Barry Eichengreen on the Irish bailout

Barry Eichengreen has a magnificent, angry piece about what happened last weekend in this morning’s Handelsblatt. With Barry’s permission, I am posting the English translation in full below.

Ireland’s Reparations Burden

Barry Eichengreen

The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency. But the more successful it is at reducing wages and costs, the heavier its inherited debt load becomes. Public spending then has to be cut even deeper. Taxes have to rise even higher to service the debt of the government and of wards of the state like the banks.

This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.

Irish public debt would then have topped out at maybe 100% of GDP. And the Irish program would have had a hope of working. As it is, the program will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.

In fact, this is exactly what the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB and the German government.

One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.

But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, recent events make clear, leadership is in short supply.

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.

257 thoughts on “Barry Eichengreen on the Irish bailout”

  1. Yes, the truth hurts. Dario Fo put it even more simply: “Can’t pay, won’t pay”.
    There is too much debt; debt that will neither be serviced nor repaid. In the end, it’s always about arithmetic, of a most simple kind. I loved the line about the IMF who, unlike the ECB, can add up.

  2. ‘Ruthless truth-telling’ indeed.

    Gut geschpielt! Wir mussen unser Deutsch schell verbessern!

  3. Oops – meant schnell! So schnell wie moglich!

    The performance of the ECB in the last month (never mind the last two and a half years) deserves to occupy its own chapter in the forthcoming ‘How Not to Handle Banking Crises’.

    Can’t resist: Who decided we should scrap the Irish currency and join this wonderful arrangement? Hands Up !

  4. @Colm
    Schnell, oder?

    Thanks for this.

    Why won’t FG listen? Unless they do, the FF capitulation will be formalised by the MoU now being worked on and we are legally snared.

  5. Wow, this article stings true. Thanks to Prof. O’Rourke for posting it.

    @ Colm,

    Whatever about those who felt EMU was a good idea for Ireland, could the legions of supporters of the bank guarantee, NAMA and making the bondholders whole please put up their hands now?

    Oh, and since you are keen on improving your German: not having a German keyboard is no excuse for dropping your umlauts: möglich = moeglich, müssen = muessen etc. 😉

  6. Why does it take a US economist – obviously a friend of Ireland and of Europe and with a sound grasp of economic history – to call it as it is?

    However, as I have pointed out previously, Ireland’s economic interests are perfectly aligned with those of the bond markets – while its political interests, in an EU context, lie in the opposite direction. Better to sit tight, let this darned budget through and let the markets do their job.

  7. @Kevin – thanks for posting the translation. I check the Handelsblatt every day but would not have the time to translate the articles, so it is great to get Barry’s English version.

    I agree with Barry – we need less debt and not more loans.

    In general the coverage of the Irish crisis in the German media has been a lot less agressive than the coverage of the Greek crisis (the stuff in Bild was very mild – not that I check Bild that often).

    Clearly Angela Merkel is playing to an internal political agenda. There may also be some tensions internally between the Chancellors office, the Foreign Office and Finance. However, with the show moving on to Portugal and Spain (Italy, Belgium, France….) the issue might well be forced rather quickly. Germany and a few other EZ members could find themselves in an uncomfortable minority before long.

    @Colm – I am available for lessons!

  8. @ Joe: “Why won’t FG listen”

    Joe, they are listening – its just that they are unable to decrypt the message. Lots of ‘noise’ is drowning out the signal. They also (as all our contemporary Pols do), lack capability. Hugely ‘risk-averse’.

    Now, if we were to get our equivalent of Big Ian – that might stir things up somewhat!


  9. Paul
    I think some Irish economists and commentators have been saying this. But an expert is someone from out of town.

  10. @Paul H
    Contributors to this blog may not have the star quality of Prof. Eichengreen but a few of us have been saying exactly the same things for quite some time now.

  11. Just to play the advocatus diaboli

    Eichengreen writes:

    For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks … etc.

    I see its party time for the counterfactualists. Perhaps Eichengreen is right – but would anything have been ‘particularly easy’ given Ireland’s sorry state? After all, potential future bondholders might have consigned Ireland to the leper colony straight away. From their perspective Ireland’s sovereign debt might have been seen a black box and there might be no ‘bright line’ to be drawn. So the outcome might have been bankruptcy forthwith, rather than a painful ‘restructuring’ over the years.

    Eichengreen seems to believe that Ireland’s predicament is some kind of problem and that if only the decision-makers had thought hard enough (or taken the advice of BE) some kind of acceptable solution would have been found. But it’s not a problem – at least not one of the ‘tic-tac-toe’ variety. It’s a state of affairs – and states of affairs don’t have ‘solutions’. They have outcomes, and all may be equally nasty.

    Personally, I haven’t a clue what the government should have done.

  12. Also, no distinction, deliberate I suspect, between senior, junior or other bonds. Let loose the troll-horde…

  13. A tad off topic, but I think this shows that we put too much emphasis on learning French in school and not enough on German.

  14. Any European economist worth reading who supports the official line?

    Just wondering as people tend to quote or link to what supports their own views.

    I tend to be anti-staus quo on most things; nevertheless, it can be interesting to get contrary views.

  15. @Brian Lucey

    ‘Renegotiate folks..’

    At last a bit of reality, instead of agonising over what might have been ..

  16. @Michael Hennigan

    Any European economist worth reading who supports the official line?

    A good question. There may be some coyly concealed in the woodwork, waiting (vainly, I reckon) for the euro to rally.

  17. (1) Has anyone seen the deal actually done & if so could they explain what will happen to the famous €90bn of short term emergency liquidity assistance in the six State-guaranteed banks at the end of Oct 2010?

    (2) Could they explain how we will roll over €12bn of bond and treasury bills that fall due in 2011?

    (3) Could they explain why capitalising the banks further is at odds with the apparent position of the Central Bank Governor?

    (4) Does anyone know what is meant by using €2bn now to “deleverage” the banks.

    (5) Can anyone explain why 26 months into this crisis we still don’t have a handle on the scale of losses facing the banks for non-NAMA loans and derivatives?

    (6) And the Regulator is talking about using yet another unidentified “independent third party” to conduct a “granular examination” of the non-NAMA loans?

    (7) And can anyone explain why the 60% debt:GDP rule in the Stability (and think about what S-T-A-B-I-L-I-T-Y means) and Growth Pact is being ignored by all including our friend Olli?

    I thought I followed these matters closely but I have never been so confused by the apparent conflicts and confusion and why 26 months after the crisis broke we still don’t seem to have a handle on bank losses.

  18. Until the Europeans (and Irish) realize that the only way to solve the crisis is to negotiate things are just going to go from bad to worse.

    Much of the explosion in Spanish spreads yesterday is because their banks could also be insolvent. If Europe is going to insist on an Irish type deal for Spain then their sovereign will suffer as it assumes the debt of the banks.

  19. @Brian L & Simpleton,

    I’m not denying that there were no vocal contrarians, but my criticism would be that they tended to focus on what Ireland could do unilaterally. For a long time now I have been convinced that, in order to address the bank debt issue which had morphed into sovereign debt, Ireland needed protection from the bond market. Only the IMF could provide that protection. But that option apparently was not available within the EZ.

    What really puzzles me is the role of the IMF in this latest cock-up. I sensed that were not best pleased to be sidelined busting the truckers’ closed shop in Greece while the EC and ECB did the fiscal and financial stuff – and that they would be more seriously involved in the next bail-out. But they seem to have swallowed the EU’s political play hook, line and sinker – and, on the structural front, only some pretty naff labour market initiatives and nothing of any substance on the requirement for deep-seated reform of the semi-state and private sheltered sectors.

    Has it been constrained by the requirement not to scupper DSK’s French presidential ambitions? And as for the US, the more I look at Obama, the more I see a neophyte Chicagoan community activist out of his depth. He talks the talk of Washington, Jefferson, Lincoln and Roosevelt and walks the walk of a selection of the most incompetent presidents. It is in the US’s interest that the EU replicate key features of its economic, fiscal and monetary policy and regulatory framework.

  20. @CG,

    Well said!

    If I was God for a week, I’d declare a ban on the use of the word ‘should’ on pain of immediate obliteration of the user.


    FG and Labour and Sinn Fein have an option – take legal action seeking to have the agreement declared unconstitutional unless and until its terms are laid before and approved by the Dail. Eamon Gilmore was busy in the Dail yesterday reading the relevant article of the constitution into the record and Brian Cowen was equally busy slinging back the sub-clauses of that article that Eamon had omitted to mention. This isn’t about some by-election in Donegal. Whoever initiated such an action would have to be pretty certain that it would succeed – at least well beyond the normal 50/50 chance. And they would have to be prepared to take the political consequences of its failure.

  21. We need less economists commentating and more geopolitical game theorists now. The Irish political science and int relations academic community: your time is now. And no, I’m serious.

  22. @ Brian Lucey

    I was in Berlin 2 weeks ago where they eat sausages with curry powder and ketchup together. 😯

    The least they could do is take a bite from a sandwich we made together.

  23. @Galviensis

    Assuming that the Irish state is good for its “core” sov. debt given reasonable funding, then the situation you’re describing there is a straightforward liquidity crisis, yes? Thus it seems the standard prescription for a liquidity crisis would work nicely. Basically the same approach as the current EFSF deal would work, except that we’d borrow less money (at a somewhat lower rate, hopefully) and would actually be able to pay it back. (AFAICS it would be a case of market failure: investors turning up their nose at a visibly sound investment.) As best I understand it, a liquidity crisis is only dangerous for us if we can’t rely on external assistance, and that wasn’t the situation Prof. Eichengreen was considering.

  24. Even if the ECB and EU were agreeable to allowing senior bank debt restructuring and to back that up with recapitalising their own banks to withstand the shock, they may not have had time to implement that solution in the context of the Irish crisis. It may be that they have all been sent home to get ready for the inevitable. However, one wonders why they were not ready in advance.

    Whether or not the Ecofin and the ECB decided that countries should strengthen their banks against such losses, it is now surely the logical for any country who can afford it to do so.

    In the meantime, the solvent countries appear to be doing their best to put the insolvent countries on the hook for the maximum amount possible. In this context, it is very distressing that we have to flush our pension reserve fund and our cash pile into the banks. Perhaps we couild put it in slowly or else put it all into BoI. Either way, the policy appears to be to socialise losses to the maximum extent possible in the insolvent countries.

    Perhaps this is the context for the Deauville announcement. Firstly, it forced sovereigns to take bank debt onto their national balance sheet forthwith. Secondly, it puts in place the system for the inevitable smooth restructuring of those debts in the interest of the creditors. Maybe this is what the markets have realised.

  25. Kevin,

    Any possibility of getting this article republished in the Irish Times? It is very well written. I realise Brian and plenty of others have been giving the same message for some time. Nonetheless, a commentary from the US always attracts attention.

  26. “Let loose the troll horde”? Can’t be any worse than the ‘ranting, dancing economist’ that we saw last Friday morning eh? Sockpuppet (?) jibes n all…

    Here’s the deal – i have never been against the notion of bondholder haircuts in the abstract, simply in the practical and the legal. Further, if there is to be any bondholder haircuts, it will simply have to be done either under the cover of or directly by a surpranational entity like the EU, ECB or IMF. It cannot, either in the past, in the now or in the future, be done at the sole discretion of the Irish government. It would also, in my opinion, have to be done in a number of Euro countries (maybe all, but at different levels) at the same time, otherwise there would be an enourmous stigma attached to any individual country undertaking this course of action, a stigma that woul have required external help anyway to get us through the market freeze-up. If the EU/ECB now reckons its the right thing to do (which it still clearly doesnt), and they can keep the wheels turning in the aftermath, then i’d love to see it happen. But we currently have an ECB that, quoting JCT himself yesterday, has no interest in putting losses on bondholders at this point in time. This is the same ECB which isn’t even particularly keen on extending additional liquidity to us, which is supposed to be their job. Taking a rather solo run at an issue which will have a direct impact on the near €2trn in maturing senior debt over the next 2 yrs is likely to lead to a rather significant backlash from our Euro-partners. For the ECB, bondholder losses are considered just as much of a nuclear option as QE.

    Like i said, im all for it, provided we can figure out how to stop another financial collapse in its wake. It’s only that we are on the precipe of the abyss that we can now seriously contemplate this. Like i said before, suggesting this course of action 2 years ago makes you right overall in the abstract, but completely and totally wrong in the practical realities of what our core monetary and political authorities (and the market itself) believe, and this was further proven over the weekend.

  27. BTW, if Michael Noonan is Minister for Finance, I believe he will continue on this path for all his apparent toughness. If Richard Bruton is Minister for Finance I think he may face them down because the principle is strong for him despite people thinking he is weak. Perhaps an immediate general election is necessary.

  28. @zhou_enlai

    The most likely is Enda for Taoiseach and Joan for Minister for Finance. I strongly doubt Taoiseach and Minister for finance will go to the same party. Think rainbow coalition.

    I suppose Gilmore for Taoiseach and and Noonan for finance is a possibility.

  29. The point I was trying to make, in bad German, is that the abolition of the Irish currency looked, at the time, like a technical decision about exchange rate policy.

    Opposition was based on unintelligible arguments about optimum currency areas & c. The supporting arguments, remember, were about getting interest rates down!

    In retrospect, the abolition of the currency was a vote of confidence in political capacity, and a bad call. The need for smart economic management goes up, not down, when an SOE joins a common currency area.

  30. Veronica,

    I wanted to respond to your point about putting the bailout before the Dáil. I happen to think the the government was in an extremely difficult situation regarding negotiating this deal (and my level of support for this government has been pretty close to nil). I doubt very much if the opposition would have emerged with even one of the t’s in the present deal uncrossed.

    The constitutional argument about whether the deal ought to go before the Dáil can ultimately only be answered by the Supreme court. Yet if I were to place a bet, I would bet that the court would suggest it should go before the Dáil.

