Buiter’s Bombshell

At the risk of adding to the gloom, here is Willem Buiter’s widely discussed “Sovereign Debt Crisis Update.”

A sample:

Despite the recent drama, we believe we have only seen the opening act, with the rest of the plot still evolving. Although we have not had a sovereign default in the AEs since the West German sovereign default in 1948, the risk of sovereign default is manifest today in Western Europe, especially in the EA periphery. We expect these concerns to extend soon beyond the EA to encompass Japan and the US.

Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.

 

74 thoughts on “Buiter’s Bombshell”

  1. ‘Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent.’

    Many contributors here have been saying the same thing. Who in their right minds would buy long dated government bonds given this background. I think Paul Hunt said that the current pricing reflected the real risk. However, a 25% haircut would not do enough on the solvency front or have I got it wrong?

  2. @cet. par.

    I think we need to draw a distinction between the combined bank and sov debt in the peripherals and the exposure to this debt of the banks in the core plus the requirement for core sovereign support of these banks. The market is equally frightened of both.

  3. “The coonsolidated sovereign and banking position is insolvent.”

    I think in making these calcs he is merely comparing the financial assets of Ireland Inc with its financial liabilities. Maybe so, at current mark to market, but he is ignoring other economic assets such as human capital and infrastructure. On an NPV basis Ireland Inc has economic earning power of over 50 x GDP (5.83% discount, 3.83% nominal growth) i.e. up to 10 trillion.

    Of course a lot of that will be needed to feed the nation, but the point is that just because tangible financial assets are less than financial liabilities does not necessarily mean we can’t meet those liabilities.

    An analogy would be someone who is in negative equity.

  4. http://www.ft.com/cms/s/0/f414f524-fbcd-11df-b79a-00144feab49a.html#ixzz16mTfuwGR

    “There is only a relatively narrow range of conditions in which adoption of all-out austerity is needed to make the difference between solvency and default or bail-out. Debt must be high enough that immediate cuts cannot be deferred, but low enough that sharp cuts will enable the balance sheet to be restored without a bail-out or default.

    The failure of austerity policies to restore market confidence, as they were supposed to do, reflects this inherent logic. For most countries, austerity policies are likely to prove unsustainable, either because they do not deliver a sufficient improvement in the budget balance, or because they are a politically and socially costly diversion from the task of achieving long term fiscal sustainability.

    The risk premiums paid by heavily indebted governments seeking to issue debt look likely to remain high as long as austerity is the main policy option. Austerity policies, and the zombie ideas that support them, are bound to fail. No-one yet knows what will replace them.”

  5. Would this be the same Willem Buiter, who on 21st September said: “… the markets are over-estimating the risk of default by the Irish Government …”, and “…the current yield spread between Irish bonds and German bonds is ‘ridiculous’.”?

    As it happens, on the latter point he was quite prophetic as the spread then was 383 bps – now it’s 670 bps. Unfortunately for Willem, his prophecy was inadvertent, as it is clear from the contexts of his remarks back then that he did not mean ridiculously low!

  6. @Igsy
    Two months is a long time in forecasting. Didn’t the Gov. say something similar.
    The good news is that yield has come in to 9.25%. ECB must be buying.

  7. There is always a tendency in crisis situations towards the sky is falling mode.

    The US is being dragged down by its housing sector but holiday sales so far have been good and today’s data shows that the confidence index has risen again in November.

    Japan has a serious problem with its related problems of ageing, high public debt and deflation; car sales in October fell to the lowest monthly level since 1968.

    Japan also shows that once a rich country does not mean forever; 35% of its workforce are temps working on less than the Irish minimum wage.

    As to Eurozone banks, there were stress tests done last summer; there were questions about the exposure on sovereign debt but banks like Deutsche Bank had very little; new more rigorous tests would be useful but it should be kept in mind that the economy as a whole is not in recession.

    Everyone of course in the periphaerals wants a bailout but there has not been the same enthuasiasm for reform and we still have the high-bubble costs and rent seeking while small firms and individuals have endured a brutal experience.

    Niall Johnston, Ardnacrusha, Co Clare, writes in the FT today: “Our banks are bankrupt due to terribly reckless lending and a complete breakdown in regulation. Our politicians are among the best-paid in Europe and indeed the world. Our so-called public service is an out-of-control behemoth. Our senior public servants are also among the highest-paid in Europe. They are grossly overpaid, with job security and pensions way beyond the means of the country to pay.

    Taxpayers’ money has been squandered and gross inefficiency is rewarded with huge tax-free retirement lump sums and gilt-edged pensions.

    How ironic it is that the ordinary, decent, hard-working taxpayer in Germany and the UK must now be forced to pay for the profligacy and waste that has characterised the Irish Republic for more than a decade.
    Any assistance given to the Irish Republic should be conditional on an immediate reduction in the pay and pensions of our politicians and senior public servants of 50 per cent or more. This would bring their pay and perks more in line with the European average.”

    This is what confronts taxpayers in other countries and what have we seen so far?; baby-steps at best.

  8. @ BW2
    “An analogy would be someone who is in negative equity”.

    With a spouse spending X per week on basic household goods over and above the household budget and 7 maxed out credit cards.

  9. @ Michael Hennigan

    Sure there is a need for fundamental reform of the gouging element in Irish society but firstly the bondholders need a good haircut. They paid over the odds for assets that have since fallen in value.

