Eichengreen and the European Commission on haircuts

Barry Eichengreen has a column at Project Syndicate.

Meanwhile, the European Commission reminds us of its political sophistication and deep-seated respect for democracy here. (HT Oliver Vandt.)

17 thoughts on “Eichengreen and the European Commission on haircuts”

  1. If keeping the bank bondholders is part of the cost of the bailout, I wonder what the APR is. As high as 20%

  2. Thank you Kevin for bringing this up.

    I think the European Commission should be far more careful than this in their discussions with the public.

    As I understand it, protection of senior bondholders is not, in fact, part of the official program. It can’t be – you can’t ask a sovereign government to guarantee in an international agreement that a private bank like Bank of Ireland will definitely pay its debts back.

    To the extent that the agreement involves protection of seniors, it is more of an implicit thing – senior bond-holder haircuts are the dog that didn’t bark in the agreement.

    The way the seniors are getting protected is (a) The recapping of the banks by 2011:Q1 (b) Restriction of explicit references to haircuts to subdebt.

    But this stuff?

    “The Irish Independent, which has seen extracts from the call organised by Deutsche Bank, understands the EU team described the protection for senior bondholders as an “integral part” and a “building block” of the entire plan.”

    Ok, here’s the plan

    http://www.finance.gov.ie/documents/publications/reports/2010/EUIMFmemo.pdf

    Go find the “integral part” or “building block” that refers to senior bond holders being protected.

  3. @ KW

    I don’t believe there is a Plan at EU level. There are just panicked decisions taken and the financial equivalents of decades of the rosary spoken. When the facts change as they will shortly there will be a U-turn

    I have been following government spin through the crisis and will be interested to compare the following with the spin when they hit the bank bondholders with the bearradh gruaige.

    “As is normal practice when bonds mature, they are repaid – in this instance all were senior bonds and all were Government guaranteed. Furthermore, under Irish law senior debt obligations rank equally with deposits and other creditors,” said Mr Lenihan.

  4. I never trust the accuracy of reports in the Irish Independent. I would like to see the transcript before making up my mind and I would caution others to do the same.

  5. When will it finally become acknowledged for what it really is, the legalized grand larceny of bankers and vested interest groups who hold governments with lack of political leadership at ransom! Awww, the blessings of globalized financial markets.

  6. Brilliant analysis of the European banking/monetary crisis. The FF governments of the last 10 years has made its unique contribution to Ireland’s fiscal and banking nightmare. However the EU and ECB must talkes its share of the blame and at this stage is the only realistic mechanism to manage the monetary/banking problem.

    Eichengreen is absolutely correct to focus on the debt problems of banks, individuals and in some cases government debts:

    “So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.

    Policymakers are understandably reluctant to go down this road. Contracts are sacrosanct. Governments fear that they will lose credibility with financial markets. Where their obligations are held by foreigners, and by foreign banks in particular, writing them down may only destabilize other countries.

    These are reasonable objections, but they should not be allowed to lead to unreasonable conclusions. ”

    To sort out this crisis within a European framework will need clear and brave European leadership. I am not optimistic that there is an FD Roosevelt in Europe at this time .

  7. @KW
    RE: But this stuff?

    ““The Irish Independent, which has seen extracts from the call organised by Deutsche Bank, understands the EU team described the protection for senior bondholders as an “integral part” and a “building block” of the entire plan.””

    “Ok, here’s the plan.

    Go find the “integral part” or “building block” that refers to senior bond holders being protected.”

    I could not find the words you mention But I found as follows:

    1. A strict requirement to recapitalise bank.
    2. Nobody except the State required to pony up for such recaps.
    3. A section re engaging with subbies.
    4. Several sections in realtion to banks saying that anything outside of what was in the document was to be “assessed” by both govt and EU/IMF.

    You may be in doubt about the interpretation re seniors because they are not specifically mentioned.
    Based on reading the document, I am of the belief that in relation to the banks, the memorandum it ties the government hand and foot not to do anything not mentioned in the agreement without getting the ok from the moneylender.
    Deutsche Bank got what it wanted and is briefing accordingly.

  8. He says that excessive debt is the problem?

    Debt can be reduced two ways:

    1. Pay it back.
    2. Bankruptcy & the debt is written off.

    Is he arguing for massive personal bankruptcies for Irish mortgage holders?

    Or is he possibly arguing for a third way:

    Anyone who feels inconvenienced by repaying his/her debt in full don’t have to.

    Who’d want to give credit in Ireland if credit is never paid back?

    There are people arguing that creation of credit (& by extension banks) was one of the most significant steps in developing economy & this guy is suggesting something which could lead to go back to cash transactions only (or one step further, barter)…..

  9. @Kevin

    This bit:

    “In a private phone call this week with hedge funds and other investors from across Europe, the EU team which negotiated Ireland’s rescue package, reassured the firms that senior bondholders cannot be burned as part of the €85bn rescue package, even if Fine Gael and Labour seek to reopen the question.”

