovereign CDS on everyone, and i do mean everyone, good bit higher today (Germany +8bps = +15%)

    Gold prices up around $20 and near $1400

    EUR/USD below $1.30, JPY and CHF both much stronger

    Belgium, Portugal, Italy and Spain yields 20-30bps higher (bigger at short end than long end)

  5. @hogan

    I agree with your second paragraph but disagree with your first.

    Ireland is small, but if the sov were to default or if the Irish banking system were to collapse, then whole EZ would be in a major crisis.

    Therefore, I think even the collapse of a “small” banking system would concentrate minds.

    This interview essentially asks the same question as this post:
    http://video.ft.com/v/691916825001/EU-must-draw-line-in-sand-at-Spain-

    The Germans won’t act until the markets have virtually dried up on Spain or until one of the big German banks gets burnt on sovereign or banking debt.

    The question is what will be the eventually outcome. I can only see a total collapse/fragmentation of the Euro or else an emergency move to deeper fiscal union and enhanced powers for the ECB.

    While the latter is in everyone’s interest (at least from an economic point of view), it is politically very difficult. For that reason, I see a real danger that the Euro’s days could be numbered.

  6. Periphery will be thrown to the wolves but I don ‘t know if that will save the core now. Can I forward buy the ‘Euromark’? Alternatively, I suppose I could just move to Germany before the rot sets in.

  7. @simpleton

    “It’s pure car crash entertainment.”

    not if you have savings in euro denominated bank accounts !!

  8. Sounds like Simpleton has a nice cosy perch from which to enjoy the “entertainment” – bully for you!

    Tough on the majority of the population who are struggling to put bread on the table, feed their kids and keep the place warm, that is, if they are not being chucked out by the courts/banks and/or the loansharks (oops, not much of a difference is there?)

  9. This is getting more and more predictable

    If it looks like FR/Ger arent going to act in the interests of the whole, then there is no future for the Euros.

    Should we be talked about a punt linked to the sterling or dollar?

    If we are going to crash, and we are(?) then we should choose what we are going to hit…

  10. Not sure if this is a stupid question, but here goes…..

    If the ECB is buying like billy-o to preserve the Euro, isnt that just centralising debt? It is still debt, just the owner changes?

    The debt/equity swap cannot be an answer to all this, as for example where Ireland has tied our banks to Sovereign debt. Is this why debt/equity swaps were’nt forced on the banks as part of the deal w/ ECB/IMF?

    If the Germans could be persuaded to do a little printing, wouldnt that take the pressure off?

    Just asking.

  11. @Highway61
    Use the printing press to buy debt.

    Debt equity/swaps do help to solve this, along with printing press financed debt purchases: the absolute amount of debt falls, inflation rises; hopefully to the point where solvency (remember this is a ratio) for the relevant entities is restored.

  12. Core Europe – 5yr CDS

    GERMANY 58/62 +9
    FRANCE 110/114 +13.5
    UK 78/83 +5.5
    AUSTRIA 96/104 +12
    BELGIUM 204/214 +31
    NETHERLANDS 62/64 +6

  13. @simpleton

    Thanks, wasnt sure of the sequencing.

    Then the printing of money is the least worst option, as I understand it?
    And we are on the hook of Germany’s fear of inflation from Weimar days which prevents us doing this?

    The consensus here seems to be that Germany will not move/cannot move and that ultimately we (Ireland) urgently need to develop a Plan B.

    Passing this damn Budget seems more academic as each day passes!

  14. @bazza
    “Ireland is small, but if the sov were to default or if the Irish banking system were to collapse, then whole EZ would be in a major crisis.

    Therefore, I think even the collapse of a “small” banking system would concentrate minds.”
    The problem is that they will keep thinking sticking plaster on the flesh wound. Lend more to fix the problem. Lend at ever lower interest rates (we are getting a lower rate than Greece if you consider the duration). Lend with specific terms and conditions.

    If we were an isolated case, that would fix the problem. Even if we and Greece and Portugal and even Spain were isolated cases it might be possible. But we are not. The rest of the eurozone banking system is up to its oxters in dodgy debt all cross derivativated with each other. The failure of a large derivative counterparty has the potential to cascade through the system. As has been pointed out numerous times, this makes derivatives less than useful – they increase systemic risk, not diminish it. In large scale, they are effectively uncallable.

    So what I meant was our scale means we are being brushed off as unimportant in the larger scheme of things. It is another “look over there” attempt. I am surprised it is unravelling as quickly as this, but perhaps the slow learners in the bond markets are becoming as cynical as the rest of us.