  10. @MH

    But Michael

    “Any assistance given to the Irish Republic should be conditional on an immediate reduction in the pay and pensions of our politicians and senior public servants of 50 per cent or more. This would bring their pay and perks more in line with the European average.”

    is just anger venting. If the public sector drops into mortgage default what then for bank costs etc?

  11. @The Alchemist
    It is the “seniors” that are being talked about.

    We might also add “senior” bankers into that. Whatever they are being paid, it is too much.

    @seafoid
    Before we go busting someone else, we need to bust the people who put us in that position.

  12. I doubt wage cuts to our senior public servants and politicians is going to knock them into penury and mortgage default.

  13. @Alchemist

    Well, strictly speaking the senior public servants refereed to are unlikely to be the ones who would be put in a position of defaulting on their mortgages if subjected to such a cut.

  14. @seafoid

    You quote John Quiggin in the FT:

    The risk premiums paid by heavily indebted governments seeking to issue debt look likely to remain high as long as austerity is the main policy option. Austerity policies, and the zombie ideas that support them, are bound to fail.

    Since in his article Quiggin himself acknowledges that ‘fiscal stimulus’ is hardly an option for countries like Ireland, what remains? Quiggin suggests achieving ‘sustainable improvement’ in GDP in the amount of 0.5% as an equivalent to “a spending cut equal to 10 per cent of GDP that lasts one year”. This is mathematically true but Quiggin does not mention how this ‘sustainable improvement’ is to be realised other than by ensuring ‘long-term structural improvements in the budget balance’, which is more like a tautology than an argument.

    Quiggin sounds to me like a second-guesser. If these ‘long-term structural improvements’ were politically achievable the pols would be climbing over one another to implement them — what politician facing election actually wants austerity?

    The first-guessers are those who buy a country’s debt — and until very recently they saw austerity as the least-risk option for themselves. Quiggin proposes no realistic alternative. If he did, those frantic ‘zombies’ would be queuing at his office door seeking to learn more about how his magic wand actually operates.

  15. Ireland was, is and remains bankrupt.

    It was bankrupt the day that Lenny decided to hand over the deeds of the country to Lord Senior Bond.

    The only solutions are and remain
    1. Find someone to give us €150 bn
    2. Default
    3. Get Frankfurt to print some euro or quantitively ease Mr S Bonds account
    4. Massive inflation of 10% plus

    You can’t solve a debt problem by throwing more debt at it.

    RE bail-out
    This gives us some breathing space and no more. The interest rate is not that significant what is more significant is the cash flow statement. What amount of senior and junior bonds are we expected to pay in the two-three years before we are up in front of the headmaster again. Can we cash the expanded NAMA bonds in with the ECB.

    In order to draw down the funds what is expected in terms of outflows to the ECB and bondholders. How essential is it that we hit the paupers by cutting doles, minimum wage. Do they want photographic evidence of suffering Irish. Could we close down some “hospitals” in BallyParishPump to convince them that we are taking up tough choices.

    What about the National Investment Bank of the Labour party. Can that go ahead by taking extra cash from the rich. In other words if we are good boys and exceed revenue targets can we spend some cash generating jobs or does all surplus go to Lord Bond and/or the ECB.

    These are the important questions to asked before we sign the memorandum. I doubt if the current administration are asking any of them, I wouldn’t trust them with my lunch money let alone auntie Mary’s pension.

  16. @MH, 100% right; that gets to the crux of the matter. German taxpayers are being asked to ship us money to keep us in the style to which we’ve become accustomed…and almost no-one here seems to have any problem with that.

    My feelings on O’sterity are the same as Gandhi’s on Western civilisation….it would be a very good idea.

  17. @ Carolus

    http://ec.europa.eu/economy_finance/eu/forecasts/2010_autumn/ie_en.pdf
    doesn’t see austerity bringing growth either. Maybe the growth tree is banjaxed as well. Maybe spuds won’t flourish in December.

    The bank bonds are overvalued. The magic credit machine is broken.

    “those who buy a country’s debt — and until very recently they saw austerity as the least-risk option for themselves.”

    They thought they could ask the world of governments. They can’t. They were only after yield. There is too much money chasing too little reward in an age when austerity is shrinking the value of everything. And there is no such thing as risk free.

  18. @seafoid

    My point was that Quiggin is playing the precocious smart-ass. Other than that I second your diagnosis. Soddy, Georgescu-Roegen and co said it all many decades ago.

  19. @ The Alchemist

    I’m not into anger venting myself.

    What we see in the badly-run countries from Aug 2007 is slow-motion responses until the wolves are at the door.

    Apr 2009: NAMA plan announced; Jan 2010 NAMA chief shocked with state of documentation; Aug 2010 bond investors head for exits as no bottom line available on Anglo and so on.

    Venting about bankers etc is much more interesting for many people than how to create an economy to match the best of comparable countries in Europe/world.

    We haven’t seen a thread here on such issues, never mind elsewhere.

    The optics are of course important in a democracy; Merkel’s predecessor lost his position because of painful welfare/labour reforms.

    It’s easy for us to say that Merkel should help us and face down her own voters who have accepted/tolerated low pay rises over the past decade.

    We are on paper at least on average, still among Europe’s better-off and the CSO data on household income last week confirmed that.

    While we are obsessed with bondholders, wonder how much of the €60bn that was invested in overseas commercial property during the bubble, is hidden in various types of shelters?

    Maderia has even came up in one particular case.