    Certainly, even if our constitution had no reference to external agreements involving public funds, it would seem appropriate in any properly functioning democracy that a decision of this magnitude would at least be placed before parliament.

    Here we have a great illustration of the fragility of democracy. Let’s suppose that most economists and poltical commentators fear that a rejection of the deal would plunge Ireland and the Euro into an even deeper crisis. And let’s suppose that for one reason or another the opposition and a handful of backbenchers are expected to play politics even in the hour of crisis and are expected to scupper the deal if it goes before the Dáil. In that case, what is the right course for a minister and Taoiseach to take?

    Lay it before the Dáil and take our chances with ‘democracy’? Or push ahead on what they deeply believe is the right course for the nation, turning a blind eye to the niceties of democratic politics?

    I think the quotes around democracy are fully deserved, yet deciding to conveniently dispense with crucial aspects of the democratic prossess should not be taken lightly.

    The trouble I have is my faith in the democratic prossess as it stands. In large part it was its disastrous malfunction that got us here in the first place.

    That said, I am hesitant about seeing it further undermined.

  31. @Eoin
    ‘enormous stigma attaching to Ireland…..significant backlash’

    er, could either be any worse than what we are currently experiencing? Could we do anything now that could make the current catastrophe worse?

  32. I am a huge fan of Barry Eichengreen, but I think this piece is over the top.

    He says: “A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out. ”

    First, I am not sure what he means by the one-third of the government debt that guarantees the obligations of the banks. I presume he is getting at the direct costs to the government as a result of covering the losses of the banks. We need more precision here.

    Second, I am surprised that he calls for default on the guaranteed debt. As the original blanket guarantee expired, this is now the ELG — funds raised by the banks on the backing of the goverment from 2009. This is not the legacy debt from the years of reckless lending. I do think that the now unguaranteed legacy debt is fair game. But that is not what is being targeted in this piece.

    And third, it would have been good to see some discussion of the need to impose losses in the context of a resolution regime that respects the rule of law. Usually, non-bankruptcy resolution is triggered only when the bank is insolvent or critically undercapitalised. Prof Eichengreen seems to be willing to impose almost arbitrary losses on guaranteed bond holders even before insolvenecy is identified.

    Large mistakes have been made in managing this crisis. While calling for default is all the rage, advocates have a responsibility to carefully think through the mechanisms and consequences so that we don’t make things worse.

  33. I believe that if we forced our banks to default on senior unguaranteed debts the other countries would have to cover their banks losses.

    I further posit that if we did not default on guaranteed senior debt the other countries would have to keep us functioning to repay this debt.

    These measures would surely suggest some kind of progress on the Eurozone problems beyond the current plan of forcing sovereign default.

    I think Trichet does not realise that the UK, France and Germany are playing “the great game” as Prince Andrew said in Kazakhstan. There have always been defaults and there will always be defaults. Better the other fellow defaults than us.

    In the meantime, I think that our political classes are willing to accept that maximum socialisation of bank losses are the rules of the game which smaller countries are forced to play by. They are (rightly) embarrassed by our carry on over the last ten years and their parents’ austerity leads them to think that we now must pay our debts. They are their parents’ children. We need something a little less homespun now.

    I would like to think that Prof Honohan and the NTMA are showing a but of nous and steel, but I get the feeling that we go into these Ecofin meetings naked. Our politicians have never bothered their arses understanding the EU properly.

  34. @ Simpleton

    thats my point – now its a viable alternative, but still only under an EU/IMF approval. If we do it without their approval, and without the markets approval, will the ATM’s be working next week? Will the banks still be open? Serious questions. Overnight capital controls would be required, but not sure how that’d go down with the MNC’s.

  35. @ Eoin Bond,

    “Like i said before, suggesting this course of action 2 years ago makes you right overall in the abstract, but completely and totally wrong in the practical realities of what our core monetary and political authorities (and the market itself) believe, and this was further proven over the weekend.”

    I am relatively new to this debate so forgive me if I ask some foolish questions:

    But it sounds like you are saying you we for the bank guarantee two years ago, now you see that it was the wrong path but feel that this is only just in hindsight knowable. Right?

    Couldn’t this line of reasoning be used to justify any catastrophic decision?

    I mean, anyone who could see default of Irish banking sector two years ago could have been able to reason that it would have been better to get it over with quickly, than to drag down the sovereign, hold on to zombie banks, run a failed NAMA experiment and then end up defaulting anyway.

    How can you say this is hindsight if they were saying it beforehand?

  36. JohnMCHale
    So: in essence its “hang on now lads, steady….”
    What, John, is your solution – this one aint working. As KoR said this now assuming a schimatic (even a saipan-ic) momentum. One side say “hell, sure what can we do”.Another says “lets see, this isnt working, but there are alternative ways. Lets talk”.
    An unfair and overbroad generalisation but…
    Time to take a stand people. Either we are for this rotten deal and all it implies or we try, this time with proper negotiators (no offense PH…) to get a slightly less rotten deal.

  37. Eoin
    Agree, you have been on the “we cant” edge of the debate for the most part. But, look at the logic : the debate has moved, whether the politicians or the bondholders want.realise from : cannot burn seniors in principle – can in principle but its hard in fact – can in fact but it would be dangerous – should but its hard – should but when
    Theres a temporal path here…want to predict the next move?

  38. Ah, I think I can see Eoin B’s point now:

    Default is now only an option with international backing – if Ireland had let the banks go earlier, then no support from EA partners, bank runs etc.

    This is a good point, I think, though impossible to prove. Who knows how EU would have react in 2008, before Greece etc to an Irish financial sector meltdown? I don’t

  39. @Tomaltach/Veronica

    I do not understand why the Dail has to vote on this. It is a facility and does not become a loan until you draw it down. Any Government can decide not to abide by its terms or not to draw down money. There is no commitment until money is drawn down. FG/Labour may will likely be in power by the first drawdown and will certainly be in power for subsequent drawdowns. What do they need to go to Court for?

  40. @zhou_enlai

    I have to admit that I used to smile when Keith Cunneen said that it was the ECB’s policy to place bank senior debt above sovereign debt. I don’t think the present arrangement is mostly the doing of the ECB, and I expect it will probably be transitory (in one way or another) but, well, here we are. It just confirms what everyone is saying: it’s hard to be cynical enough nowadays.

  41. It all reminds me of WW2 with AIB as Breslau and FF as the 1000 year Reich.

    Taken from Microcosm by Norman Davies, not available online AFAIK.

    “Breslau, the chief city of Silesia, was designated a Festung, or fortress, by Hitler as the Red Army advanced on Berlin in early 1945
    Despite the patent lack of any fortifications it was to be held by a motley collection of under age Hitlerjugend, elderly Volkssturm (territorial reservists) and battle hardened Waffen SS veterans.,. The Breslau garrison held the besiegers at bay but failed to halt the Soviet advance
    When Hitler committed suicide on April 30 it continued to resist. It surrendered at 6pm on May 6, half an hour before General Jodl’s general capitulation at Rheims. Breslau had experienced its Gotterdämmerung or twilight of the gods.The most prominent victim was to be its German Character. German Breslau, like Jewish Breslau, would cease to exist.”

  42. “It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency.”

    If a teacher is paid €50,000, takes a 50% pay cut (“internal devaluation”) and is now paid €25,000. The teacher is very unhappy.

    If a teacher is paid IR£50,000 with an exchange rate of IR£1=1€ and the Irish Punt is devalued by 50%, IR£2=1€, the teacher is paid the same punts, but half the euros. Is the teacher happy?

  43. @Colm McCarthy,

    Completely agree, but a currency union has to have mechanisms in place to deal with the risk of abysmal economic management. The US learned that lesson during the 1930s – even if it lit a bonfire of banking supervision and financial regulations from 1998 that has engulfed the developed economies. Banks will fail, voters will elect stupid governments, bond investors will chase yield and fail to price risk properly. All these – and more – are inevitable; but some supranational body – or collection of bodies – has to be empowered and have the authority to resolve these problems without the whole shooting-match collapsing. The EMU is inching its way towards a recognition of this, but the bond markets lack patience when they are confronted with so much uncertainty.

  44. ESRI newsletter arrived this a.m. with link to the Euroframe assessment of the Euro area. 1.7% growth is predicted this year, 1.6% next and 1.7% in 2012 with this proviso on p. 3:

    “…the forecasts contained in this report are critically based on the assumption that the European sovereign debt crisis is contained and is resolved swiftly.”

  45. @BL

    “But, look at the logic : the debate has moved..”

    I think that is Eoin’s point. You can’t do these things until the debate and situation moves. The IMF coming in was the biggest move so far. Eoin has said he thought this was an opportunity to restructure. Eoin has said from the beginning that we needed the right environment to be able to default. You wanted to burn the house down from the start. Do you understand Eoin’s consistently stated position at all????

  46. @zhou
    “Even if the ECB and EU were agreeable to allowing senior bank debt restructuring and to back that up with recapitalising their own banks to withstand the shock, they may not have had time to implement that solution in the context of the Irish crisis.”
    They’ve had the three years since the collapse of Northern Rock to realise the implications of too much debt. The roots of the FIRE economy run deep, even in the non-Anglo Saxon economies, since they were the ones who loaned the money to a pyramid economic model.

    What few want to address is the fundamental problem of the deficit. It has been around for three years and more (in structural form). Other countries run significant structural deficits too. For all the talk of 14.5 bn in savings already having been made in Ireland, government spending has increased and government tax income has dropped.

    As Mr. Connor has pointed out, debt deflation dynamics are playing out, but of the debt that is guaranteed to be taken over the next three years, only 10 bn (coming from the NPRF) is to go to the banks. The other guaranteed 50 bn is coming from the debt markets to fund the deficit. That is a ridiculous amount of money over too long a timescale. So far, we’ve only seen debt forbearance for developers, in all their speculative guises. I suspect the next bailout we’ll see will be for apartment flippers and tax gamers. Still nothing for homeowners – not just to write off the debt, but to let them make a new start unencumbered by homes they cannot afford. This means repossessions, but no carrying of debt following a new bankruptcy mechanism. Firesales are essential to resolve the paralysis.

    FG are, rightly, pushing a jobs program, but it is unclear both where the jobs are coming from and the nature of those jobs. Low skill, low paid work is going to be required, because a lot of those on the dole are not skilled in a useful way. Privatisation of some of the semi-states, particularly those that could generate further employment (water companies, for example) must be on the table. But this will probably mean consumer charges and will certainly industrial action. Anyone fancy the lights being off over Christmas?

    We are in the position of a bust company hoping to trade our way out if we can just get another overdraft. None of our lenders will give us an overdraft rate that we like, so we blame them. Meanwhile, we’ve a huge stock of assets that we don’t want to sell for “less than they are worth”, because someone else might make a profit on them.

    The implications of an alternate path are being ignored. “Not this” is the cry, without any expression of the difficulties that are otherwise faced. “Leave the euro”, “burn the banks”, “increase taxes”, “slash the public service”, “don’t hit me, I’ve a pensioner in my arms” are spouted without any analysis of the implications of them. These are polemic, not policy. And they are bad polemic.

    The air of unreality on this blog and elsewhere (particularly in Europe) continues.

  47. @Brian,

    I know there is no appetite to hear this, but I think there is a reasonable chance that the plan can work. It is important to see what has been achieved: We have secure funding to cover our budget deficit for next next few years and we have an (implicit) commitment of the ECB to prevent the complete collapse of the banks. We thus have bought time and goodwill. If Patrick Honohan is right about the banks and we get even half decent growth — admittedly big ifs — we will get through this without default. If eventually a restructuring is required, and I certainly do not rule that out, we will have a much better chance of avoiding a “sudden stop” of funding if we have maintained the goodwill of our potential funders and we do it as part of braoder EU resolution mechanism.

    Colm McCarthy could usefully remind us again that “anger is not a policy”.

  48. I dont understand the logic of internal devaluation
    To use your George example teacher takes 50% pay cut but isnt there mortgage the exact same? So does it not greatly increase debt burden? Also would ESB, Bord Gais cut wages/costs? Do you not end up with a very uneven reduction is wages depending on where people work with the debt burden greatly increasing for both personal debt and government debt? Or have I got it totally wrong?

  49. Russia and Argentina and many others have defaulted on soveregn debt….and they didnt drop off the face of the earth. We are talking about defaulting on private debt that was wrongly covered by the govt, not actual, borrowed for spending purposes, sovereign debt. So surely the stigma and backlash would be less for us than the myriad of other nations who have defaulted on sovereign debt.

  50. @ JMcHale

    The FT reported some analyst as saying that the deal would sort Ireland’s funding out for 2 years. What then ?

    The banks, says Martin Wolf, are too “big to save”. What happens if the ECB cuts off the liquidity window ?

    The banks seem to me to be like a dying alcoholic asking for a few Euros “just for today”.

  51. It is not just Barry Eichengreen, Martin Wolf, Buiter, and many other respected overseas commentators who don’t believe you John; the markets are screaming as loudly as they can that they don’t believe you. The two ifs you mention are just too big an ask. We have been provided with liquidity, and yet our yields are up. The markets believe that this is a solvency crisis, not a liquidity crisis, and until something is done to address our debt overhang (and, indeed, our macroeconomic situation) they won’t change their mind.

    So: we can default on bank-related debt now, or on sovereign debt later. I know which I prefer.