    With the ratings agencies no longer giving a triple-A beanz label to every tin (or no longer being believed), fund managers are having to look inside themselves. There are worms everywhere. Due diligence is back in fashion…

  15. @Highway61

    The gathering storm means that doing nothing is no longer a viable option for Germany. It has to make a choice. If I am wrong, and it continues to do nothing, then a particular, rather nasty, choice will have been made.

  16. @all

    ‘… “We at Eurointelligence consider a default of Greece, Ireland and Portugal a done deal,” they wrote today.’

    What will have to happen before the powers that be decide that the strategy of making Ireland fall on its sword in order to prevent contagion isn’t working?

    It is happening – which must surprise very few who have actually been looking at it. Faith of all our fathers rests in Frankfurt – and the leadership of Trichet the Frank – who needs a catalyst from somewhere to force the issue with the political heavyweight tango-duo of Angela/Nicholas ….

    Realism with the Irish Banking System last weekend could have started it …. EC/ECB were basically AFRAID to address it …..

  17. An alternative perspective:

    This is all from a well thought-out playbook called ‘How to impose a fiscal union in 10 painful steps’

  18. @all
    We could fall now of our own free will, leave EZ, deal with the banks by the use of the sword and negotiate a devalued Punt pegged to Sterling, while remaining in the EU?

    Could we?

  19. @KO’R

    It good to see such a article in the German press, but as I see it, a two tier Euro Zone would have nearly all the disadvantages of a return to the Mark.

    In a two-tier scenario, a currency involving Netherlands, Austria and Germany would be almost as strong as the DM. German exports would be savaged and unemployment would rise.

    More importantly, I presume all that lovely AIB debt that is held by Hypo bank would be redenominated in the 2nd Tier Euro. The German banks would take the massive hit that they have gone to great lengths thus far to prevent.

    While I see it as a more plausible scenario than the reintroduction of the DM, a two tier EZ would still have massive consequences for Germany. The question is if such consequences would be enough to deter the semi-irrational German govt?

  20. @Highway

    Unless we defaulted on all our current Euro denominated debt, that idea is a non-starter. We would never be able to repay Euro debt in punts.

  21. I note Messrs Whelan and Lucey have been very quiet of late. I wonder if they locked away penning masterpieces.

    @Eoin – what they doing?

  22. Buying rather large amounts of Ireland and Portugal in last hour, much bigger amounts than previous. Obviously someone has finally woken up to there being a problem in the markets, albeit this is only the stop gap solution.

  23. @Bazza

    “a two tier EZ would still have massive consequences for Germany”

    Fair point. All of the other potential outcomes also would have massive consequences. It is a case of which outcome is the least worst.

    ” note Messrs Whelan and Lucey have been very quiet of late” End of semester exams presumably.

  24. A radical answer.

    A run on the Irish banks by retail depositors would bring the turbulence to an alarming head.

    Europe’s ‘Black Monday’ on the markets could easily turn into a black week and even month.

    So far Spain tops the official unemployment league (20%), Ireland (14.1%), Portugal (11%) and then it is a sliding scale. The economies most rocked by the crisis are also the ones with the highest unemployment. And if you throw into mix the eligible working adults in further education, unemployment figures are frightening.

    A strategy for industrial development that involves public sector, redundancies, low wages across the economy, mortgage forgiveness, and direct private sector subsidies might become less an imponderable very soon. May be a new Irish constitution is required to aid rather than hinder the country climb out of the hole it is in – one that cuts down on legal audience entitlement.

  25. @Eoin

    Something that confuses me and have always been afraid to ask. Why are the ECB buying Greek and now Irish debt? What’s the point in it? Are they simply trying to provide a bid to keep some sort of liquidity? Also, surely they have now realised that what they are doing is pointless unless they make a statement of intent and go in and buy huge amounts of Spanish debt. Simply dipping their toe in now again to remind the market that they are there is having zero effect.

  26. @Eoin,

    Agree about the ‘stop-gap’. Presumably a holding operation to take the edge off things until the next conflab of the big-wigs can be arranged. But this conflab will have to have everything on the table – QE, selected haircuts, some write-down of peripheral sovs, D/E conversion, the whole shebang.

  27. @ Enda

    correct – mainly liquidity providing. They have said a few times that they are not trying to target ‘rates’, but simply to make sure that there is a functioning market, but you would think that a slightly more aggressive take on it during the summer could have calmed the markets down somewhat. And the ratings agencies DO take spreads into account when making credit ratings calls, so its not a totally pointless act either.