  20. @ Carolus

    The bucks over at monthly review reckon that late stage capitalism tends towards stagnation and that only massive credit growth over the last 30 years has masked this tendency in recent years.

    Nobody writing in the FT or anywhere else seems to have a plan to put humpty dumpty back together again.

  21. Most sovereigns are bankrupt, both before and now during the crisis. In the sense that they are nearly always engaged in borrowing to roll over the national debt. If the borrowing wasn’t available they wouldn’t be able to pay their debts – insolvent by some of the definitions going around.

  22. @Michael H,

    “We haven’t seen a thread here on such issues, never mind elsewhere.”

    This has often puzzled me. Some contributors have dipped their toes, but pulled them back quickly. I can think of lots of reasons, but, rather than speculate, perhaps, unfairly, I’d prefer to see some focus and analysis.

  23. @seafoid

    The bucks over at monthly review …

    They sound like hard-core Neo-Schumpetarians to me. No problem there.

  24. @MH
    There have been plenty of threads on here about how we might create a better country, it’s just that they’re comparatively fewer.

    The strategic discussion is almost always drowned out by the noise of the tactical shouting match.

  25. @MH

    Only just read your post above:

    “Everyone of course in the periphaerals wants a bailout but there has not been the same enthuasiasm for reform and we still have the high-bubble costs and rent seeking while small firms and individuals have endured a brutal experience.

    Niall Johnston, Ardnacrusha, Co Clare, writes in the FT today: “Our banks are bankrupt due to terribly reckless lending and a complete breakdown in regulation. Our politicians are among the best-paid in Europe and indeed the world. Our so-called public service is an out-of-control behemoth. Our senior public servants are also among the highest-paid in Europe. They are grossly overpaid, with job security and pensions way beyond the means of the country to pay.”

    I think a very good point, but there don’t seem to be any takers – for the point that is, plenty of takers for Euros obviously!!!

    Previous post by KoR turned into a bit of a BL / Lab thing so am re-posting a point I made there, here. Maybe someday people will agree that it is relevant. viz:

    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.

    The easy thing is to go off and bitch about Trichet or how financially unsophisticated Merkel is, but I think that is just tilting at windmills in an attempt to avoid making any real reform.

  26. Guys, calm down. Insolvency just means default, restructuring, inflation or forgiveness. Life will go on. Argentina can still put a decent rubgy team out. Greece has been in default for 50% of its (modern) existence and still has good weather.

    UK had debt/GDP of 220% in 1821, 170% in 1921, 220% in 1945.
    They still had an Empire, just, in 1945.

    We will default and Bertie & Gerry will still contest the presidency. Nothing much will change.

  27. I’m an amateur trying to do some back of the envelope calculations to see where Ireland’s 83 Billion (the amount that the Irish taxpayer is on the hook for) fits in all of this.

    I guess the basic thesis is that Ireland (and the IMF) is being strong-armed by our “partners” into standing behind bank senior bondholders in order to ensure some sort of benefit for the EZ’s banking system? (EZ banking system critically depends on sancity of the senior bondholder, just as important as deposit guaranteed, avoiding a bank run, blah, blah. blah)

    Now, I’m trying to figure out to quantify how much this “social good” could be worth to the EZ?

    The easy part is the per capita cost. 83 Billion is about 20,000 euro per Irish person and about 250 euro per Eurozone person. Less if we include the Brits. Or 50% of Irish GNP, 1% of EZ GDP. In other words, a huge burden for Irish taxpayer while chickenfeed at the EZ level. Now we should be able to parameterise the benefit of the EZ as a whole.

    I checked out something called “European Banking System Stability” published by the ECB.
    http://www.ecb.int/pub/pdf/other/eubankingsectorstability201009en.pdf

    On page 44, they refer to the balance sheets of “All Domestic Banks” in the EZ. This states that these banks had total liabilities of 37,770 Billion euro.

    Of these, there’s something called “Total Debt Certificates (including bonds)” which totals 6462.8 Billion euro. I assume these are the counterpart of our infamous junior and senior bondholders?

    Now the question is just how much more “risky” this debt would become if Anglo/AIB/BOI/et al defaulted on their senior bonds? From Rehn, Trichet et al going nuts, I can assume that Irish support for its bank senior bondholders is worth at least 30-50bps (and probably more) in terms of a reduction in percieved risk.

    Now that gives me a 13-30 billions worth of risk reduction IN ONE YEAR. Capitalize that at, say, the 5.8% rate that the “bailout” is being offered to us at and you get to a figure somewhere like 225-500 billion in terms of the net benefit of our bailout of Irish bank bondholders to the overall EZ Banking system?

    And that’s before we get to the value of risk reduction provided by Ireland’s “sacrifice” for EZ bank depositors who hold 17,956 billion euro in European Banks. If we believe there’s a 20-50bps risk reduction for these folks, you could add 35-90 billion benefit PER YEAR?

    If this is true, the EZ has plenty (to put it mildly) scope to make us a better offer?

    Please let me know if I’m missing something? Or if the logic is flawed?

    I continue to believe that the EZ core would (will have to) pay the most fiscal price of savings its fractional reserve banking system.

  28. While we’re at it though, hospital consultants in Ireland are creaming it, way over-paid in comparasion with their European counterparts, or most other people on planet earth. Union leaders – again, vastly overpaid. Quango heads and semi-state body heads. The head of Coillte is apparently on over 400K a year. Who is he? What does he do?