  52. John
    “lIf Patrick Honohan is right about the banks and we get even half decent growth — admittedly big ifs — we will get through this without default. If eventually a restructuring is required, and I certainly do not rule that out, we will have a much better chance of avoiding a “sudden stop” of funding if we have maintained the goodwill of our potential funders and we do it as part of braoder EU resolution mechanism.”
    I wonder what the marginal probability of that is tho?
    Anger is not a policy – but it can catalyse policy responses. A key element of the plan, in general, is growth. And what is the EU growth forecast? Another is the banks : who now knows how much more money they will eat – i dont , my worst nightmare losses were lowballing it, but in an environment where mortgage rates are rising, trackers are common and SME financing is constrained would anyone hazard a guess. I now hear that we wont hear the results of hte next, no really this time its definitive, stress tests. I wonder why. As for the endgame : what odds that it will be “going forward” not retrospective? That is, spanish/belgian/wherever senior bond finances in banks will be haircut/absorbed by ECB/sorted in some other way but….we will be left with ours as is? As I say, some game theorists needed here and some good monte carlo similations.
    So : i have all the appitite in the world to hear hard things – i have been sauing them for over two years after all – but as a citizen I do have to wonder where we are going and I have zero/little faith in the present/future drivers.

  53. @John McHale,

    I agree. We have no shortage of targets to rail against – the ECB threatened to curtail liquidity support, Chancellor Merkel spooked the markets by unguarded comments about haircuts, the Germans, French (and the Brits) are protecting thier dodgy banks at our expense, etc – if we so choose. But this is pure displacement activity. There is nothing we can do to punish these ‘villains’ that the bond markets won’t be able to do far more effectively and rapidly.

    We now have ‘expensive’ protection from the bond market and we should treat the debt service cost of any additional borrowings to support the banks as an on-going ‘tax on previous stupidity’. We need to focus on growing the domestic economy and the first step is removing the deadweight costs the public, semi-state and private sheltered sectors are imposing.

    But this, apparently, is far too difficult when we can comfort ourselves by moaning about all the evil people out there intent on doing us in.

  54. @John McHale:
    “If Patrick Honohan is right about the banks and we get even half decent growth — admittedly big ifs — we will get through this without default.”

    Is the avoidance of default an aim in itself, or just one of several possible methods of achieving a broader goal?


  55. @Kevin O’R
    I don’t think you or I are likely to be invited to join Ireland’s council of economic advisers when it is formed next year.
    Tull: can you lay odds on who will be on this?

  56. Kevin,

    Things are indeed getting a bit lonely.

    By the way, do you share Barry’s view on where to draw the bright line? I have always argued strongly that we should draw the line between guaranteed and unguaranteed bank debt — and have always thought unguranteed seniors should be in the firing line in the context of a proprer resolution regime. I think it is quite extreme to draw this line between ELG guaranteed debt and sovereign debt. Both are sovereign obligations. I could more easily accept a distinction between the blanket guaranteed debt and sovereign debt, but that is now moot.

    I really do think that the advocates of default need to spell our more cleearly the details of their proposals, including the likely responses of the ECB etc.

    Just because the strategy of managing our way back to creditworthiness without default faces severe challenges, it does not mean the alternatives are better. Could you put a bit more meat on your default proposals?

  57. “Both are sovereign obligations”
    Really? Why? Coz BL TD says they are? One is debt drawn down to run the counrty- the other is debt drawn down to run banks, guaranteed by legislation (which can be overturned). Sorry John, as BLTD would say “i dont accept that”.

  58. @colm mcarthy

    “Opposition was based on unintelligible arguments about optimum currency areas & c. The supporting arguments, remember, were about getting interest rates down!”

    I remember advising people in rhetorical fashion along the lines of “what do you think is going to happen to house prices as interest rates are forced down?” for those that didn’t get it tthe follow-up was “things will go totally mad”. What I found most disturbing was that most said nothing but aquired a stupid grin and a few muttered something like “oh, as bad as that” and then acquired the stupid grin. For those that were warned it was short termist gombeenism that motivated joining and for a lot of the rest it was about giving the finger to the Brits.

    The argument against was always about how volatile the cycles for each country were, where they were in that cycle vs Germany and France, and how the longer run impact of joining on their cycle would be managed within the EMU structure. For Ireland it was just thje wrong move at the wrong time and nobody was in the mood to listen.

  59. @Brian Lucey
    “Really? Why? Coz BL TD says they are? ”
    No, because the Dail voted on it. Sovereign promises are sovereign promises whatever they are for.

    It is too late to be talking about what should have been done. The mistakes are made. While we can and should blame those who made them, we are left with our current predicament to work from.

    The logic of default on sovereign promises, is default. Work from the implications of that, not from the implications of some other decision that might have been made two years ago.

  60. @ John McHale

    We are in retreat. Perhaps we could have held the line of guaranteed/unguaranteed bank debt if we cut our losses in September.

    Now I think we can hold the line at bank/sovereign debt. We can have an orderly retreat and pay back sovereign debt, or turn the retreat into a rout.

    (Sorry for military metaphors, but I’m reading a book on Italy during WW1)

  61. @ Brian Lucey

    i ‘get’ the logic on the original blanket guarantee, regardless of its merits – we were bounced into it on false pretences. I don’t get your logic on the ELG. This was not an overnight guarantee, ill thought out and unprecedented in Europe. This was a very carefully put-together agreement, with very specific conditions, and which had a detailed fee structure before even a cent of it was guaranteed. It has been ongoing for almost a year now, and has comparable schemes across Europe. The legalities, if they are indeed revocable (which is debatable), are meaningless – these are freely undertaken sovereign obligations.

  62. Hogan
    Fair enough. Promises are not obligations however. Obligations are legally binding..until they are not
    I agree, lets move on. But lets both sides move on : if we cant cut/debt ourrselves out of this hole and we cant default out of it….what then?

  63. Rory
    Italy, as you know, was on the winning side but at a dreadful dreadful cost. Is this Caporetto or the intermiable Izosno we are at?

  64. @John McHale.

    A commitment from the ECB means nothing – they have proved that by their actions.
    They are the strangest of CBs as they believe they are completly divorced from the sovergin – believing that they can game one of their minion states off against the other.
    Whats the point of growth if all the surplus goes to interest – there is equity and wages also , although I would be prepared to accept consumption austerity in the interests of core capital growth this present wealth transfer scheme does nothing for wealth creation.
    If as I believe the Irish economy has a slow real growth potential of lets say 2% why ask for 5 – 7% interest ?
    Part of me was thinking that there would be a grand deal regarding our corporate tax rate for a default on our external bank debt…….. my cynical side was right again.
    P.S. FG has lost my vote when they believe in selling the countrys wealth to pay off unrepayable overvalued debt money.

  65. @Tomaltach,

    In a normal democracy, of course the Dail should have a right to vote on this agreement. In fact, there’s nothing to stop the parties in the Dail forcing a vote. There are other options than just the courts – tabling a Dail motion for next week is one possibility. The Taoiseach said yesterday that the Budget is the first stage of implementation of the agreement; thus they have a further opportunity to bring down the government and scupper the agreement in one fell swoop.

    Thinlg is, neither Fine Gael nor Labour give the impression of really wanting to tear up the agreement. They’ve met with Chopra at least twice and presumably the alternatives available to them if they reject what’s on the table have been spelled out clearly.

    All that I’ve heard since the deal was announced is predictable flights of rhetoric and ritual condemnation of Fianna Fail and the hapless frontline negotiating team as incompetents, traitors etc. Their main concern seems to be that (in FG’s case) they will be able to use the money they get from selling off the semi-states to invest in the creation of a ‘green economy’ and the creation of 153,000 jobs promised by their ‘New Era’ plan, so they can still wave that load of old guff before the electorate as an election ‘promise’ early next year. Labour is miffed about not having access to the NPRF fund to create its proposed recovery bank – as if we didn’t have enough trouble with banks as it is – and their stimulus package comprising a variety of cheap labour, make-work, schemes, so they have something to compete with Fine Gael on when it comes to pounding the pavements. Where, by the way, are the ‘alternative’ budgets that were promised? Being held back for the opportune moment for maximum media impact? Or is it possible, even more than possible, that none of the parties have a clue about any sort of feasible alternative to the IMF/EU package?

    And then there’s the EU dimension. As Zhou put it above, “Our politicians have never bothered their arses understanding the EU properly.” How true. In essence, the EU has been regarded by our political class as a funding cash cow and its political institutions turned into a game of musical chairs for clapped out or no longer ‘fit for purpose’ national political figures. Ireland looks to the EU like a child to its father, always seeking protection but failing to appreciate its political fragility in turn.

  66. Can we not, please, focus on crafting and implementing the economic policies to address pressing domestic issues where Ireland retains almost unfettered sovereignty – rather than moaning about the gap between political fantasy and economic reality that the EU is seeking to maintain (and which the bond markets will close in any event)?

  67. @ Brian Lucey

    Bizarre that the seniors have been turned into sovereigns. Why bother buying sovs with a lower yield? But, being practical…

    What sacrifices are the public willing to make to back up the government that fails to persuade the EU that there is no choice and therefore doesn’t get cooperation in large scale restructuring.

    Don’t forget the Croke Park Deal has to remain untouched since as far as I am aware the only two public sector employees who seem to have acknowledged that salary cuts might be permissable are you and Constantin.

    Would be nice for the gov to have the people behind it if push came to shove, and a quick dive in deficit to get back to issuance might actually be needed. As it stands any foreigner can look into the country and work out Ireland needs mountains of funding for its structural deficit and its people see no urgency to do anything about it. If your opponents know you are bluffing it is not a good hand.

  68. @John McHale

    You write:

    While calling for default is all the rage, advocates have a responsibility to carefully think through the mechanisms and consequences so that we don’t make things worse.

    Exactly — and that is what Eichengreen hasn’t done. Besides, the very idea that there might be any such thing as an ‘easy’ option seriously damages his credibility.

    Making a serious effort to think inside the box, and assuming the current agreement gives us a few months (weeks? days? hours?) grace, there remain two options:

    either Ireland will default

    or the Mickey-Mouse 4-year plan will be radically rewritten (elimination of minimum wage, 30% cut on public sector salaries, halving of welfare benefits, etc, etc. — in other words McAusterity).

    But option 2 is politically impossible (howls of anguish from Saint Fintan O’ Toole and his devotees, neo-Keynesian sectarians banging on about shooting oneself in the foot, etc.).

    Thus, Ireland will default.


  69. @ Brian Lucey

    I’m reluctant to use military metaphors. People have said we are in a war situation. But that would permit a government to do things like internment.

    But anyway, Italy probably could have ‘won’ what it won from the war without going to war. Garmany wanted Austria to just give the Italians what they wanted to keep them quite.

    I think they would also like to keep us quite. We should pretend the Euro doesn’t mean so much to us. Pretend that if the Euro collapses (which I don’t seriously believe) that we will just use the dollar anyway, so if they want to save the Euro they should pay.

    Military technology shifts the balance of defence versus offence back and forth. In WW1 they were thinking in terms of battles where offence was better. Similarly I think economic crises switch between supply and demand crises, but a bit like WW1 generals we haven’t switched our tactics to the current problems.

    But regardless of Italy’s war record the Carabineiri are the most stylishly attired police/military unit in the world 🙂

  70. Spot-on analysis of Ireland’s debt-deflation situation and what is indeed likely to happen without far-seeing political leadership in Europe.

    It is time for European politicans (and economists!) to read some history, in particular the actions of FD Roosevelt on banking in the 1930’s in the US.

  71. On the plus side, I think there is a lot of micro-economic reform being undertaken in Ireland. Businesses are genuinely doing more with less.

    It is hard for the lay-man to judge whether we are insolvent. I think we can recover and can pay higher taxes if the banking situation is resolved.

    However, while the banking situation remains uncertain people will be unwilling to invest much and credit will be dearer and will be harder to come by. It is this uncertainty about the banks which is making people angry and which is stifling recovery. People have accepted the subsidisation of the banks by the state. However, a line has to be drawn somewhere.

    People are not averse to austerity or paying their way. People are averse to dead-ends, uncertainty and a lack of hope.

  72. @Carolus

    You say “But option 2 is politically impossible.”

    This goes all the way back to leadership and ruthless truth telling. The truth is that this must happen as Ireland defaulting will not (not whilst remaining a member of the EU anyway). Now we need a leader who will stand up, say so and make it happen.

  73. @Brian Lucey:
    “I think the debate hasnt moved to the how yet. Its still at the whether to default.”

    If the IT hadn’t made it unfashionable, I might be tempted to quote another bit of Yeats. Instead I suggest that it might be difficult to separate discussion of whether from discussion of how.

    It might be nice if the sitemeisters were to set up a separate thread for each of the options: (a) work the bailout, (b) default, (c) anything else. It might then be possible to think through the advantages, disadvantages and practicalities (including the gaming and political aspects you mentioned earlier) of each before (perhaps after a few days) comparing and contrasting the options.


  74. By the way, ECB buying fairly aggressively again this morning, and market now starting to move towards assuming that something big and bold is announced either by ECB tomorrow or via some other “official” response over the next 48 hours…

    @ Brian Lucey

    on next move – wont be QE but it should, wont be haircuts but it should. My guess is a combination of QE by stealth (increased PIIGS buying, increased EFSF), pledges to keep liquidity going to the banking sector, and increased usage of NAMA-style vehicles across Europe, all in an effort to keep the muddling through going. The EU doesn’t do tough decision making, as we are all clearly aware.

  75. @Kevin O’Rourke
    “I think I missed the bit where Barry suggested there was an easy option available to us.”

    Same as that.
    I have never thought default was an easy option. It will have negative consequences for the state and its citizens long term.

    However, I think the probability of Ireland repaying all the accumulated debt is close to nil.

  76. @Brian Lucey
    “if we cant cut/debt ourrselves out of this hole and we cant default out of it….what then?”
    It’s not that we can’t cut ourselves out of the hole, it is that we don’t want to.

    As @Carolus says, it will be McAusterity with cheese (we already have the cheese it appears). I disagree with his “politically impossible” though. Political impossibilities have a history of becoming possibilities when faced with arithmetical impossibilities. This is the lesson for me of the 1980s/90s.

    The loans we are getting are on a sliding scale of expense. I see no reason we can’t use our own money, then borrow the cheapest money and do our utmost not to call on the more expensive money. This means shortening the austerity period, not lengthening it. It means squeezing the plan into, at most two years.