  28. @Eoin

    And the ratings agencies DO take spreads into account when making credit ratings calls

    Surely not. They have spent years denying such a thing!!!

  29. @bazza

    I was kind of thinking that we could in some way default on all Euro bank related debt, somehow separating out the soverign and undoing in effect the Sept 2008 decision?

    Obviously, I know not of what I speak (sort of!), was trying to codify my thoughts.

    Does any one here truly believe that our Govt has a Plan B that is predicated solely on what is best for this country?

  30. I saw this on another site: http://www.financeandeconomics.org/Articles%20archive/2010.11.28%20Collapsing_Europe.htm

    “It is now becoming impossible to see a way out of the euro-banking problem without the ECB giving in on its anti-inflation stance and implementing aggressive quantitative easing. However, the ECB was set up to survive attempts to get it to inflate, so if it backs down from its sound-money stance in the middle of this crisis, the euro itself will suffer a loss of confidence.

    It looks like divine intervention is the best hope after all.”

    Scary stuff

  31. If I recall correctly the ECB has a mandate for financial stability as well as price stability. It was not set up to preside over the demise of the euro.

  32. Nov. 30 (Bloomberg) — European Central Bank President Jean-Claude Trichet said “observers” are underestimating the determination of European policy makers to shore up the euro region’s stability.
    “I don’t believe that financial stability in the eurozone could really be called into question,” Trichet told lawmakers in Brussels today.

    That’s alright then.

  33. *TRICHET SAYS HE WAS AGAINST TALK OF PENALISING BONDHOLDERS

    If that is the case, then its up to him to help fix the problem, not just walk away from it.

  34. ““I don’t believe that financial stability in the eurozone could really be called into question,” Trichet told lawmakers in Brussels today”

    When the facts change does he change his mind?

  35. @Cetris

    They are achieving nothing though. Look at Italy’s 10 year for a very scary picture about where this crisis is heading. And yet we have policy makers still burying their heads in the sand.

  36. A central banker in a currency union whose only target is inflation while parts of the currency union are facing deflation – and are being given no option but to suffer more – is about as useful as a eunuch in a harem. It’s not ‘sky falling in’ time; it’s ‘please, return to this planet’ time. I suspect his politcial masters nay be forced to inject a dose of reality.

  37. Eh, can only guess who this may be aimed at…not gonna do a Barry Caesar Hunt and say it’s a b1tchslap….but….

    *TRICHET: PROBLEM WITH EUROPE IS PEOPLE SPEAK OUTSIDE MANDATE
    *TRICHET SAYS VERBAL DISCIPLINE IS ESSENTIAL

  38. anyone looking at leaders queston time in the dail would despair and take berties advice.
    I wouldnt put any of them to negotiate the purchase of a bottle of milk…

  39. All,
    everybody assumes the Germans have a cunning plan. What happens if they do but but its author is Baldric.

    Wikileaks published the Us assessment of the European leadership. It is not flattering.

  40. BL

    we need someone with proven numerical & financial knowledge to assume a leadership pozzie. I hear you have been approacheb by the Labour party to run in Dublin South. Any truth to the well sourced rumours.

  41. @Tull,

    Speaking of Wikileaks, heard today they are going to publish a few things about a certain US bank in the New Year that will make interesting reading!

  42. Hmmmm ..

    Still no breaking news in online Die Welt, normally the first to bring bad tidings.

    Headline in business section (at 16:36): Labour market is celebrating one record after another

    They’ll know soon enough.

  43. It’s easier to explain things visually and I think those of you that work in the economics area professionally should consider modifying this diagram to the current situation in Ireland.

    http://www.visualeconomics.com/how-the-average-us-consumer-spends-their-paycheck/

    Reworking this individually for a series of representative units of the Irish population e.g. young working households with heavy mortgages, elderly single state pension household etc., the data should be presented to the policy makers who can apply different modelling scenarios.

    An extra spending category of ‘taxes into nebulous black hole’ would be needed in an Irish context.

  44. BL

    its already on politics.ie, you are running in Dublin S. Congratulations and best of luck (genuinely). Anybody who has the b**** to put there name on the ballot paper and ask people for a vote deserves praise.

  45. @ceteris paribus

    Thanks for the link.

    Roger Cohen in fine German-baiting form again:

    Politics is pushing Merkel. She’s trying to answer the baying of the Bild tabloid: “Will we have to pay for all of Europe?” Hell hath no fury like a German not getting his money’s worth […] But how shallow, paltry and mean-spirited has this German reaction to the euro crisis been!