    What about the excesses and waste of the private sector? Is that immune from logic in the name of freedom of enterprise? It’s not just the public sector that excessively remunerates itself at the top in Ireland. They’re not the only ones to fly across the world to stay in overpriced hotels for pointless conferences.

    The Construction Industry Federation – how much damage have this crowd done? When are we going to have transparency in relation to lobby groups?

    We’re mad, literally, about our low corporation tax, but is it not fair to say that when there’s more to gain from taking risks, more risks will be taken? Why should we expect level-headedness and conservatism from our banks when they can get more money per euro of profit than anywhere apart from frigging Bulgaria? We’re just going to head into another uselss boom and bust with this easy money mentality, although obviously not for a long, long time.

  29. @MH

    “We haven’t seen a thread here on such issues, never mind elsewhere.”

    You are quite right there.

    One would imagine that natural resources in an underpopulated island would kick a good many industries off but it hasn’t happened except patchily. Tara Mines still exports ore for processing. A smelter in Ireland would create many spinoffs but would it ever get planning permission. The island is very much under forested leading to shortages of adequate timber (varieties) and firewood. Hurleys made from Irish ash are a rarity. Vast quantities of white timber are imported into the country for construction. Furniture factories have failed in droves before imports yet timber should be one of our best and cheapest products to produce and turn into something useful (think Century Homes). The challenge to overcome is partly policy makers’ snobbery about primary material processing and manual rather ‘cognitive’ labour.

    Incidentally when Waterford Crystal went looking for the government to underwrite a loan of just under @30 million, it was refused. Strange then that the government has no compunction underwriting huge loans by the banks.

  30. @remnant

    There may well be a social and economic benefit to the EZ from Ireland continuing to repay its sovereign/bank debt, but that doesn’t mean we are ‘owed’ anything. Or at least that’s not the way it will be perceived in Berlin and Paris. From their perspective, Ireland has essentially been a free-loading member of the EC/EU since 1973, gaining many benefits both from direct transfers, from the progressively deepening single market, and from the security umbrella we enjoyed but never assisted. In return, we contributed little, and instead frequently sided with the Brits to block integrationist proposals (even before we voted down two treaties acceptable to all our partners).

    The further issue is that Germany, in its munificence, might indeed bail us out at marginal cost to the EZ if we were the one delinquent. Unfortunately we are not alone, and the costs are therefore much higher than you allow.

    and greece

  31. Hi Ninap,

    I appreciate what you say – and I’m trying to move us beyond a “morality” or emotional basis for negotiations. We can get into all sorts of rights/wrong and France (Rainbow Warrior, Colonialism, arming Saddam, blah, blah) and Germany (1933-45) are in no position to claim any high ground . I myself, for example, have ancestors who lie in Flanders Fields defending small nations, etc.

    The classic Irish thing is to ovestimate personal relationships (level 1) and appears to “morality” as drivers in international relationships.

    France and Germany are big boys and will be back knocking on our door if they want to keep Turkey out.

    The basic situation is that we appear have something that they want (e.g. protecting senior bondholders) that appears to be of significant importance to them. I am trying to do some calculations as to how much this might be worth to them?

    The cost to us of doing this is 50% of GDP (83 Bn). Obviously, not in our national interest – to an absolutely spectacular degree. In my opinion, the threats they (may?) have employed to do this are not credible in my opinion. (e.g. turning off the ECB would prompt a run on peripheral banks, contagion, even a 5% threat of collapse of core EZ banks is an unacceptable hazard for them).

    That puts us into the middle-ground. What can they give us in return for this? Myself, I would hold the ground indefinitely for the full 83 Bn but I can see how a reasonable person will accept 40-50 Billion from them to cover 50-60% of the cost.

    Their offer appears to be a 3-4% annual “discount” on a 85 Billion loan – worth about 3 billion a year (which is highly arguable in the first place as our sovereign yields are only this high BECAUSE we are standing behind the banks).

    In the context of the _minimum_ 13-30 Billion a year, that our “sacrifice” is worth to them – it doesn’t make sense at all for us to settle for this.

    They will face this with other countries – and the “hole” in the EZ banking system may be about 1,000 Billion – or about 6% of EZ GDP or 2000 euro per person. This WILL get fixed (through monetisation or taxes?) because the alternative is armageddon, bankruns, no cash in the ATMs, riots, etc. If it comes to it, America and China would even pony to stop this…..

    The key is that Ireland, with 1% of the population, doesn’t get stuck with 10% of it through the naievete of our leaders.

  32. @ remnant

    As many others have pointed out, the issues at stake are as much political as economic. And in my view we don’t have many political cards to play (or chips to cash in, to slightly alter the metaphor). But I fully agree with you that if we had the right negotiators, we might be able to conclude an arrangement that took due account of the mutuality of interests involved. Of course, the issue hasn’t gone away, it has just been deferred, so perhaps the next government will have a better shot at it.

  33. @ Does anyone here get sick of talk … talk talk talk.

    M. Noonan on prime time just stated that the executive had no input in the IMF/ECB slam bam thank you Mam. Tell us what we don’t know Micky
    Billy boy Kelleher is just a creature – why are they not interviewing Elder field and co who were negotiating for us paddy’s?

    There is only one word that needs to be spoken DEFAULT or in more appropriate Anglo Saxon – two words – F£$K OFF

  34. MH.
    re-Letter of “Niall Johnston, Ardnacrusha, Co Clare, writes in the FT today:”

    I fully endorse your sentiments and those of the letter writer.
    And not just becaue I too happen live in Ardnacrusha, though I don’t know Mr Johnson. It must be the air down here.