    That means radical restructuring of Health, Education, Pension provision in the country. It means everything being means tested and not just on income but on assets too (including pensions). It probably means giving people access to their pension savings now as taxable income.

    It doesn’t mean it will always be like that, but it does mean that for the duration of the emergency the public finances have to be put on a war footing. Fiscal autarky is going to have to be practiced for a while and always with an eye to generating sustainable growth in the economy.

  77. @Brian Lucey – “if we cant cut/debt ourrselves out of this hole and we cant default out of it….what then?”

    Rock, meet Hard Place.

    And that’s exactly where we are.

  78. @Kevin O’Rourke

    “I think I missed the bit where Barry suggested there was an easy option available to us..

    I quote again from BE’s article:

    For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case.

    What part of the word ‘easy’ is it that we don’t understand?

  79. Yes, Barry is right: that would of course have been easy.

    But nowhere does he suggest that we wouldn’t still have had major problems. This is about making a hopeless situation difficult (or, as the powers that be advocate, the reverse).

  80. @Mr. Bond

    Article 123.1 TFEU, we hardly knew ye. Anyhow, this is why I’d be a bit leery about Paul Hunt’s suggestion that we can just lie low and let the markets do the work (I know you’d rather us lie low yourself). I’m not confident that this is going to be over by Christmas.

  81. @hoganmahew:
    “That means radical restructuring of Health, Education, Pension provision in the country.”

    Is there information on the unfunded long-term liabilities of the Irish state including public service and other pensions, PPPs and anything else the state would have difficulty in getting out of? Not to mention public service and other pay.


  82. @Eoin,

    Portugal bond auction will be interesting. Perhaps the markets will hold fire to see what variety of fudge the EU’s Great Panjandrums will offer up. I just can’t get a sense of how keen the markets are to close what I describe as the EU’s political fantasy/economic reality gap.

  83. Bond- agree the EU doesn’t do big tough decisions. Not only that but I suspect that the Germans (who went through a tough 15 years after reunification) quite simply regard us as having to do the same. As they keep saying, in 2013 they are looking at bond holders taking more of a risk, not now. That’s why the can is being kicked


    Willem Buiter, chief economist at Citigroup

    in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent.

    Jim Reid, head of global strategy at Deutsche Bank

    In speaking to clients and traders yesterday, it’s clear that there is extremely low appetite to take fresh peripheral or financial (especially sub) exposure. There are an increasing number of investors who will not touch these assets at any price for now given all the uncertainty

    Gary Jenkins, head of fixed income research at Evolution Securities

    If bond yields keep rising like this then we may see a much faster move towards a de facto fiscal union with a central debt management office and a single European government bond, possibly under the auspices of the EFSF initially. A muddle-through option could involve the ECB [European central bank] announcing a “shock and awe” amount of QE [quantitative easing] to hoover up a significant part of government issuance. With the ECB expected to scale back extraordinary measures at this week’s meeting, such an option would require the sharpest of U-turns, but might well be the most flexible and easy to implement in the short run.

    David Buik at BGC Partners

    The really visceral treatment has been meted out in the futures market. The bond cash market trading has been somewhat sedentary. If dealers wanted to shift a large amount it would not be possible to accommodate any size.

  85. @Rory O’Farrell

    “But regardless of Italy’s war record the Carabineiri are the most stylishly attired police/military unit in the world”

    If you think the carabinieri are di moda, keep an eye out for the prison police (polizia penitenziaria).


    “Markets are also worried that the deflationary policies imposed on debtor countries will worsen ratios of debt to gross domestic product by shrinking their economies. They do not believe the cheery official forecasts for Ireland’s growth, to take an obvious case in point, and regard the state of the Irish banking system as proof of the laughable nature of the recent stress tests for European banks. A further concern relates to the newly announced European Stability Mechanism, where there is uncertainty about how decisions will be made about the solvency of debtor countries.

    Underlying all this is the fact that the public finances of most advanced countries are in a greater mess than at any point in peacetime history. There used to be a tradition in public finance that debts were racked up during wars, national emergencies and other upheavals. They were then paid down in peacetime. Since the second world war, the growth of the welfare state has caused budget deficits and public debt to rise inexorably. Inflation has played an increasingly important part in reducing the real value of debt.

    Today, in a more deflationary world marked by a global savings glut and by independent central banking, it is beginning to look as though defaults, whether in the form of stretching maturities, restructuring or other means, will stage a comeback in advanced countries.”

  87. Danny,

    well put. The attitude of the core and the IMF would appear to be put your own house in order first-cut wages/transfers/numbers in the PS and reform the delivery of service. Then restore a bit of sanity to the tax system and unpick the populism of the last decade at both ends of the income sprectrum. BTW here is 35bn to sort out you banks plus a list of people to call. Come back in 2014 and we will see how you get on. Call it can kicking if you wish. That is the EU plan. It does not envisage much more than a loan from the centre to tide us over-at a rate that does not encourage others.

  88. “The Irish “program” solves exactly nothing – it simply kicks the can down the road.”

    And what has *any* plan in the West+Japan done these past two years but kick the can down the road? The US, where the federal government has supported the housing market with everything but the kitchen sink, where municipal debt is out of control, and where federal debt, when everything is counted, will soon be in the Irish league? Or Japan, with 200+% of government debt/GDP? Or China, whose dependence on export-led growth has accentuated, rather than decreased? *Everyone* is kicking the can down the road. The can-down-the-road strategy might work; lightning can strike in the interval, and problems do diffuse in the flow of time. It happens all the time. I don’t think they will in this case, but c’mon it’s not so unusual. Eichengreen seems to be shocked shocked that it is being tried in the Irish case. He’s either naive, ignorant, or disingenuous.

  89. It appears Portugal got its half billion of 12 mth away for 5.281% (up from 4.813% 2 weeks ago). Scope for a small bit more can-kicking, perhaps.

  90. RE FG/Labour on the economy and competitiveness. Not much happening.

    I heard Joe Duffy will reveal on RTE later that the ESB gives its staff a 55% discount on electricity. The best paid semi-state workers in Ireland, with tremendous pensions and sick schemes, get the cheapest electricity. Should go down a treat in the Dail later.

  91. @ Jagdip Singh

    An interesting aspect of all this is that we have no deal document as such. The Memorandum of Understanding awaits detailed negotiation and agreement.

    I suspect that this is why we are having no Dail debate on the matter. Ireland did not formally sign up to anything last weekend. So, in a narrow technical sense, there is no agreement to debate. All we have at present are a series of press releases and public statements which (hopefully) interlock seamlessly together.

    @ John McHale

    I don’t agree with you that the government’s plan can work.

    But keep up with your coherent and well-articulated arguments. It is of vital importance that arguments from both sides are rigorously tested.

    The failure of policy makers in the past to rigorously test the consensus views on EMU and the property bubble helped aggravate the impact of both.

  92. And it appears the US is taking a bit more of an interest. Lael Brainard, undersecretary at the Treasury for International Relations, is embarking on a grand tour of Madrid, Paris and Berlin. Dammit, who do you ring when you want to call Europe?

  93. @The Alchemist,

    For some time now, it seems to be open season on semi-state staff. Their terms and conditions are only a very small part of the problem. Cutting their pay, even significantly, would have a vanishingly small impact on final prices. Applying sensible negotiation and engagement would allow them to be part of the solution.

    The real problems are in the areas of ownership, policy and regulatory control and the financing of investment and it is these that are imposing deadweight costs on consumers and the economy.

  94. @ Tull

    The EU Plan appears to assume that the banks are not, in fact, insolvent. The markets don’t appear to agree.

  95. @hohanmahew.
    re: Honeowners-“This means repossessions, but no carrying of debt following a new bankruptcy mechanism. Firesales are essential to resolve the paralysis.”.

    There is another solution. a State shared ownership of the house they currently live in. Of course it would involve State funds but avoids the terrible human and emotional costs associated with repossessions and evictions.
    It would also make more economic sense because the evicted homeowners will have to housed at 100% cost to the same State that owns 100% of the bank that is evicting them.
    Howver perhaps there is a moral hazard in helping the little guy.

  96. @ BL: “The Irish political science and int relations academic community: your time is now. And no, I’m serious.”

    There are, as of latest count, 49 political ‘isms from which to choose!!! Makes ECON look positively sparse!!!

    Neorealism sounds good for the current predicament: The state must do what it can to survive. Assume domestic banks are a dangerous liability: Let them go down. Bondholders are not states – well not so as you would notice anyway: Let them go. Other states: We must rack-up our Relative Advantage fast – need to decide what that is. Exogenous imposed reduction in social cohesion must be fiercly resisted.

    Problem: Our domestic pols are ‘naval gazing’. Cannot divert their attention from upcoming GE. Goldilockism (that’s # 50).

    Nice try!


  97. Time for me to bang on again about QE. My modest proposal is the ECB buys sov bonds at zero coupon but 3/4% principal payment per annum. After 10yrs the sovereign would exit with 30/40% less debt. This type of mechanism should cap inflation fears and build a stronger eurozone.

    (off topic) Moody’s were in town this morning. Dietmar Hornung had an interesting phrase about our upcoming multi-notch downgrade. To quote him “expects to be able to keep Ireland in investment grade”. The lowest investment grade is Baa3. So, although he didn’t specify exactly what he has in mind, hanging on to single-A looks unlikely. He did say that there are a number of things they need to see detail on before any downgrade. They expect to complete their review in December.

  98. @ John McHale

    what kicthen window were you looking out of this morning. Are you one of these american positive nuts. I,m no economist but I can see the game is up. Brian Lucey is correct, its down now to geopolitics.

  99. The Eichengreen analysis is a good one and makes perfect sense from an Irish point of view. His red line, drawn exactly where is should be drawn, would be an Irish solution to an Irish problem, if it were just an Irish problem.

    But we are where we are!!.

    It would be better to concentrate on solutions to the EZ banking problem and EU defict problems and then try to sell those solutions at European level. Lets get on the right side of the curve for once. The current deal is done.

  100. My prediction of the day. Frankfurt will have to eat hard cheese and do some serious quantative easing over the next few weeks or the euro will go down. They should do it now before any more damage is done.

  101. @ Ahura

    i doubt they’ll knock us down that low. The spectre of being ‘junked’ would be too close for the ECB’s liking. I’d suggest it’d push the ECB into pretty much immediately setting up their own ratings agency in response. Given the time of year, Moodys chopping us by that much would be a bit like turkeys voting for Xmas.

    Btw, completely agree on the QE idea. Doubt we’ll get something that explicit, but somewhere halfway there could be a real option soon.

  102. As Colm says, the ECB gave us a lesson on how not to handle a banking crisis over the past 2 months. To suggest that anybody in Europe could either technically or politically (given the intricate web of financing) deal with a bond restructuring is way too much to ask. The only way out of this mess is to tolerate moderate inflation in the eurozone for the next 3-4 years. We cannot deflate our way out, so we must inflate our way out. And this is where attention needs to turn.

  103. A legal question.

    If the ECB does Quantitative Easing, what would it buy? Should it just print the money and give it to each Euro member on a per capita basis?

    In the US its simple as they have a federal system.

  104. @ David Burke

    Even if the game is up, it depends which game you are talking about, and in which respects it is in fact up. No one is pretending that the PTB have got a good handle on the various fissures which are appearing in the economic and financial landscape. There is plenty of head scratching these days.

    The domestic situation is very frustrating, but clear thinking was never more necessary. I hope we we are going to have serious civil disorder, emigrate en masse or sink into the Atlantic, so I’m listening to the debate, along with many more curious citizens.

    Comments on this particular thread show a broadening politcal economic awareness. is a real vehicle for change. Even though the moderation is very light touch, the exchanges of view are generally fair. As they need to be.

    BTW, governments will always need advisers, and skilled people have legitimate ambitions. Of course these things can and must be arranged in better and more transparent ways.

  105. Sorry. I hope we we are NOT going to have serious civil disorder, emigrate en masse or sink into the Atlantic, so I’m listening to the debate, along with many more curious citizens.

  106. @ David Burke,

    I don’t know you and I don’t know John McHale, but I do know this: courtesy costs nothing but carries a high value nonetheless. It is essential to any constructive debate between adults and progress towards resolution of any shared difficulty. It requires that you listen to the arguments of others and construct an intelligent counterargument if you don’t agree with their perspective. I’m sure you would agree that personal denigration of another or imputing improper motivation to their words or deeds, however wrongheaded you may think they are, is a bully boy’s cop out and says more about the person doing it than the person against whom it is directed?

    But congratulations, your comment convinces me that John McHale must be right.

  107. @simpleton Says:
    “Contributors to this blog may not have the star quality of Prof. Eichengreen but a few of us have been saying exactly the same things for quite some time now.”

    While reading Eichengreen I was thinking that he had compiled his article from this blog

  108. In response to Rory O’Farrell,

    If the ECB loosens policy, the market will tell it what to buy. The ECB has already undertaken to support bond prices of member states (in addition to its commitment to the banks). This is clearly not possible in the context of current targets for inflation and is why the markets will not give up. Something has to give.

    So QE would be used to support those bonds and those banks that the markets target.

  109. It is naive to expect a negotiation of bailout terms without it being part of the wider response to the debt problems of the other countries which like Ireland were misgoverned, failed to reform and had electorates with a high tolerance of corruption.

    Ireland does have some sovereignty left; it could quit the euro and have a massive default.

    Compared with Argentina for example with its wheat and beef commodities, unless we want to be just a theme park, there is a slight complication; we produce little ourselves and foreign firms are responsible for 91% of tradable exports. Fools may argue we could return to the pre-1999 situation and still have an offshore financial centre but others have gained a command of the Queen’s English, IT and have a lower cost base within the European Union; they also have the experience of FDI.

    We were out of aces by last week, 2 years after being the only country in the world to massively guarantee its existing bank debt, in Sept 2008 – – 55% of GDP compared with an average of 6% during the crisis by 12 advanced countries including Ireland.