    It’s not just the Bild tabloid that’s ‘baying’. As regards Ireland, at any rate, commenters right across the mainstream spectrum — from Die Welt to TAZ — are apoplectic about what THEY consider to be the ridiculously LOW 6% interest rate under the bailout plan. From the German perspective this is quite understandable.

    Yet Cohen again plays the ‘ingrate’ card — as though Germans should be on their bended knees thanking the rest of Europe for allowing them out of the post-war leper colony and paying through the nose for the favours that have been bestowed upon them. Instead they are calling the shots, albeit in a semi-suicidal way.

    Any hope of stemming this tsunami-like tide of sermonising bullshit on both sides of the divide?

  46. @Enda F
    re Trichet “I don’t believe that financial stability in the eurozone could really be called into question,” Trichet told lawmakers in Brussels today.

    Unusual statement for a man in a charge of the only organization that could resolve the problem and has continually done nothing to resolve it.
    He should consider joining Fianna Fail. He has some of the credentials. The technique of sounding like you are in opposition when you are actually in government and responsible for the mess.
    Apologies for the ad hominem. Could not resist.

  47. @KoR
    What will have to happen before the powers that be decide that the strategy of making Ireland fall on its sword in order to prevent contagion isn’t working?

    Ok the simple answer is that Irish bond yields do what Greece’s did and the rest of the Pigs tag along.

    What might be a more useful question to pose is this:

    What alterations to the Irish economy would need to be made in order to allow politicians in core Europe to sell to their electorate, a stategy of credit writedowns for Ireland?

    I put it to you all that if you want this to happen you need to think about this question carefully – and not just from the Irish perspective.

  48. Brian

    “http://www.politics.ie/labour/144063-ivana-bacik-gilmores-running-mate-dun-laoghaire-30.html#post3235451
    very interesting…totally wrong, but interesting”

    a non-denial denial if ever I read one.
    Good luck with that.

    Mary

  49. I have a lot of sympathy with the German in the street on this. There’s no good reason why se should be putting up the money, and there’s no good reason why we should be taking it. The world has the IMF to provide temporary liquidity to countries that need to get their finances in order, and the German government is making things much worse for us by interfering.

    We’re all getting done over by the extend and pretend merchants in the German government and their EU allies.

    The Greeks are insolvent. We are almost cerrainly insolvent. Spain may well be insolvent if the liabilities of its banks are socialised. Portugal probably isn’t insolvent yet, but is heading that direction.

    All that means that large parts of the German banking system are probably insolvent too. The longer everyone keeps pretending otherwise, the worse things will be for the Germans and everyone else too once the charade breaks down.

    So the sooner it happens the better. Roll on the Portugese and Spanish debt crises. May the German banking system blow up sooner rather than later.

    And if it happens that we make a small contribution to that when the Dail votes down the budget, and the new Irish government rejects the reparations ultimatum, we can be proud that we have helped not just ourselves but also the German in the street.

  50. BL, I never believe anything until officially denied. Watch that White fella though-sense of entitlement as big as an elephant
    Politics.ie

    Join the conversation

  51. Financial Times yesterday suggests that more than €10bn of senior bank debt is not covered by the state guarantee. While at the end of the day this may be quite irrelevant, this amount could not in any circumstance be a public debt and no legal liability on it, let alone moral one. It’s not our stuff! Yet the govt. seem hell bent on paying these and the ECB seem to be the puppet masters on that one. Interesting law action if someone wants to have a go. Anyway time we got the whole game on here. I write from Berlin. This whole money business has had a Berlin Wall feel about it since Sept 30th 2009 (the fateful night.) So the walls will come down. If I can be slightly philosophical for a moment, the walls are in essence walls of thought and belief, though they are manifest as actual quantifiable money. Just as in post MauerFallen German, this will require an adjustment, quite an adjustment! Bring it on.

  52. Brian, for god’s sake don’t do it. Under the current political system, political involvement is a mug’s game. Perhaps when Ireland’s second republic is established, political involvement might be worth while. Your entry into the political arena would certainly raise the average IQ in the Dail by at least 80%.
    Simpleton, I think your proposed solutions would work as a short-term measure, but ultimately if this project is to survive, full fiscal and political union is necessary. Now do we want that?

  53. Jim, wrong question. Rather, we will not be given the choice. We will be made an offer that we cannot refuse.

  54. Seafoid,

    not a big fan of Labour. I think they are lead by a Bertie Lite character with an interesting past. However, that is my view. If Brian wants to run for them, that is his right. Anyone who has the courage to ask his fellow citizens to vote for him deserves respect.

    There are many fine people in LAbour though..Ruairi Quin and Sean Sherlock for one. However, the DL lot are overrated.