    I think however we must make a distinction between the well paid public servants and those on lower wages and indeed those temporary local government workers who were amongst the first to be laid off.
    I heard no major support from unions on behalf of those temporary workers.

    Both as an economy and a society we would have been far better off keeping those workers at work and funding their cost by reductions in the excessive salaries and benefits of those at the higher end of the spectrum.

    re : This is not venting anger.
    Galbraith pointed out that excessive income disparity was one of the indentifiable indicators in the decade leading to the great depression.This point has been verfied by stats from another contributor (OMF).
    Galbraith’s findings appear to have been airbrushed out of Irish economic thought. No surprise to me.
    I recall a particular UCD 1970’s textbook that presented a series of chapters by different economists. It included an analytic chapter from Galbraith’s “the age of affluence” and the next chapter of the text outlined a solution to the problems posed in the previous chapter. The solution chapter was written by Friedman.
    People were being programmed not educated.
    Unprogrammed off message solutions will be slow to take seed in Ireland.

  35. God, RTE are desperate. The 9 o’clock news on the day the Eurozone burns and they devote the first 5 minutes to shnow in Galway. That was a verra nice farmer they interviewed BTW.

  36. Hi Ninap,

    Destruction of the EZ banking system would have political consequences too 🙂 This whole problem is political and soluble.

    The Germans would get over this and the French too.

    Maybe Cowen et al are cleverer than I think and we’ve kicked the ball up the road and let Greece/Portugal/Spain bust all of this open. Maybe the bond markets will do it too…..but from Dermot Ahern’s statement today I don’t have a lot of confidence that our agreement was a part of cunning plan/game-planned thing rather than a bunch of small-town solicitors and teachers

  37. @PL Malone
    Maybe the solution is to ingest Euros although Euros of the metal variety may prove painful in the long run.
    Best stick to paper.

  38. Martin Wolf is very pessimistic. AIB could bring down the euro project.

    http://www.ft.com/cms/s/0/259c645e-fcbb-11df-bfdd-00144feab49a.html#ixzz16o8ZZ1mJ

    Expectations are self-fulfilling. This is what is now emerging in peripheral eurozone credit: slow-growing countries with large fiscal deficits cannot promise sufficient tightening, given the high interest rates, to strengthen their credibility. Austerity may fail to deliver the credibility it promises.

    So what, against this background, needs to be done by individual countries and the eurozone? Not what was done in Ireland, is one answer. The Irish banking system is worse than too big to fail; it is too big to save. The first duty of the state is to save itself, not to load its taxpayers with obligations to rescue careless lenders. If the eurozone is not a “transfer union”, that has to work both ways: taxpayers of one state should not rescue those of others from having to save their banks from their follies.

    The Irish state should have saved itself by drastic restructuring of bank liabilities. Bank debt simply cannot be public debt. If bank debt is to be such debt, bankers should be viewed as civil servants and banks as government departments. Surely, creditors must take the hit, instead.

    That leaves the sovereigns. What is needed here, as eurozone leaders recognise, is a combination of generous funding with restructuring: the former is to reverse self-fulfilling panics; the latter is to recognise the realities of insolvency. Managing this combination would be very tricky.

    Moreover, however helpful such expedients might be, membership of the currency union has transformed the financial position of members, which are deprived of a tame central bank and currency flexibility. As a result, they are far more likely to be driven to outright default than they used to be, as markets realise. The only ways out would be for the European Central Bank to buy the public debt or a fiscal union, with the capacity to bail out members in difficulty. Both are inconceivable. Germany would surely exit first.

    So the big question now is not whether the eurozone can avoid a wave of fiscal cum financial crises. The question is whether the union will survive.

  39. @seafóid

    Martin Wolf is very pessimistic. AIB could bring down the euro project.

    Well, the lads at AIB and their adoring fans on Merrion and Dame Streets always did think that their bank was destined for great things on the world stage.

  40. I watched that Kerr guy on Prime Time stating that the Agreements are not legally binding agreements. I think he said unlike a Treaty.
    Problem solved – we can repudiate at leisure.

  41. Why is 3% GDP (what about GNP?) growth a year in future years regarded as very likely, with a hairshirt series of budgets to come and an ever growing debt mountain? Why, when central bank interest rates must eventually rise? I don’t believe that many people who say that we can avoid default believe that we are likely to do so. Certainly not without massive economic dislocation. FG and Lab have been a woeful opposition and are now rapidly diminishing in credibility. They have only themselves to blame. Now I see from politics.ie that’s it’s gotten worse on Prime Time tonight. Michael Noonan’s commitment to protect bondholders is bad enough. But also committing himself to keep (in politicians lanhguage not tear up means a few tweaks) an agreement negotiated by a government with 20% support that will drown us in massive debt is staggeringly dreadful. If FG and Lab are just going to be a sock puppet opposition then it’s time they made honest men and women of themselves and merged with FF. They really don’t disagree with the government’s policy they just want to be the one’s to carry it out. As FF TDs they would get their chance. Dukes, Bruton, Spring and Fitzgerald have shown the way.

  42. @ninap

    There may well be a social and economic benefit to the EZ from Ireland continuing to repay its sovereign/bank debt, but that doesn’t mean we are ‘owed’ anything.

    It means that either we are owed the money to continue these contributions, calculated on a pro-rated basis from the rest of the EU, or that the European bank-bailout program should end. This is something close to self-evident. Your use of sneer-quotes around the word owed is pretty hard to take.