    We had 2 negotiators who have proved their mettle; Governor Honohan had dropped the curtain on the Government’s dance of the seven veils on the issue of a bailout a week before; within weeks of assuming office, Matthew Elderfield with Honohan’s support, had called time on the Quinn Group, facing down a then assumed billionaire, street demonstrations and a delegation of politicians to Dame Street led by a senior government minister.

    It would be good if the well-run countries bailed out the rest in return for genuine reform; the political reality is that outside of the unprotected private sector, the Irish enjoy levels of income and one of the world’s best pension schemes compared with the average Joe in Europe’s rich countries.

    We can huff and puff but there is the problem now, compared with 2008 when we had an independent fiscal policy, that we need to get a credible jobs policy in place supported by a proper banking system with external support.

    If like Greece, it is evident that after reforms that the debt burden is unsustainable, the likelihood is that there would be a restructuring.

    Politicians are often blamed for a focus on short-term interest, but the history of the EU has been enlightened expansion with significant cash supports for new members.

    We want a bailout just like the universities got when responsibility for pensions deficits of €630m led by Trinity College at €315m, was passed to the taxpayer including the majority of private sector workers who have no occupational pension. The ones who do have funds in deficit cannot expect a bailout.

    These deficits didn’t arise just because of poor investment returns but because they were treated as a bottomless pit like many others in their drawing from the public treasury; Yes to debate and burden sharing which which I am in favour of, but why the silence on what has gone on under your noses as regards the use of public funds?

    Why not have a bailout of private sector pensions?

    Isn’t it strange that a State agency yesterday said that there is no appetite to tackle high costs in sheltered sectors?

    This after the worst recession in 80m years.

  110. @Henry Withinshaw 11.30
    ‘ Now we need a leader who will stand up ..’
    Conor Cruise O’Brien is dead.

    ‘Political impossibilities have a history of becoming possibilities when faced with arithmetical impossibilities.’
    Nice. But the arithmetical impossibilities have been around for quite some time and yet the Croke Park deal remains sacrosanct. I hope you’re right anyhow.

    @Kevin O’Rourke
    ‘So: we can default on bank-related debt now, or on sovereign debt later. I know which I prefer.’

    Or — I enter dreamworld — we could toss the Croke Park deal into the rubbish bin of history and adopt a McAusterity version of the 4-Year Plan.

    Or at least you guys at could bear witness and spell out what you think just might work if you were philosopher-kings with complete freedom to live your nightmare-dreams. At least Brian Lucey has acknowledged that a 10%-20% in public sector pay might be essential. Iulia Siedschlag has suggested scrapping minimum pay altogether. But I haven’t found much else, perhaps I didn’t search hard enough. You might come up with a revamped 4-year plan that would make Ayn Rand look like a bleeding-heart liberal, I dunno. But so far you have been pretty quiet. I’m surmising here and entering ad hominem territory but is it that you just can’t face the opprobrium that any such an unmodest proposal would trigger? The Blessed Fintan O’Toole would wail and blubber and play to the trade union gallery, you would be howled down by revolting students etc. etc.

    It’s not that I don’t feel your pain — and hiding behind a cloak of anonymity I can say what I like, of course, since I don’t have to face the music afterwards.
    Still, a bit of ‘tough love’ from your neck of the woods wouldn’t do the country any harm.

  111. @Veronica,

    Many thanks for this. And for your earlier comments which link to Barry Eichengreen’s citing of Keynes on leadership and ruthless truth-telling. What we lack is a political leader who will say to the people “Economically, this is a terrible deal. But we need protection from the bond market to sort things out – and this is the best deal on offer. Politically we are chained to the EU and to the EMU. We cannot jump ship even if we want to. But there is a gap between what the EU, politically, wishes to achieve and the economic reality perceived by the bond markets. The EU will develop – and will be compelled to develop – the mechanisms and institutions required to close this gap. And we will benefit from these developments. Let us work within the broad parameters of this deal and change for the better those things that are within our control.”

    But, of course, the political factions are in election mode and telling voters the unvarnished truth is off the agenda.

  112. @Rory

    They could pay off the bondholders. Say they did a 0.5 trn euro they could give the Anglo/INBS/AIB and Bof i bondholders about 50 bn. They could then reduce the “rescue” pacakage by 50 bn and we could just take the 20 bn offered by the IMF at a lower rate of interest of 4% giving us a couple of years to get our fiscal house in order.

    They could also pay off alot of the municpal bonds in Germany as a lot of the city councils over there are in big trouble.

  113. Carolus Galviensis Says:

    “Conor Cruise O’Brien is dead”.

    Altogether now

    Is é mo laoch mo ghile mear ..

    @ Paul Hunt

    Even if there was a Nelson Mandela in Ireland that speech wouldn’t do. There is no mention of the banks. The State without the banks would have a fighting chance.

    The banks are insolvent. The State chained to the banks is insolvent.

    Mrs. Irish Taxpayer : Never mind that, my lad. I wish to complain about this parrot, what I purchased not half an hour ago from this very boutique.

    Olli Rehn : Oh yes, the, ah, the Norwegian Blue… What’s, ah… W-what’s wrong with it?

    Mrs. Taxpayer : I’ll tell you what’s wrong with it, my lad. It’s dead, that’s what’s wrong with it.

    Olli : No, no, ‘e’s ah… he’s resting.

    Mrs. T : Look, matey, I know a dead parrot when I see one, and I’m looking at one right now.

    Olli : No no, h-he’s not dead, he’s, he’s restin’!

    Mrs. T : Restin’?

    Olli : Y-yeah, restin.’ Remarkable bird, the Norwegian Blue, isn’t it, eh? Beautiful plumage!

    Mrs. T : The plumage don’t enter into it. It’s stone dead!

    Olli : Nononono, no, no! ‘E’s resting!

    Mrs. T : All right then, if he’s resting, I’ll wake him up!

    (shouting at the cage)

    ‘Ello, Polly! Mister Polly Parrot! I’ve got a lovely fresh cuttle fish for you if you wake up, Mr. Polly Parrot…

    (olli hits the cage)

    Olli : There, he moved!

    Mrs. T : No, he didn’t, that was you pushing the cage!

    Olli : I never!!

    Mrs T : Yes, you did!

    Olli : I never, never….

  114. @ Eoin,

    I was surprised by Dietmar’s ‘keeping investment grade’ comment and noted it. He went through the usual credit risk headings and how Ireland is faring. Although some elements are strong, there is deterioration across the board. On Economic Strength, the supply side is strong (increased competitiveness) but demand side is weak (hello austerity). On Financial Strength, what used to be ‘very high’ is now ‘high’. On Government Financial Strength, biggest deterioration – ‘it’s a high debt country now’. On Susceptibility To Event Risk, I must have dozed off. One other interesting remark was that the NPRF used to provide some comfort regarding liquidity risk but it looks that it would be available in the future.

    I might be wrong, but I now have the impression they’re thinking sub-A3. Though it is worth recalling that they left Greece at investment grade for longer than it made sense.

  115. @Veronica

    The thing to watch is what is happening in Germany. Apart from the article by Barry Eichengreen, the Handelsblatt also carried a piece that was very critical of Angela Merkel. The central point in the article is that Merkel will have to make up her mind as to whether she wants to keep the voters happy by ‘not giving anything or very little’ or whether she wants to keep the Euro/EU. I have no doubt that the choice will ultimately be the latter, because it is in her voters’ interest, but the big danger is that she can’t make up her mind quick enough (her government has been incredibly indecisive on a whole range of issues). The article is quite right to point out that indecisiveness characterises the whole crisis.

    In my view Greece should have had a restructuring deal in the winter but instead the sparks were blown all around and at the last minute a wet rag was thrown on the fire (by the way Barry Eichengreen disagreed with me on this one – wonder what he thinks now?). The problem is that rags burn if they were not wet enough!

    While the focus in Europe is on the problem countries in the Euro Zone (given that Belgium is now mentioned it is no longer just the periphery we are talking about) we should not forget the international imbalances. In that context Brian Lucey is quite right to call for some geopolitical awareness – Europe could get badly caught out.

  116. @KOR

    The country is run (ruined) by consensus. When the TCD/UCD innovation alliance was announced, the media wasn’t stuffed with analysis skeptical of yet another rainbow with a promised crock of gold (or something less odour neutral).

  117. @Joseph Ryan
    “There is another solution. a State shared ownership of the house they currently live in. Of course it would involve State funds but avoids the terrible human and emotional costs associated with repossessions and evictions.
    It would also make more economic sense because the evicted homeowners will have to housed at 100% cost to the same State that owns 100% of the bank that is evicting them.”
    The bank already owns the house. If it is in negative equity they own more than 100% of the house…

    “It would also make more economic sense because the evicted homeowners will have to housed at 100% cost to the same State that owns 100% of the bank that is evicting them.
    Howver perhaps there is a moral hazard in helping the little guy.”
    If the mortgage owner has an income and they are no longer required to pay unsustainable levels of mortgage debt, I don’t see that the state would have to bear any cost. That is the whole idea of a personal resolution scheme.

    If the mortgage owner doesn’t have any income, then they are already being borne 100% by the state.

    A key need is to get the housing market moving. That isn’t going to happen without a clearing price. That isn’t going to happen without sales and an end to the paralysis. The banks need to be able to replace their bad loans with ones that are likely to make money in the future, preferably on long-term fixed rates that will enable them to securitise them at decent rates.

    This is not to say that a return to the casino is required, but it is unhealthy to have a sector of the economy doing nothing.

  118. @Jules – “They could also pay off alot of the municpal bonds in Germany as a lot of the city councils over there are in big trouble.” – spot on. I think I heard that some 300 municipalities are close to insolvent. Whether to bail these out has been subject of some debate. Likewise there have been bailouts of federal states. All this is relevant to us as this experience will inform the response of the German government.

  119. @Carolus
    “I hope you’re right anyhow.”
    I hope I’m right too… not much of a strategy, is it?

    I echo your calls for some hairshirt policies with workings. We can’t keep all the Dr. Evil fun to Mr. McCarthy now, can we?… “With this plan we can cut a million euro from the deficit… *evil laugh*”

  120. @Cormac Lucey

    “An interesting aspect of all this is that we have no deal document as such. ”

    Quite. And I doubt that we will see any document which sets out any new understanding between Ireland and the ECB so how is that famed €90bn to be substituted? Will Irish banks buy our bonds next year and is that how we rollover 12bn of maturing debt?

    Remembering that we are fully funded until the middle of next year, the only thing that happens this week and next is €2bn goes from the NTMA cash reserve into the banks to help “deleveraging”. By the end of Feb 2010 up to another estimated €8bn goes from the NTMA and NPRF to the banks to recapitalise them. And a couple of months later we will need to start accessing the IMF/EU funds for our day-to-day spending (earlier than June 2010 because we threw another €5bn of NTMA cash into the banks).

    If the problem isn’t the banks then we should have a few months (indeed a couple of years if we use the NPRF to fund day-to-day spending and we flog off State companies) to debate this deal and if the problem is the banks then what extra nasties are hiding there?

  121. @Edgar,

    German voters tightened their belts to pay for unification under Chancellor Kohl. Chancellor Schroeder required a further tightening to bring down unit labour costs to power the German export machine. So perhaps it’s understandable that Chancellor Merkel is reluctant to demand even more belt tightening (on top of the recent austerity – and no tax cuts that has upset the Free Democrats) to support the Euro. Politcally, its very difficult to explain to voters that the banks and pension funds to whom they entrusted their savings made very stupid investment decisions, that the really stupid recepients of this investment – and the voters in these countries – cannot bear all the pain and that some of this pain must be shared either by reductions in value of their savings pots or an increase in general taxation to support these stupid banks.

  122. @Paul

    Agree with you. The domestic politics of other EU (read Germany) countries is intricately linked to the EU response. Aren’t there mutterings the IMF wanted tough measures on our banks but the EU didn’t?

  123. “For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.”

    Surely, at this stage, people need to be more specific then simply saying paying 20 cent on the euro for “bank debt”. If you cant do that, either because you don’t know the specifics, or because you don’t have enough space or time, maybe it would be better to hold your counsel

  124. @Danny Haskins,

    Yes, but don’t forget that France and the UK (even if it isn’t in the EZ) are in the frame as well. Sarkozy has just 18 months to turn things around to get re-elected. He might be able to cope with some faeces hitting the rotating blades after that; but not before. Cameron wants to get some serious austerity out of the way in the same time-frame to prepare for the sunlit uplands before 2015 and doesn’t want any of the majority state-owned banks springing leaks in the meantime.

  125. @John McHale
    ‘We have secure funding to cover our budget deficit for next next few years and we have an (implicit) commitment of the ECB to prevent the complete collapse of the banks’

    Its the implicit thing that I don’t like. We had implicit guarantee of funding from the ECB until they suggested a wind down of special funding schemes thereby precipitating our latest crisis.

    It would be foolish to rely on undertakings given by the ECB in those circumstances. We need explicit undertaking in the Memorandum that ensure we have funds available to cut the balance sheets of the banks in the new circumstances.

  126. Someone suggesting to me that if you were to change legal framework regarding reorganization of banks, the following would provide for measures taken in one state to be effective throughout the EU…

    anyone got an opinion on it? what, technically, is a “directive” anyway?


    EC Directive 2001/24/EC reads as follows (on the first page):

    7) It is essential to guarantee that the reorganisation measures
    adopted by the administrative or judicial authorities
    of the home Member State and the measures adopted by
    persons or bodies appointed by those authorities to
    administer those reorganisation measures, including
    measures involving the possibility of a suspension of
    payments, suspension of enforcement measures or
    reduction of claims and any other measure which could
    affect third parties’ existing rights, are effective in all
    Member States.

  127. twas 24 nights before Christmas and not a creature was stirring, except for a DoF document dump …

  128. @Eoin,

    A directive is primary EU legislation which, when enacted, must be transposed into national legislation in all member-states within a specified period of time. This should have been on the Irish statute book by May 2004.