    Looks to me like a public disclosure problem. It appears to be “specific, price sensitive information” and would therefore breach insider trading legislation.

  10. I don’t know what Barry Eichengreen’s solution has for the fiscal train wreck in his own backyard where there is also no currency to davalue (it was surely an interesting recipe for disaster; tax increases required a two-thirds support in the legislature while spending needed a simple majority).

    California could of course default but it’s unlikey to get federal support from Republicans.

    The NYT reported: “And as a cold rain fell outside the Sacramento Memorial Auditorium, the news — delivered by state budget officials to an audience that included about 500 state and local legislators — got progressively bleak. Unless something is done, California faces annual $20 billion deficits for at least the next five years. Unemployment will not return to pre-recession levels until 2015. And the title of one slide projected on the screen behind the panel? ‘Worse next year than this year.’”

    In the recent campaign, Governor-elect Jerry Brown pledged that he would not raise taxes unless the idea was approved in a referendum by voters.

    It makes the Irish siuation seem less of a problem.

  11. @M.Hennigan

    California as a stand alone conomy is sixth largest in the world.
    Apple and oranges etc.

  12. @Barry Eichengreen and Oliver Vandt

    Good stuff. The ‘Brady Bunch’approach was also tossed around in NYT some weeks back – it succeeded reasonably in S America. BIG Black Hole here is in EuroCoreBanking System …….. and our seniors can trigger it … so agree with Eichengreen, and most European Pragmatists, that a collective and sharp intervention arrives soon: best I’ve seen, imho, relates to the trio of e-bond, restructuring of banks and bonds, and a lesser contribution from European citizens. This can work [are we ready?] One expects much more transparency and accountability on the fiscal …. surely the Germans understand federalism and the importance of a strong decision making centre in a globalized, and pretty volatile, world. Europe has its first duty of care to its citizenry – not to a subset of gamblers in the financial system.

  13. @Kevin O’Rourke
    I’m sure I robbed the link off thepropertypin.com or politics.ie. Good to see Eichengreen taking up the cudgels for us again, along with supportive FT articles, Krugman, yourself, etc.

    @Everyone
    This government has bribed more parliamentarians than any since the Act of Union was passed. Bribing a few more will cause them no qualms whatsoever. I therefore very strongly expect the IMF deal to pass. When it does I fear we will be trapped in the EU’s bondholder Iron Maiden. In that context promoting engagement with our European critics is sensible. It would be interesting to have guest posts from and discussions with non-bondholder EU critics of Ireland, especially German and French ones.

  14. This government has bribed more parliamentarians than any since the Act of Union was passed. Bribing a few more will cause them no qualms whatsoever. I therefore very strongly expect the IMF deal to pass. When it does I fear we will be trapped in the EU’s bondholder Iron Maiden. In that context promoting engagement with our European critics is sensible. It would be interesting to have guest posts from and discussions with non-bondholder EU critics of Ireland, especially German and French ones.

    +1

    How convenient that van Rumpuy and Barosso engage in bilateral talks with India on a free trade agenda, it probably boosts the sale of toilet bowls as well, not sure whether this is a export speciality of Ireland though.

    Of course not a single sentence child slave labour or lack of social standards in India labor markets was lost in the common paper Manmohan Singh and van Rompuy released.

    Ah well, as a musician, I contacted the Simon Stockhausen and suggested a short boom-bust cycle for synthesizer, video, celli, brass and spoken voices. Brecht-Bukowski-Kafkaesque style pictures, and voices from people in lsave labor markets, people sleeping rough in Europe and voices from the opening event of ‘The Cosmpolitan” the Deutsche Bank Casino in Las Vegas.

  15. @Georg R. Baumann
    Thanks. I don’t know much about child labour but pressuring countries to educate children can’t do any harm. Not so long ago since children left school at 14 in Ireland so progress can be made.

    @Everyone
    We would have to warn European guests about the robustness of exchanges on here. Also emphasise to them that they don’t have an obligation to respond to all the comments, as if it was an academic conference. Giving their view and then reading the comments and giving a general response would be enough. They will just be food tor trolls if they take everything as an attack on their personal honour. Of course, there is the possibility that the net effect of all this could be a dialogue of the deaf, and an even lower opinion of Ireland, based on its mouthy internet community. Risk still worth taking though I believe. Link up to economics blogs in other EU countries also valuable.

  16. @ceteris paribus

    If we were to believe wikipedia:

    California’s economy is the largest of any state in the US, and is the EIGHTH largest economy in the world. As of 2008, the gross state product (GSP) is about $1.85 trillion, which is 13% of the United States gross domestic product (GDP). The state’s GDP growth rate slowed to 0.4% in 2008 after having grown 3.1% in 2006 and 1.8% in 2007. As of 2010 California along with Texas leads all other states in the number of Fortune 500 headquarters at 57 companies each.

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