    Or at least that’s not the way it will be perceived in Berlin and Paris.

    It may very well not be how it is percieved in Berlin and Paris, but that is to say that Berlin and Paris are demented. Are you saying that

    1) we are not owed some measure of proportionality in our share of the banking burden

    or

    2) Berlin and Paris are out of their heads

    ? These two are not the same argument.

    From their perspective, Ireland has essentially been a free-loading member of the EC/EU since 1973, gaining many benefits both from direct transfers, from the progressively deepening single market, and from the security umbrella we enjoyed but never assisted.

    Ireland has been a net beneficiary of the union since ’73 due to (mostly) structural funds and the CAP. These programs were always run on a roughly pro-rated basis – on precise bases which all the member states collectively negotiated, and which would never have been approved if they weren’t broadly to the satisfaction of the Core Two, the Motors of Integration The programs were part of the deal on the table when we were freely offered and freely accepted EEC membership. And assuming our current troubles don’t gore us too badly, we’re facing into being net contributors to the EU for the foreseeable future before too long. So you’re suggesting that because we’ve done well out of pro-rated programs over the years, the Commission (or the Franco-German axis, or the ECB) feels an entitlement to chuck the rough basis on which every common EU program has been funded – the only sane basis on which common EU programs could be funded – and at their liberty slap us with a huge, comically disproportionate (and to us, ruinous) share of their massive, futile new EU program? (A program notably lacking in democratic or formal EU approval, but let that pass.) This is justified because we, like every other country, like to hustle and wheedle for a few percent more here and there from the prorated programs? If so then you’re right: Berlin and Paris actually have gone insane. I often find our EU-grubbing distateful – I loathe the CAP almost tout court, something Paris notably doesn’t – but this is motes-and-beams stuff. As for the idea that they’re always entitled to hit us up for a few tens of thousands of euro per capita anytime because after all they let us join their free-trade area … ! I agree with you about our free-riding on defense, but serously: do you think the Core is sticking us with the EFSF package because we haven’t joined NATO, or because it’s the easiest thing for them to get away with? I think you indirectly answered that question below.

    In return, we contributed little, and instead frequently sided with the Brits to block integrationist proposals (even before we voted down two treaties acceptable to all our partners).

    But this would really take the biscuit. I’ll mostly just pass over it, actually.
    Just one thing for now: speaking of treaties we voted on, how’s about that Lisbon? EFSF is illegal under Lisbon. Pouring vast sums to prop up private investors in failed industries is frowned upon under Lisbon. Default (private or sovereign) is legal under Lisbon. So the EU core is resentful towards us for voting against the very treaty they’re now merrily wiping their arses with? Merciful hour.

    The further issue is that Germany, in its munificence,

    in its ‘munificence’ would be accurate here.

    might indeed bail us out at marginal cost to the EZ if we were the one delinquent. Unfortunately we are not alone, and the costs are therefore much higher than you allow.

    Well, it seems that the EU might have been better off offering us an acceptable package and hoping to hold back Spain and Portugal from applying, given how badly their decision to make an example of us to scare the remaining PIIGS and then hoping to reassure the markets that the periiphery is contained is going so far. But fundamentally that’s neither here nor there. It comes back to the question of democratic deficit that the eevil Brits so often bring up when dragging their feet on further integration. If indeed there are only three possible courses of action for the European financial “rescue” at this point – 1) massive EFSF fiscal transfers from the periphery to the core, 2) large fiscal transfers (ie. not loans) from French and German voters to their own insovent banks, routed through the periphery or 3) banking and sovereign default in Europe, and if Franco-German voters really are completely, unpersuadably unwilling to consent to 2), then Europe has spoken, and lo! it has instructed its elected representatives to carry out option 3). It doesn’t matter how unthinkable the EU’s leaders consider 3); unless they can change people’s minds about 2) – or at least go ahead with it and accept the consequences at the next elections – they’re obliged to execute it. And that’s quite aside from the fact that the Weekend at Bernie’s farce which the EU’s leaders so adamantly want to keep up is probably unsustainable and probably not in the actual interests of Europe’s voters anyway. (Among other things, it is in itself an attempt to decieve voters about how badly the current leadership has wrecked their economies and their savings.)

  43. We had an opportunity to dictate terms in Q3/Q4 2008 but now there isn’t the political will to agree a Eurozone wide restructuring and that is what would have had to be agreed at the weekend if ‘haircuts’ were on the agenda.

    The positive development is that Angela Merkel has pushed for burden sharing in the permanent mechanism and it’s likely that restructuring would be on the agenda for Greece and Ireland if it appears that the reformed economies cannot sustain the high debt.

    Up to now, the focus at home has been on fire-fighting by the arsonists while we folks in the unprotected private sector have been subject to brutal ‘reforms.’

    It’s long past time for the culling of sacred cows to start and replacing a fairytale ‘smart economy’ plan with a credible jobs strategy that at last would realistically consider the challenges in creating up to 200,000 net new jobs.

    When a senior minister has nothing better to do than seek credit for plans to create as little as 25 jobs, it should be clear how big the problem is, in a global economy where picking up a few crumbs is the best we can hope for from the giant emerging economies.