    One for legal eagles, perhaps.

  129. @Edgar Morgenroth 2:58

    re: Merkel
    Edgar, if I understand you correctly you are saying that Merkel is more knowledgeable about her voters’ interests than they are themselves. This may well be the case but I think the tide in Germany is now turning so anti-Euro that it may be political suicide for her not to follow the herd. For example, high-profile ex-IBM manager and former Euro-fan Hans-Olaf Henkel has just authored a book entitled “Save our money – Germany is being sold out. How the Euro-fraud threatens our prosperity”.

    His narrative is now becoming quite a familiar trope — I was a card-carrying XYZ until shyte happened .. :

    Once upon a time, I was a passionate supporter of the Euro.

    But then the feckless PIGS shat on us and had a party and started spending oodles of the German taxpayers’ hard-earned cash etc…

    Then I saw the light and mended my evil ways and now I want the DM back (or sumthin similiar).

    This is the sentiment and it is to be found everywhere — right across the commenter spectrum from the flamethrowers at Die Welt to the LGBT corner at TAZ. Support for the Euro is dwindling and may be entering a kind of Schweigespirale [spiral of silence] where even the Europhiles themselves start keeping their mouths shut to avoid social ostracism.

    Merkel’s indecisiveness seems quite rational to me under the circumstances. She’s waiting to see how the wind blows.

  130. Tell me again, who had the bright idea of the government assuming liability for the private banks debt and then asking for a government bailout?

    sorry guys, you ought to have let the banks deal with it on their own. After one or two failures, the haircut would have been enforced by the insolvencies.

    Greetings from Germany.

  131. @all

    ‘… the inevitable Irish restructuring.’

    Quite! An economy and society with a bit of a buzz in it is preferable to a decade of stagnation and dislocation; and path-dependent in a wrong direction.

    ECB will wake up! Will we be ready?

  132. ‘The tougher conditions came as the European Commission extended by a year a framework of rules set up in October 2008 allowing EU governments to bail out their lenders under looser terms.

    “After almost two years of a specific crisis state aid regime, we need to prepare a gradual return to normal market functioning,” Mr Almunia said.

    “The remaining risk of renewed stress is a valid reason to proceed with care and caution in the exit process.”

    Pity they did not proceed with care and caution in the last few weeks.

  133. Is BLTD channelling JtO?

    “The Fine Gael leader referred to the European Commission’s less optimistic forecasts in the Dail yesterday which he suggested had undermined our Four Year Plan. He ignored the substantial upward revision of the Commission’s forecast on international trade which will benefit a small open economy like ours in which growth, by common consent, will be export led.”

    “A Cheann Comhairle, we have every reason to be confident about the future of this economy.”

    Well, that’s reassuring.


  134. @Brian J Goggin
    “I’m not sure why we need one, given that we have several spare houses, ”
    But perhaps not of the type that people need or where they need them. The bubble was characterised by malinvestment for the most part. Getting movement in the areas where there is demand will generate some economic activity (for all I have doubts about whether it should be counted as investment…).

  135. @Carolus Galviensis – not quite. At the moment the issue is not so much anti-Euro opinion but an attempt to carry favour with the voters by being tough on the PIIGS. There seems to be an inability or unwillingness on the part of the government to properly spell out the implications of a Euro collapse. There may be more anti-Euro stories in the printed media but certainly on TV there is not that much (yet). Some of the people stirring up anti-Euro sentiment are those who have been against it all along and have fought it at every step. Up to now they may have been vocal but largely ignored where it matters.

    “She is waiting to see how the wind blows” – that is her style in general, and she has been lucky as something usually comes along to help her out. However, this is bigger than the Euro anyway, otherwise the UK and Sweden would not have come in on our ‘deal’, and indeed it goes well beyond the EU. This is the scary bit and Merkel and the EU as a whole need to play this very carefully but decisively (or else Colm might be better off learning a language other than German!!!).

  136. @Edgar,

    The point you are illustrating is that politicians are much the same the world over, as they always have been. I guess it’s one of the disadvantages of democracies, as much as one of the benefits, that the electoral cycle is short. In this crisis you can’t separate the politics from economics, and the pace of events is such, I think, as to make all predictions of how things will work out in the end, for Ireland, for the eurozone, for the EU and western civilisation generally, almost entirely speculative. Whether we got a ‘good’ or a ‘bad’ deal from the EU/IMF appears academic, since any agreement may be rapidly overtaken by events that are entirely beyond our control and beyond Merckel’s and Sakozy’s and the EU institutions’ as well, by the looks of it. In such circumstances, the standard advice to Irish politicians with regard to the bailout deal would be to look to the country’s long term best interests, recognise the international constraints on the available options and act accordingly.

    It’s bad when members of the current government, or some of them anyway, come across as having their heads screwed on while the opposition who will shortly replace them in office give a general impression of being delusional, semi-hysterical and incapable of even getting their basic facts straight, as happened in the Dail yesterday. Both Kenny and Gilmore and their respective finance spokespersons know that they won’t change anything beyond a few cosmetic details of the budget that’s proposed next week, even if it fails to pass the Dail vote and they are swept to power before New Year’s Day.

    So in the absence of seismic international political events that may change the course of western civilisation in the coming months, it would appear that John McHale’s view is the most sustainable – the new government to work the 2011 budget and implement all the measures set out to deal with the banks and look to adjustments to the their own liking in the programme in subsequent years.

  137. BLTD has clearly been reading my comments on here….

    “There has been much commentary about the need for senior bondholders to accept their share of the burden of this crisis. I certainly raised this matter in the course of the negotiations and the unanimous view of the ECB and the Commission was and is that no Programme would be possible if it were intended by us to dishonour senior debt. The strongly held belief among our European partners is that any move to impose burden sharing on this group of investors would have the potential to create a huge wave of further negative market sentiment towards the eurozone and its banks system. That apprehension was confirmed by Professor Honohan in an interview last Monday when he said there was no enthusiasm in Europe for this course of action.

    There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the ECB. Those who think we could do so are living in fantasy land. Worse still, those who know we cannot do so but who nonetheless persist with the line are damaging this country and its financial system: and all for the sake of a cheap headline. It is a case of politics as usual even at this most difficult time.”

  138. @ CG

    Does the average German understand the likely macroeconomic effects of a collapse of the Euro esp wrt German exports? Can it be explained in Currywurst terms?

  139. @Eoin

    Where to start ?

    “damaging this country and its financial system”

    he says as he takes a break from his chainsaw .

    “living in fantasy land”

    and the govts growth projections aren’t ?

    ” would have the potential to create a huge wave of further negative market sentiment towards the eurozone and its banks system”

    I believe the avalanche has already started.


  141. @veronica – totally agree. Decisions have been made for us. The ‘deal’ may not be what we need but that is what we got.

    @seafóid – “Does the average German understand the likely macroeconomic effects of a collapse of the Euro esp wrt German exports?” – no, and it would also help if they were informed about how they benefited from the boom we had (instead of sniggering about our stupidity). You might recall the former German ambassador getting himself into trouble by pointing out that we had an unusually high proportion of new luxuary (German) cars in this country – he was of course right (about this and with regard to the other comments he made at the time) – but I can’t recall him pointing out that this equated to a significant flow of funds back to Germany.

  142. @Eoin
    Can you say counterparty risk really quickly and quietly? I wonder who has insured eurozone bonds… the big French and German banks were fond of AIG, weren’t they?

  143. @Bond. Eoin Bond

    …. how to design an SPV to take 50-90 billion of irish banking system debt ‘somewhere else’ – as if this one is a BIGBIG bail-out fund … how will it be used? Prob still no appetite to launch the irish as this, as you note, triggers the rest of the EU and Global banking systems. And we have nothing signed …. ‘time’ is having one whale of a time at the moment.

  144. I’d feel better if trichet or junker said “no way no how no senior bond cuts” than “cheapest bailout, oh look were turning a corner, yes the 09 budget will be the worst”‘ Td. Call me cynical.

  145. @Veronica

    Lighten up. No offence was intended. I just find John McHale very frustrating to listen too, he protrays everthing as ok and the IMF are lovely people. Its only an opinion.

  146. Quite a while ago, but here goes:

    “If Patrick Honohan is right about the banks and we get even half decent growth……….”

    The problem with this is that (imo) there is a zero correlation between gdp and credit risk. To put it another way, I never once showed someone an offer for funds where gdp was a serious factor.

    Which is why this nonsense still goes on in the face of seemingly improving ‘real world indicators’.

    Debt has to be retired or this just goes on forever.

  147. The programme docs seem to have been written for a time in the past before this happened :

    “In speaking to clients and traders yesterday, it’s clear that there is extremely low appetite to take fresh peripheral or financial (especially sub) exposure. There are an increasing number of investors who will not touch these assets at any price for now given all the uncertainty”.

    Jim Reid, head of global strategy at Deutsche Bank

  148. Ref to remarks on the housing market.

    It would indeed be welcome if the volume of sales increased sharply. However ther are some structural matters. My comments refer to res mortgages only.

    1. Res mortgages will have to be capped at 80% of a valid valuation, not some ‘fantasy’ value.

    2. Buyer will have to have cash for remainder of loan + transaction costs. This requires some element of prior saving. Like the ‘good olde days’!

    3. Heavy duty due diligence on income docs. Max loan 2.5 times one salary or 3 times two. No leeway whatsoever on this issue.

    4. Factor in interest rates in range 7% – 10%.

    This should bring res property prices to early 1990 levels.

    Big predicament: All those in Neg Eq.???? Not to mention the repossessed properties and all the empties as well. Bloody awful mess. Will take several years to sort out.

    Other requirement: Res property mortgages must be made non-recourse – put some manners on lenders.


  149. @ Veronica

    ‘So in the absence of seismic international political events that may change the course of western civilisation in the coming months, it would appear that John McHale’s view is the most sustainable – the new government to work the 2011 budget and implement all the measures set out to deal with the banks and look to adjustments to the their own liking in the programme in subsequent years’

    @ Carolus commented above that there are no solutions here, only a selection of bad outcomes. Along the way there are moves which are more or less plausible, politically or economically. The 2008 guarantee was based on the information which was made explicitly avaialble to government at the time, and enjoyed a certain temporary cred. After that lemon, and the revelations about the banks, any government projection is going to be looked at askance.

    The opposition may be up in a bit of a heap, and at odds over the options, but it’s very hard to believe we are going to be seeing politics as usual in Ireland or in Europe. Unless by ‘ as usual’, we mean over the last five hundred years.

    @ Tomaltach has raised some pretty fundamental (and classic) concerns about democracy. The default debate has also revealed new alignments and fissures among the technically proficient, and there are plenty of dynamics within Ireland itself which could rock the boat.

  150. @Brian Woods

    I might modify the recourse requirement to only allow the first portion of debt up to a certain multiple to be recourse. I’d also have a total recourse credit restriction for individuals and disallow personal guarantees as a legal form of security (only actual assets and not promises to be tenderable as security).

    As you say, this will increase the cost of credit. It will also, however, make the credit more saleable (hence the retention of some recourse), which will at least make credit available to those who can service it.

  151. @seafoid

    Does the average German understand the likely macroeconomic effects of a collapse of the Euro esp wrt German exports? Can it be explained in Currywurst terms?


  152. Thanks Dreaded – At least now we know there will be bank resolution legislation come the end of Feb 2011:

    In the context of the above strategy, a specific plan for the resolution of Anglo Irish Bank and Irish Nationwide Building Society will be established and submitted to the European Commission in accordance with EU competition rules. Any related legal procedures will be set in motion under a precise timetable. This plan will seek to minimise capital losses arising from the working out of these non-viable credit institutions. The Government will ensure that these credit institutions adhere to the requisite capital ratios.

    Legislation on improved procedures for early intervention in distressed banks and special bank resolution regime (SRR) will be introduced. The SRR should include a robust set of powers and tools to ensure the competent authorities can promptly and effectively resolve distressed banks e.g. when they pose a risk to financial stability. The legislation will be consistent with the EU Treaty rules and will be consistent with similar initiatives ongoing at EU level.

     Central Bank staffing in relation to the PCAR and PLAR exercises will be reviewed and augmented as necessary to guarantee that both exercises can be conducted on a timely andefficient basis.
    Burden sharing by holders of subordinated debt

     Consistent with EU State aid rules, burden sharing will be achieved with holders of subordinated debt in relevant credit institutions over the period of the programme. This will be based on the quantum of capital and other financial assistance the State commits to support specific credit institutions and the financial viability of those institutions in the absence of such support. Resolution and restructuring legislation which will address the issue of burden sharing by subordinated bondholders will be submitted to the Oireachtas by end-2010. Where it is appropriate in line with the above criteria, the process of implementing liability management exercises similar to that which is currently being undertaken in relation to holders of subordinated debt in Anglo Irish Bank will be commenced by end-Q1 2011.


    Another oddity of the EU/IMF bail-out is its stance on bank liquidity, the short-term financing vital to ensure the banks still do their core job of funding the economy.
    Alongside the capital stress tests in the spring, the bail-out document promises a prudential liquidity assessment review – a pretty essential exercise, you might think, given that the commercial funding markets have all but given up on the Irish banks, leaving a record €130bn of financing to be supplied by the emergency folk at the European Central Bank.
    Yet the bail-out document seems not to address this core concern. In four short paragraphs about liquidity, the central bank says simply that it will set “bank specific funding targets”. Beyond that, all the “liquidity” measures are focused exclusively on shrinking the banks to such an extent that they won’t need so much of it.
    An element of the bail-out should have been specifically targeted at plugging the liquidity gap, if only to signal an acknowledgement of how crucial a role it has played in undermining the global system – in Ireland, just as it did during the big bank failures in the UK (Northern Rock) and the US (Lehman Brothers and Bear Stearns).