    I am disappointed that Jim Power thinks so little of public service. He has something to contribute but the paycut is probably too big.

  55. We do need politicians. And great kudos (plus ARE YOU BONKERS) to anyone who stands. But, not for me. I have a job in a listed building in D2. Thanks anyway.
    Now Deppity Power…that sounds good. Stand up for Decies Jim!

  56. Simpleton,

    Now as you should know, I have held a fictitious seat in Kerry since 1923.
    If you really want a passport, I can get you one. Do you want a bypass as well.

    Come on BL, you can move to another listed building in D2. No constituency work in Dublin S either.

  57. Ivana in DL…at last a demographically appropriate constituency. Be interesting to see how that works..

    Go on Brian! The commentariat changes nothing. You’d have a chance in power. Temporal power!

  58. BL
    Economists have a great track record in DS-Eithne, Olivia, George. You would be a shoo in. it would give you a chance to implement policy rather than talk about it. I would say there would be a good chance of a half car.

    You could hire Eoin Bond or BW II or JTO as your driver.

  59. I had 200/10 with my local (unofficial) accountant of the turf. I know the man cannot resist the challenge when called upon. There is a big Munster contingent in Kilmacud Crokes that could be got out for him. I reckon we could get 40-50 canvassers up there and 500 number 1s in the bag.

    I would also fancy our chances up in Knocklyon way. George got 86% in 2-3 of those boxes. Big Trinners community in Stillorgan, we would clean up there.

    Brian, we would be out of the count centre by tea time-job done.

  60. @ Bazza

    I don’t believe it’s clearcut that Ireland would need to default on Euro-denominated debt to repay in punts. We did not default on our IEP debt when we converted it to EUR.

    On entry into the Euro currency all of our outstanding IEP debt was converted to EUR. In an exit from the single currency presumably our sovereign debt could be re-converted back to our new domestic currency. € 100m could then convert to IR£ 78.75m (or whatever IEP conversion rate would apply). By rolling the printing presses up in Sandyford we could then pay off our debts (but live with the inflationary impact of the monetary expansion).

    I’m sure there would be legal challenges to this strategy by European investors but the possibility is acknowledged in the Der Spiegel article above and its not clear that this would be classified as a default.

  61. @Kevin O’Rourke
    While the metaphor of contagion is a nice one, it doesn’t seem appropriate to the situation. Using the right metaphor is a critical element in driving human undertanding of any sophisticated situation, so I don’t think this is a trivial point.

    Ireland can’t infect Portugal or Spain. They already have the disease. The other people who have the disease are the ones to whom Ireland, Portugal, Spain etc, owe money. France and Germany have the disease too.

    It’s too late to put Ireland in an isolation ward. This whole contagion metaphor is not a good one to use.

  62. Ireland has been bailed out, we are assured of stability for the next four years. We are a member of the biggest free trade bloc in the world. We are also a member of the biggest monetary union on earth. I see no clouds on the horizon for the EU or the Eurozone. America will collapse before Europe since they have a deadlocked gov’t and have shown no signs of responsibility for the past 25 years. In our bloc the biggest components are highly responsible and that has allowed some of its members to engage in reckless behaviour. It is a situation much like Ireland where the women are responsible so as the men can be irresponsible. Europe plods along at a steady pace no fits and starts. Everything that has happened so far has been dealt with satisfactorily. We should be thanking our lucky stars and stop the whining, complaining and helplessness. Let us get off our incompetent derrieres and ensure we elect competent and honest politicians. In Ireland these are relative terms but at least give it a try.

  63. @Hugh: good point. Another metaphor I have been thinking about is Ollie Rehn’s one about the bush fire and the forest fire. If you live in the bush, you don’t need a firebreak.

  64. @Hugh Sheehy

    Yes, I was thinking more of rotting floorboards in a room. As you put pressure on different parts of the room, you are never quite sure which one is going to give way beneath you first.

  65. Ireland is not Greece; Portugal is not Ireland; Spain is not Portugal; Italy is not….
    Maybe Ireland is Agentina?

  66. @Kevin O’R
    Perhaps a metaphor of climbers on the North Face of the Eiger….all tied together, and we all tied ourselves together voluntarily.

    Still not sure it’s the right one, but if someone can come up with a better one we could at least stop talking about Ireland as a disease carrier…..

    Other than that, Mickey Hickey’s point is not made often enough. The EU has made a bunch of mis-steps, and the recent deal is perhaps not terribly good (or even terrible), and the Euro area isn’t well coordinated, but imagine how screwed Ireland would be if we were on our own?

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