    This is a letter in today’s Irish Times from GERARD MONTAGUE BSc, BA, MA, an Irish resident of Germany:

    “Average gross income here is currently €32,000 per annum, which translates into considerably less take-home pay than is common in the Republic. Apart from mostly higher income tax, the social levy (pension, health, and unemployment insurance) amounts to 36 per cent of gross salary, of which employers pay half. University teachers here can only dream of what their Irish counterparts of equivalent qualification take home and the same goes for ordinary teachers

    ….Few can afford more than a €300,000 mortgage and they are expected to come up with at least 20 per cent deposit, so sellers cannot ask for more in most regions. You won’t see many of the larger German cars on German roads: most of them are exported to places like China, the US, or Celtic Tiger Ireland. And I don’t know anyone here who ever went on a Christmas shopping trip to New York – but I do know several in my home country

    ….The highest contributory state pension is similar to that in Ireland but that is not a fiscal issue here anyway, as the system only pays out what it takes in. Those without a pension get the dole, the standard rate for adults being €359 per month per person, means-tested. Plus means-tested rent subsidies, etc. Those insured against unemployment get more, but generally only for the first 12 months. Like everyone else, pensioners pay for their medical insurance, around 7 per cent of their pensions; there are no medical cards, free travel, free TV licences and the like.

    It is an issue for the Irish in Ireland to solve, and not for the rest of Europe…”

  44. Two points from Trichet’s Quarterly Hearing before the Committee on Economic and Monetary Affairs of the European Parliament on Tuesday:

    He said that ‘haircuts’ would only help the speculators if not planned carefully – – he did not say that he opposed them outright.

    Nikolaos Chuntis (Greece) worried that an extension of the period for Greece to repay the EU/IMF loan would prolong austerity in the country.  “We must realise that it is time to return to normal economic levels and not the falsely inflated economic levels existing before the crisis,” Trichet replied, indicating that an end to austerity must not be equated with Greece’s economic level of 2008.

  45. According to the latest OECD Benefits and Wages statistics for 2008, the average gross wage in Ireland in 2008 was €40, 862 and in Germany it was actually a little higher at €41,400 . Taxes and contributions for individuals are a lot higher in Germany so that take-home pay for a single person at the average wage in Ireland was €32,581 and in Germany it was €24,015.

    In the first year of unemployment a single person in Ireland would get €17,700 in 2008 and €14,300 in Germany. Interestingly, OECD calculations of net pension wealth for individuals are about the same in both countries, but Germany spends a lot more on pensions (about 5.6% of GDP) than Ireland which is presumably due to a much higher share of older people in the population – public health spending is also about 2% of GDP higher.

    The wage comparisons are in nominal terms not PPP adjusted – the last time I was in Ireland – a long time ago – it seemed to me to be expensive.

  46. The National Competitiveness Council says in its latest report that there is not a strong appetite in Ireland to tackle high costs in sheltered sectors.

    I may have said that myself once, twice or a hundred times.

    The NCC has been reporting to the Taoiseach since the 1990s and its reports were of course binned in boom times and apapraently still so in depression times.

    The MOPE (Most Opressed People Ever) role is more comforting.

    “The NCC is concerned that there is not a strong appetite in Ireland to tackle high costs in sheltered sectors. A systematic approach
    to ensure that competition law applies to all sectors of the economy is necessary.

    A rigorous review of laws, rules and customs governing locally traded sectors is required to identify barriers to enhance competition. In addition, the State should use its purchasing power to exert downward pressure on professional fees. The NCC also supports the CSO proposal to introduce an administrative cost index which would enable more accurate
    benchmarking of government driven costs relative to the wider economy (Section 2.5).”

  47. The Irish Examiner reports that Justice Minister Dermot Ahern will be paid a windfall of €318,000 in the first year after retirement following his decision to step down at next year’s general election.

    When he retires as minister and TD for Louth early in the new year, the 55-year-old will be paid an initial tax-free golden parachute of €177,636 as well as a pension of €140,861 in the first year. This will be followed by an annual pension worth €128,291 for the rest of his life.

  48. @finfacts

    The MOPE (Most Opressed People Ever) role is more comforting.

    I completely agree with you about the importance of reforming the public sector, shaking up the sheltered private sectors, and so on. But the fact remains that we’ve been brutally mugged to the tune of several thousand euros per head. It’s true that this happened partly because of our own stupidity in taking a shortcut down the endless dark alley of the bank guarantee. It’s also true that as a fairly rich country whose economic management has been not only stupid but stupider than the EU average, we don’t cut a very sympathetic figure overall. But it doesn’t follow that we had it coming. Conversely, the fact that we wuz robbed doesn’t grant us a victim card which excuses us from facing up to and dealing with our own self-inflicted and self-remediable problems. Competing narratives be damned: we have to be able to walk and chew gum at the same time here.

  49. @ anonym

    I tend to think your 08.18 post answers many of the points raised in your 12.42 one.

    Was it Clint in Unforgiven who said “Deserve’s got nothing to do with it”?

  50. @ BW II

    “….just because tangible financial assets are less than financial liabilities does not necessarily mean we can’t meet those liabilities.”

    “An analogy would be someone who is in negative equity”.

    Let me expand the analogy to take account of the cashflow part of the equation:

    This person who is in negative equity to the tune of say EUR200,000 is not able to find work for 15% of the timed, has a net income of c. EUR30,000 and has outgoings, mainly on necessities for the family, of EUR50,000.

    Unfortunately, the tenor of the loan that is in negative equity is c. 7 years and given that this person’s relationship with the bank is a little strained it is unlikely the bank will extend the tenor or refinance.