  154. Long post from Michael Pettis on “The Rough Politics of European Adjustment” is very germane to this discussion (and references it in an update). As with a few days ago I am going to paste a long section so that everyone can see it:

    “Most of the afflicted European countries suffer from both of the above problems – an uncompetitive economy and excess debt (in some cases after we include contingent banking liabilities) – and in the aggregate all of the above resolutions accomplish more or less the same thing. They allow the country to bring costs of production, including most importantly the cost of repaying the debt, back to some sort of manageable level, and to reduce financial distress costs.

    The means by which each economy adjusts however involves very different distributions of the pain of adjustment. And make no mistake, there is absolutely no way for Europe to adjust without significant pain. Often enough whenever a euro-skeptic says that Country X should abandon the euro, aghast euro-philes insist that country X should never abandon the euro because it would involve heavy costs, which they identify mainly as a rise in debt to GDP and vague – and historically suspect – warnings of hyperinflation. Of course abandoning the euro would involve costs, but under the circumstances so would not abandoning the euro. Abandoning the euro, in other words, is not about taking on costs. It is about distributing existing adjustment costs.

    What Keynes and Kindleberger (and the other K: Krugman) remind us is that the distribution of these costs is not determined by economic theory but rather by political interests. That is why I said last week that political radicalism in Europe will almost certainly rise and the process of governing will become increasingly unstable. It is through the political process that the costs of adjustment will be assigned to the different groups, and when the costs are likely to be so high, the squabbling over the assignment of those costs is likely to be quite brutal.

    In order to see how, let’s go through the distribution of costs:

    1. Abandoning the euro and devaluing imposes much of the burden on creditors whose assets are redenominated, especially those with newly mismatched books (i.e. their redenominated assets were funded with non-redenominated euro liabilities). These may include the wealthy, but because they know this, we will probably see significant flight capital as they liquidate assets and take them out of the country. Foreign banks who have lent to the redenominating country will also take big losses. This may sound invidious, but although an approach in which foreigners bear a disproportionate share of the pain may not be fair, it certainly is convenient.
    2. Forcing down labor costs through unemployment puts the bulk of the burden on workers and the lower middle classes, especially non-unionized workers. Other forms of deflation hurt borrowers, including small businesses and mortgage borrowers.
    3. Trade barriers may be impractical within Europe (at least before abandoning the euro), but to the extent that they are imposed they force domestic consumers and foreign producers to bear the cost of the adjustment. Remember however that local households comprise both domestic consumers and domestic workers, so the real impact on household income may be positive if trade barriers are expansionary for employment (which they usually are in diversified deficit economies). The question is which households. The unemployed working class may benefit while the struggling middle class may get hurt.
    4. Inflation hurts everyone on a fixed income. Middle class people with savings, pensioners, and non-unionized workers are usually the ones hurt the most.
    5. Default and debt forgiveness places the adjustment cost on lenders, in this context especially on lenders to the sovereign borrower. Again, it is worth remembering that if a disproportionate share of lending comes from foreigners, they absorb a disproportionate share of the cost.
    6. Raising consumption and value-added taxes hurts consumers, mainly the middle and working classes since the poorer you are the higher consumption is as a share of your income, while raising income taxes on businesses puts the pain of adjustment on businesses, especially small businesses who often aren’t able to protect themselves. Finally cutting fiscal expenditures mainly affects the middle classes (medical and education) and the working classes and poor.

    Its politics, not economics

    There may be other types of resolution and other distribution of costs. For example former Argentine Economy Minister Domingo Cavallo in April advised Greece to raise VAT taxes and reduce payroll taxes. This works broadly in the same way import tariffs would work, with a similar distribution of costs. Sellers of consumers goods, many of whom are foreign, effectively end up subsidizing domestic producers.

    But whatever the proposed solution, my main point remains. We cannot escape the fact that these costs have somehow to be assigned to different economic groups, and the process of assignation is wholly a political one. And with such high stakes, it is likely to be angry.

    In Latin America in the early and mid-1980s, unemployment pushed most of the burden onto the working classes. By the end of the decade inflation and hyperinflation hit the Latin American middle classes hard. Once US banks had sufficiently rebuilt their capital bases, by the very late 1980s, debt forgiveness passed on a small part of the adjustment onto foreign banks.

    This formally began in 1990 with the Mexican Brady Plan. But formal or secret discounted debt buybacks throughout the decade ensured that part of the cost was passed on to foreign lenders earlier – mainly US regional banks and European banks whose exposure was small enough to allow them to absorb the losses.

    In retrospect (and even for some of us back then) I think it is pretty clear Latin Americans should have demanded debt forgiveness much earlier. This would have been terrible news for the large American and European banks, but failure to receive debt forgiveness may have condemned these countries to slower or negative growth for much longer than they otherwise would have experienced. (As an aside, check out this fairly common-sense primer on how to default.)

    Throughout the decade, and largely because of the debt crisis, Latin American politics were unstable and difficult, with a variety of responses throughout the region, ranging from conservative free-market adjustments to radical and populist adjustment. In her very interesting book, Who Adjusts?, Beth A Simmons focuses on the similar processes experienced by European countries in the 1920s and 1930s. We saw there the same range of outcomes, and Simmons tries to explain why different countries chose different outcomes.

    She makes the following point about how different types off governments attempted to resolve the crisis in a cooperative or combative fashion:

    Stable governments and quiescent labor movements contributed to international economic cooperation, while domestic political and social instability undermined it.

    I interpret this to mean that over the next few years, in countries in which there is significant labor unrest, we are probably far more likely to see sovereign debt defaults and the abandoning of the euro. If this is true, this argument also gives us a sort of conceptual timetable – any solution aimed at preserving the euro or at an orderly debt restructuring that protects the European banking system must take place while the current political elite, left or right, is still in control. The longer we wait the less likely a coordinated solution.

    In fact Simmons’ book, for those who are interested, is an interesting study of how different European countries evolved different approaches to adjustment depending on political and social conditions. I suspect that the basic problems and approaches she identifies are pretty much the same ones we will be watching over the next few years.

    I am not suggesting that politics will get nearly as crazy or as radicalized as they did in the 1930s. There are much more robust mechanisms today for transferring and sharing adjustment costs, and I assume (hope) we learned enough from the 1930s to recognize that asking one side or the other to pay the full cost is not likely to be good for anyone. But it is hard to imagine that the kinds of disruptive political sectarianism that we saw in some European countries as recently as 20 or 30 years ago cannot revive.

    P.S. Yves Smith, over at one of my favorite blogs, Calculated Risk, comments on this post and argues that I am being overly optimistic in my timing. Yves doubts we have two years to get this right — more like two months. Maybe. One of the commenters on that blog discusses irish politics in a way that suggests that my prediction of a radicalization of European politics may already be stale. Another commenter notes a furious piece by the always-lucid Barry Eichengreen in Wednesday’s Handelsblatt. You can find a translation in the Irish Economy blog — a definite must-read.”

  155. @ Paul Quigley

    Thanks for the reference. He’s a bit of a ranter, some interesting stuff in between it all, but people who are that quick to say “it’s all obvious” have rarely really thought through the dynamics.

    Echoing many of the commenters here, I think the debt deflation spiral has been obvious since the bank guarantee was put in place. It didn’t have to happen, but once you assume all the banks debt, avoiding it is practically impossible.

    Restructuring will eventually have to happen and not just here but in many countries. The consequences of that are far less certain or harmless than Hubert suggests. We are now in a situation where Pandora’s box has to be opened. I do not know where that leads us.

  156. @ John McHale
    “Things are indeed getting a bit lonely.”

    For what it’s worth, I’m on your side. Even though there are a lot of sensible people saying we will not be able to pay it back, I disagree. For me the problem is not whether we will be able to pay it back, my only bugbear is that we should have to -when these debts were run up for the private gain of relatively few.

    In reality though, we will have assets to sell a few years down the road once capital repayments start. These will include the banks which by then should be overcapitalised and worth a considerable amount. I think it would be a relief to everyone if they were sold overseas, but even if they are sold internally, they will raise a considerable amount of cash for debt repayment. We will also be looking at selling off State assets at this time which likewise will help in running down our debt mountain.

    More worrying than the amount of debt is the possibility of further declines in GDP as budget cutbacks bite. However, with a combination of labour market reforms and increased access to credit, I am hopeful (I use the term knowing it can only be pounced on) we can tackle unemployment, maintain our GDP and set ourselves up for significant growth in the middle of this decade, when repayments will begin. I freely admit I am not certain about this, it is after all, something of a crystal ball act to predict the future, but that’s where I’m starting from.

    Defaulting must remain the last option. When it is clear that we cannot repay then default we will, but before that, we are bound to do our best to repay our creditors. A default, and the damage to the European economy that would result will not be painless for Ireland as a small open economy with a significant deficit to fund.

    @ jules
    “My prediction of the day. Frankfurt will have to eat hard cheese and do some serious quantative easing over the next few weeks or the euro will go down. They should do it now before any more damage is done.”

    I believe this will be a real existential crisis for the Euro and specifically for the Germans. On the one hand, QE is the destination we are remorselessly being pushed towards. I think it is not OTT to say the currency will not survive without it. On the other hand, for the Germans QE will in itself be a symbol of the demise of the currency. Loss of cred for the currency in Germany will itself be a threat to the survival of the currency. The ECB is between a rock and a hard place on this one, but I do not underestimate their ability to inexplicably choose the rock over the hard place.

    Still though, as an irishperson, it’s a no-brainer -QE please, lots of it, and the sooner the better. We’re going to end up doing this eventually, so why wait for things to deteriorate further?

  157. @Paul Quigley
    ‘Richard Smith and Swedish Lex were similarly doubtful about Pettis’ conclusion, while still admiring his analysis. Swedish Lex noted:

    I believe that he underrates the risk of a sudden and chaotic death for the euro, the reason being that absolute crisis management can only be successful in containing disaster for so long. The rottenness of the euro system is now so apparent that markets AND le peuple will see through the propaganda immediately.

    Had I been Irish, I would never have accepted this level of servitude.’

    Indeed! I see weekly monitoring is on the menu.

    Maybe a thread could be opened on the practical effect of a euro breakup.

  158. @ Paul: Not to split hairs but a directive is secondary legislation.

    The ECJ found in Frankovich and Italy that member states could be liable to pay damages to individuals and companies who had been adversely affected by the non-implementation of a directive.

    IMHO, we as citizens have been adversely affected here.

    Perhaps there is someone ready willing and able to use the ECJ machinery to force the implementation of the directive. If this was Germany, the 4 professors of the apocalypse would be chomping at the bit.

    Implementation may give us more leverage in future negotiations with the ECB. Whether any future dream team chooses to use such leverage is another question entirely.

  159. @all there has been a few posts implying the ECB suddenly woke up and stopped funding our banks…and this latest crisis is somehow is all the fault of the ECB being stupid.

    Read The ECB’s exit strategy

    Now its fair to say things haven’t gone as planned 🙂 but at least the ECB have signaled almost from the start that they regarded the crisis as justifying extraordinary measures and had published their exit strategy and their intention to stop these measures asap

    Show me an equivalent exit strategy declaration from Lenny and the boys for the extraordinary measures they undertook.

  160. @Colm
    The Professors have various actions before the constitutional court in Germany. I imagine that the Directive is being cited. I think a result is due in Feb.

    ‘ll there has been a few posts implying the ECB suddenly woke up and stopped funding our banks…and this latest crisis is somehow is all the fault of the ECB being stupid.’

    Having an exit strategy is fine and dandy but seeking to implement it in the full knowledge of the Irish Banks dependence on ECB liquidity has to be particularly stupid.

    No wonder there was a mass exodus of deposits.

  161. @cet. par.

    Having an exit strategy is fine and dandy but seeking to implement it in the full knowledge of the Irish Banks dependence on ECB liquidity has to be particularly stupid.

    Not stupid: bold and ruthless. The ECB doesn’t sit around sighing that it has a pair of twos. Pity the Portugese contagion’s threatening to unravel their plan.

  162. @ Mick C
    Thanks. I didn’t read Hubert as an optimist though. He states the ‘Euro project is horribly flawed and will not work long term’, and anticipates inflation en route to Euro breakup. He believes the core state politicos are prepared to lose a limb or two on the periphery, but they’ll pull out all the stops in terms of support and capital resttrictions if the heartland (incl Spain or Italy) is besieged by the markets.

  163. Now there was something I didn’t know. FT story posted at 10pm this evening. “Irish banks exposed to euro periphery: Among leading lenders to Portugal, Greece and Spain.”

    Talk about a double whammy.

  164. #Joseph
    I just emailed a friend and told him to expect more nasties from the banks
    and there we go/

  165. @Joseph
    It also said Italy ($40.9Bn) – but no figures for the others (PGS). Mother of .. WTF was going on with these guys. To think that two years ago I thought banks took in deposits and handed out a few loans here and there tp make a small profit .. I’m going to stop reading this stuff it’s making my head hurt – and please can someone come up with a better economic term than “kicking the can down the road”.

  166. @Joseph
    It seems that Irish banks were particularly undiscriminating in who they loaned money to. Irish developers, Greek govt, Spanish cajas…..sure didn’t our Irish banks have a particular talent for finding the wrong people to lend money to!

    Instead of “kicking the can down the road”, how about “moving the bodies to a different location”?

  167. @Paul Quigley

    Sorry if I wasn’t clear. I didn’t read him as an optimist either, just as someone who interpreted the actions of the players and their understanding of the consequences in an omniscient tone. I think everybody is flying much more blindly than he suggests, c.f. the discussion of the intelligence of the ECB announcing withdrawing the liquidity that’s keeping Irish and Iberian banks alive and not being prepared for the new phase of the crisis that such an announcement was bound to precipitate.

    I also don’t think it’s really possible to cut off a few of the periphery nations because the endgame in Ireland and Greece has to be restructuring for the euro to survive intact.