    This person then goes to his wealthy uncle and tells him that in 4 years he thinks he can get his income up to EUR35,000 and his spending down to EUR40,000 but the smart uncle spots that this is unlikely unless he gets a promotion and he stops feeding some of the children.

    However, to keep the family reputation intact the uncle lends his nephew some money that will help him to make the payments for another 3 years or so albeit a higher interest rate than any growth in his foreseeable salary…..

    So BWII, a better analogy might be someone who is in a lot of negative equity with a major cashflow problem who is filling the gap by going to a loan shark

  51. @John McHale

    John – I’ve sent you an email to the queens address – would you mind checking your spam folder in case it went in there? (my yahoo mail sometimes falls victim to filters…) thanks

  52. Reform of the public sector will NEVER happen. Every opportunity for reform in the past has been kicked to touch. Redundancies in themselves are not reforms but an essential precondition nonetheless. The legacy of Min Harney’s managerialism incarnated in the HSE is an appallingly wasteful inefficient Ozymandias. Solution – retire a few thousand on redundancy packages unheard of in the private sector. There are towns in Ireland ‘cities’ with not just one but two (may be even three) third level institutes and all the duplication that entails. But that’s fine apparently.

    And while I am at it could anyone explain to me why every new road must have a ‘hard shoulder’ the width of a car yet one can’t drive in it. The cost implications must be enormous for this nonsense. Don’t the people in the NRA, local authorities and even the national politicians occasionally get to drive the better highways in Europe and learn from their experiences?

  53. @Ninap

    I hope I have a fair grasp on the distinction between ‘ought’ and ‘is’ in this case. I have to say that I think it is you who is equivocating between them.

  54. @MH
    re The Irish Examiner reports that Justice Minister Dermot Ahern will be paid a windfall of €318,000.

    The examiner got it wrong. Windfall is not the correct. I believe the economists call it rent seeking.
    Ordinary folk call it greed,gouging, feather bedding and a host of other words.

  55. @BJG

    All sorted – his queens address is on his page even though he’s at NUIG. Lines of communication all open now 🙂

  56. @ KC

    “There is only one word that needs to be spoken DEFAULT or in more appropriate Anglo Saxon – two words – F£$K OFF”

    Would it not be more cute hoor to delay this tactic until we had drawn down the 67.5Bn.

    @ Pa Bandit

    Yes, that is one version of the metaphor. I will work on a more optimistic one which taps the fact that the NPV of Ireland Inc’s income is 10 Trillion of which a mere 0.2Tn needs to be given to foreigners.

  57. @Brian Woods II
    Perhaps you are right from a purely monetary viewpoint but this will merely drag us down deeper into the ECBs warren.
    Besides the Pension temporary independence card seems to be spent in this deal and therefore this state is even more a creature of the credit making institutions.
    It is all very acedemic anyhow when describing this sod as a “state” when it relies on monetory priests to negotiate on its behalf.
    We are as pure a vassal state as I can imagine – then again my imagination has been found wanting in this crisis as I never would have thought that the banks had 100% of the power.
    How depressing that individuals who have no concept of wealth creation can have such power in the west with not a single check other then a blank cheque.

  58. @ BWII “NPV of Ireland Inc’s income is 10 Trillion ..”

    Mathematically correct based on your discount figure etc. But it is like saying that my company has turnover of 160,000 when I am only able to take a salary net of 30,000. Total turnover is only relevant as a guide to how achievable the salary is – the key metric is exchequer takings and not national income. What’s the npv of the deficit I wonder and then add that to the negative equity….?

  59. @ PA Bandit

    The household has €160,000 coming in from a few sons and daughters who are at work. Some are unfortunately not at work. The master of the household is only extracting 30K for the upkeep of the house (including paying the mortgage). He has flagged that in future he is going to be less lavish in that upkeep and he is going to expect those at work to pay a bit more towards its upkeep. He is also hopeful that those not at work might get a job if things start to pick up. He is fairly confident that he can roll over his mortgage in 7 years time, in fact he is fairly confident he can keep it rolled over indefinitely. All in all, he feels its manageable.

  60. @KC

    IMHO it is far too early to be throwing the toys out of the pram. Trichet has more or less stated that the euro will be maintained, whatever it takes. In fact it is difficult to see how there can be any orderly way out. There is just the possibility down the road that if Ireland simply can’t pay its debts that there would be actual fiscal transfers as happens in a true currency union like the US.

  61. BWII why do you not see this in macro or micro terms? At best with a fair wind income receipts will increase to c. 36 and expenditure declinetothe early 40’s assuming good growth. The debt will be c. 200 at that time ie 6 times receipts/income and the banks have refused credit right now with the strong signs that this situation will continue due to the size of the debt.

    So to take your points – 1. Income will increase (to 36 with luck), 2. expenditure will go down (to early 40’s with luck) 3. The markets may be open to roll over debt in 3 years (not 7). Therefore taking 1-3 you arrive at the conclusion that 4. 200 billion debt is manageable…

    I wonder do you pay off your credit card every month? Imagine you could only make the minimum payment and you needed to increase the limit each month just pay for the essentials…..

  62. @ PA Bandit

    I am looking for some hope. You won’t allow me indulge myself. That’s spoilsport.

    Only hope then is a real bailout – i.e. fiscal transfers. What can we offer? We could increase the CT rate. We could offer that German would be the compulsory second language taught in our schools. We could offer changing our road signs to be in English, Irish and German. Selling Rockall has also been suggested.

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