    If you think about things in Pettis’ terms of the political calculations of who bears the costs, the crisis has so far been played by the powers-that-be in the hopes that the financial system could be protected by imposing the costs on the labor force and general population. Their calculation that this would be possible because growth would return. I never bought how that could happen on a sufficient level to outpace the cutting and markets never did either (See Kevin O’Rourke’s What do Market’s Want? article from several months back).

    We’re now approaching the moment where the inevitable will happen and at least some of the costs are going to have to be shared with financial actors, i.e. the bondholders, many of whom happen to be banks, because the growth and austerity story has no legs. As Pettis point’s out in his book, there are situations where the value of the outstanding debt would actually be increased by a restructuring, because the current debt load is impossible to repay and restructuring it removes an uncertainty discount about the possibility of default and removing some of the burden ignites growth that would not have happened. Our politicians need to be convinced of this reality, despite what they may be told by “the markets”. (Pettis also states in the book* that you will find it very hard to find any investor who will agree with you in the moment of crisis on this point).

    The problem now, and what Eichengreen kind of recognizes, is that a restructuring in Ireland almost inevitably means that restructuring will happen elsewhere in the periphery and that creates huge uncertainty around the total losses that could be borne by an undercapitalized European financial system. Hence ECB and German intransigence – they know they can’t bail out the Landesbanke and Deutsche. Hence also Ackerman’s “there’s nothing wrong with Spain” comments.

    If we had had a rapid restructuring of Greece back in May or Ireland a month ago (fanciful perhaps, given the complicated interests and incentives of dispersed bondholders), at a time when contagion was not live, perhaps that could have served as a model for the other countries and actually reduced uncertainty. As it is I see us in a very dark place where restructuring is definitely required but because it opens the Pandora’s box of uncertainty on the whole European financial system, and the dangers of a Lehman-esque spiral. The only way it could successfully be achieved would be in a highly coordinated almost simultaneous way in several countries but again the dispersed bond holders makes this almost impossible. So we get the ECB hinting at QE with a view to getting us through this difficult patch and then….what exactly I do not know. Just like the first crisis back in May, the problems do not go away. New information regarding Italy or Spain’s true state and we’re right back where we started.

    *I have a comment in to Pettis blog for him to publish the chapter on debt restructuring in his book on his blog or to write an article about it. It would I think be very helpful to have those ideas out there.

  168. @ AMac

    those figures im 99% sure relate mainly to the German banks, and Depfa in particular. I believe Depfa has something like 15bn in Greek govt bonds and 30bn in Italian ones.

    If you look at the CEBS stress test figures, which weren’t by any means complete but were still a good data-source, AIB and BOI had next to no sovereign debt exposure to the rest of Europe.

  169. @Mick Costigan
    ‘They have the monetary strength to do it. And the eurozone as a whole has the fiscal strength to do it.’

    We will have a better idea later in the day as to their resolve.

  170. Thank you for this wise reminder to the unwise European leaders of debt mathematics & Fischer debt deflation paradox. Unfortunately, the world is ruled by the ‘tyranny of finance’ that comes to worse than the tyranny of politics as even more insidious, unidentifiable and unfathomable.

  171. Back in May, when the first ‘bail out’ was imposed upon Greece, I wrote an article with the title “A New Versailles haunts Europe or Furiosa Teutonicorum insania” ( It is good to see that the allegory is catching on. And disheartening that the penny has not dropped in the quarters that should have, by now, recognised their way’s error. Yanis Varoufakis

  172. @AMcGrath:
    “[…] please can someone come up with a better economic term than “kicking the can down the road”.”

    I suggest “cunctation”.


  173. Barry Eichengreen suggests three possible reasons for the behaviour of the EU institutions and the EU member state governments:

    1. “First, they understand neither economics nor politics.”

    2. “Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems.”

    3. “But European officials are scared to death not just by their banks but by their publics”.

    The last seems rather unlikely, as in general there’s little that the publics in any of the member states could do about it until it got to the point of large-scale and uncontrollable violence, ie revolution.

    A national electorate is virtually impotent between elections, and even in the event of an election the main political parties in all of the member states have long ago been bought up and enlisted in the service of the EU project; and it has been observed that if necessary most of the political leaders are now prepared to sacrifice their careers in national politics in the interests of the EU, in the reasonable expectation that the EU would not let them starve but would instead reward them with well-paid positions.

    I suggest something much more obvious, that policy makers in the EU institutions and the member state governments are scared to death over what “the bond market” would do to them if they didn’t make sure that bondholders were paid in full.

    From the Daily Telegraph, October 28th:

    “EU ‘haircut’ plans rattle bondholders”

    “Investors face large potential losses on eurozone debt under German plans likely to win backing from EU leaders on Friday – risking a boycott of Greek, Irish, and Portuguese bonds.”

    “Silvio Peruzzo, Europe economist at RBS, said talk of “haircuts” for bondholder at this delicate juncture could backfire. “The debt crisis in the eurozone periphery has not been sorted out. These countries need markets to keep buying the bonds, but investors are going to stay away if you open the door to private sector pain,” he said.”

    “Yields on Ireland’s 10-year bonds briefly rose to a post-EMU high above 7pc on Thursday, partly due to a stand-off between Dublin and angry funds facing losses on the junior debt of Anglo Irish Bank.”

    “However, EU officials fear that the proposals could make it harder for high-debt states to tap debt markets, risking a self-fulfilling crisis.”

    Basically it seems that the private investors holding bonds issued by the private banks based in the EU are not prepared to accept losses on their previous unwise private investments and are insisting that public money must be used to protect them from any such private losses; and they are making not entirely veiled threats that if they don’t get what they want then EU member state governments will find that they can no longer borrow to fund their budget deficits, the whole system will come crashing down on the heads of the general population and that will almost certainly bring to an end the primarily political project of the euro.

    One could describe this “demanding public money with menaces”, or equally as a kind of protection racket:

    “Nice euro you’ve got here, be a pity if anything happened to it …”.

  174. What were the figures for the debt to GNP ration back in the 80’s recession. Didn’t that also go over 100%. Sorry not an economics expert. Just hoping to compare as i remember what it was like then.

  175. I agree and on my blog I keep writing that the only way out is to stop the Ponzi scheme along with the money creation, restructure the debt and issue new one at EU level. Moreover a tax on financial transactions could start to help funding the EU budget and some EU governments. A financial transaction tax giving revenues for some 200 billions Euro per year could replace several austerity measures and aid packages to single countries.
    When EU foreign currencies where attacked by speculation we got the Euro to replace them. If now we get sovereign bonds to be attacked we need the EU bond to replace them.
    If we still are believers in the EU project we need now more Europe and European economic measures not less to sustain the project. The bailouts are national nonsense. Let’s see when it comes to bigger countries like Italy…

  176. For many years europhiles condemned the fact that the EU as whole and the Commission in particular was a servant of the Council not of the Parliament, in particular Barroso was highly criticized because of this. Why the europhiles insisted so much in deleveraging the Council and getting a stronger Parliament? Because the intergovernmental method of solving European problems has always been ACTUALLY THE CAUSE of those problems!
    The “European Concerto” was the XVII century idea of solving European crisis… we know how it ended up: the intergovernmental method should be called the jungle method, the fittest will sUrvive the weakest will “sErvive”.
    And this is what is actually going on here: not only the German government but also the British one pressured Ireland Gov. for getting into the mess… why they could do that? Because Europe still isn’t a complete federation. We need a federation with proper checks and balances, till that point we will continue to suffer for regional hegemonies, with or without EU.

  177. Trichet’s announcement was a disappointment. The tone and substance was the opposite of what was needed. No QE anytime soon.

  178. Following up on Rory O’Farrell’s comment, perhaps there was too much emphasis on French and German in Irish schools and not enough on Economics and Maths.

  179. @bjg
    Obscure – thought you were maiking it up there for a minute 7 outof 10
    @Hugh Sheehy
    “moving the bodies…” good one but maybe only accurate in some circumstances!

    My own offering is “irresolution” especially for the failure to introduce resolution regime
    heres a few synonyms for irresolution from the online thesaurus
    Synonyms: averseness, dawdling, delay, delaying, demurral, doubt, dubiety, equivocation, faltering, fluctuation, fumbling, hemming and hawing, hesitancy, indecision, indecisiveness, indisposition, irresoluteness, misgiving, mistrust, oscillation, pause, procrastination , qualm, reluctance, scruple, shilly-shally, skepticism, stammering, stumbling, stuttering, tentativeness, timidity, timidness, to-and-fro, unwillingness, vacillation, wavering

    I suspected as much – but the “Irish” threw me.

  180. eurozone default. ecb has taken a loss of 1/2 a trillion since the crisis began. If you add all the debt outstanding of the weaker countries it would be 8 trillion.(why default would probably cause a meltdown) RTE news at 9pm

  181. Irish voters, get angry and get out to vote in a new party with leaders that know something about economics/finance and have the following agenda:
    1) get out of the Euro, negotiate to stay in EC (like Sweden and UK),
    2) bring back the Irish Punt and devalue 20-40% against the Euro,
    3) renegotiate the bail-out plan and force haircuts on the bank bondholders,
    4) have government form agency to promote export growth and tourism, and
    5) heavily regulate banking and speculation in property.
    Yes, this will be painful…but no more so than that of a lost generation or two of depression economics, which is where we are headed.
    All we have to lose is … our shackles …

  182. It is a mystery how some people can be liquidationist in one continent and can-kickers in another. If Irish banks had to be left to fail, why was letting Lehman fold wrong ? Does Professor Eichengreen now think TARP was wrong ? Banking is nothing more complicated than kicking the can down the road for ever and ever. Real trouble starts, once one begins to try to look virtuous by picking the can up and putting it in the rubbish bin. Deleveraging, purge the rotteness out of the system and the like. Essentially, liquidationists want the EU to do a Ceauşescu. Unvirtuous nations should not borrow, ever, goes the tune. A very sorry sight.

  183. Plenty of references to cans being kicked down the road. Unfortunately this seems to have become the preferred option of the financially ignorant. At some point in the near future all the can kickers from the developed world will reach the end of the road at about the same time only to find a jumble of cans all filled with worms. There are no solutions and this has to play itself out. The biggest can kicker may still prove to be China

  184. The end of the road … Kingdom come, financial millenarianism … Hard to believe that this passes for financial analysis and reporting in ceratin publications. On the evidence so far, the financially ignorant seem to do much better the supposedly financially knowledgeable

  185. The Euro is going to need to stay competitive against the US dollar because Germany’s exports into the US demand it. When the Fed announces that it’s prepared to take National Debt up past ten trillion by printing dollars, the ECB is going to need to take appropriate measures to ensure that the relative values don’t move outside agreed parameters. If Ireland hadn’t been a problem, they’d have had to invent one. Spain, if it really turns out to be in the ditch, is going to involve a LOT of printing… but it probably won’t be expensive.. it’ll track US printing.

    The EU has almost as much insane immunity with their currency to gamble with as the US Treasury. About 60% of global foreign exchange reserves are held in dollar-denominated instruments and about half as much again held in Euros. This isn’t a currency that’s going to go to the wall… it’s out of the question. It can no more be uninvented than the idea that a Federal State in the US could decide to start their own currency again… which would be fun – but it isn’t going to happen. The reality is that even if they have to bail out Spain and will probably largely print to do it… if it means a modest adjustment of comparable values between the dollar and the euro (and it probably won’t because of dollar printing) so be it. Chine will sooner or later have something to say about the value of their savings depreciating but that’s another matter.

    As this piece rightly points out, though in an exaggerated comparison with reparations at Versailles, the public in Europe will effectively and patiently organise at a grass roots level, to prevent their politicians pushing their agenda through… printing will look like the easier route.

  186. @Scotlyn:
    Well, the petitioners quote Bunreacht na hEireann Article 45.4.1 thusly:

    “The State pledges itself to safeguard with especial care the economic interests of the weaker sections of the community, and, where necessary, to contribute to the support of the infirm, the widow, the orphan, and the aged.”

    At this moment, few are weaker than bank shareholders, and the Article puts their interests above those of “the infirm, the widow, the orphan, and the aged”.


  187. The actions of the ECB or perhaps more accuretly the Bundesbank only makes sense when you realise most of their non debt assets are under Manhattan island.
    As I have said before there is a very simple mechanism to re balance the books – its been done in the past.
    The Bundesbank is up shit creek without a paddle as Ben B is now acting in a nationalistic manner given his QE II policey of buying treasuries solely rather then crap securities.
    The Germans are in a very weak postion – their only hope is that their Paddy “partners” continue to repay overvalued debt.

  188. Kevin,

    I agree with Eichengreen. Fine Gael is in the position of probably not being able to state this truth at the moment. I have written it myself on my website. The country must get its fiscal gap down and then renegotiate.

    This side of a general election, Fine Gael cannot really say this. Afterwards they will be forced by markets and by the public to get real. If I am elected, I will ALSO force a little dose of reality into the procedings. As it is Noonan, Varadkar, Hayes, Bruton are easily the best Economic Team in Irish politics. That is obvious.

  189. @Bill Tormey:
    “Fine Gael is in the position of probably not being able to state this truth at the moment.”

    Haven’t we had enough of keeping stumm, of “whatever you say, say nothing”, of getting elected first and telling the truth afterwards? The good guys of the economic crisis are those who have been willing to tell it as it is; some of the rest probably kept quiet out of self-interest, but even those for whom that was not true have contributed to the debasement of public debate and political culture: they have helped to maintain the Irish electorate, and the Irish state, in the condition of political immaturity that has led it to its current condition.

    Let your yea be yea and your nay be nay. Speak the truth and shame the devil. Say it loud and say it clear.

    bjg [who votes only in Senate elections]

  190. The German bully Mrs. Merkel and French Nicolas Sarkozy and the rest bullied the Irish to vote for the Lisbon treaty. Most views in Ireland now is we wish we were like the UK had or own currency back leave the EU.

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