Reading List

Today’s FT carries op-eds by Lorenzo Bini-Smaghi on the costs of sovereign default (here) and by Klaus Regling on the feasibility of monetary union without fiscal union (here).

This week’s Economist compares Iceland and Ireland here.

40 replies on “Reading List”


Bini-Smaghi and Regling provide good, sound, conservative, orthodox accounts that emanate from the centre but that provide little respite for peripherals in trouble with debt. They are on a holding exercise …. The elephant remains the thunderingly silent linkages between core banking system and bust peripheral banks/sovereigns. I believe support for e-Bonds is growing, also within Germany, but this needs a little preparation or restructuring (which is where locals come in if tuned in and in tune) ….. but this will only happen when the orthodoxy runs out …. a few months …. locals cannot realistically wait around to 2013 and the testing out of yet another bl**din orthodox equation on the local serfs.

from The Economist: ‘The next Irish government may look at Iceland and decide to play hardball with Europe. ‘

Well, not exectly – I’d prefer:

The next Irish government intends to play hardball with_IN Europe.

Commentators often use examples from other countries to support a case, deliberately ignoring inconvenient facts but likely more commonly just going along with received wisdom. Fact-checking is rare.

Certainly the treatment of Iceland’s banks and what could potentially have been done with the insolvent Anglo and INBS in Q4 2008 is glaring. Absent the guarantee, despite all the blarney about Trichet’s phone call, there was nothing stopping a strong government from putting them in an examinership type process.

Iceland did need the assistance of its Nordic neighbours and the IMF – – so leaving the euro without lifeboats isn’t a very interesting option.

Bini-Smaghi has a point if extensive haircuts are going to hit struggling private pensions across Europe while the public sector ones are untouchable (don’t mention the war!).

The Eurozone is often compared unfavourably with the US federal union.

Trichet said some months ago that regional disparities in the US are greater than in the Eurozone; the biggest state is struggling with a fiscal train wreck and Texan exporters are likely to be concerned about the Mexican peso as New York state exporters would be about the Canadian loonie.

The Economist traditionally doesn’t use by-lines and if people were to observe the serried ranks of teenage scribblers fleshing out its pages they might give less credence to their effusions.

And Michael H, I think that putting Anglo and INBS in ‘an examinership type process’ would have revealed the fundamental insolvency of the other banks and the contagion would have spread throughout the EZ at the speed of light. Perhaps the resulting brutal purging of the system would have worked wonders, but even the IMF was insufficiently resourced and empowered at the time to do the necessary shoring up – and the EU was so far off the pace it wasn’t funny.

I sense that the EU’s Grand Panjandrums are fumbling to get something reasonably comprehensive in place by early 2011 as the pressure from the markets will not abate. But I wouldn’t hold out great hope about how much relief this will provide to Ireland.

And put on a negative outlook. It appears as though resorting to IMF assistance is a green light for ratings agencies to say what they really think. Prior to this event there seems to have been a softly softly wait and see approach to Ireland. Ratings agencies…more like state the bleeding obvious with hindsight agencies. Although I will admit that one doesnt role off the tongue quite as easily.

“What do they know that the IMF don’t ?”

What makes you think the IMF wouldn’t agree?

re: Lorenzo Bini-Smaghi article.

“The writer is a member of the Executive Board of the European Central Bank.”

I got to the end of the article before finding this out.

No suggestions, no alternatives, no solutions for bank chaos that the ECB is directly responsible for. Just a veiled warning that only unter-mensch countries default!
Somebody should remind these very well paid ECB board members that they have a job to do and they are not doing it.

@Joseph Ryan

Excellent point. His article is pure subterfuge. It talks solely about why sovereigns should not default while not mentioning at all why private banks should not be allowed to default, or why the taxpayers should assume the debts of private banks.

His gumption is breath-taking.

What makes you think the ratings downgrade is a bad thing? If we can just get the yield over 20%, then buybacks will solve the sovereign and bank debt problems.

Great plan hogan, But where do you get the money? And how are the banks supposed to get back on their feet when the sovereign is junk ?
If Ireland was a horse I would probably shoot it to put it out of its misery.

@seafóid – “Meanwhile another senior FF minister drops out”

Rearrange the following into a well known phrase or saying: sinking, rats, leaving, ship, etc.

“If Ireland was a horse I would probably shoot it to put it out of its misery.”

If Ireland were a horse, one of the core EU countries would have probably eaten it by now. Avec frites of course.

@ Grumpy

As the negotiators said to the IMF who asked “will you take this money?”.

Indeed we will of course if you grab us by the ponytail and ride us like a horse.

The IMF needs to take a few yokes.

“Great plan hogan, But where do you get the money?”
I don’t and neither do you. Our bon ami spends it for us. We ‘refinance’ it at whatever he paid for it.

“And how are the banks supposed to get back on their feet when the sovereign is junk ?”
Again you’re assuming there’s any plan to get the banks on their feet. There isn’t. They are being liquidated in situ. The assets will be sold off, the retail franchises will be sold off etc.

We are seeing the world’s first “ratings default”. It is sort of a double-secret default where nobody says that the default is happening, but everyone is taking their losses in slow and measured fashion.

‘Again you’re assuming there’s any plan to get the banks on their feet. There isn’t. They are being liquidated in situ. The assets will be sold off, the retail franchises will be sold off etc.’

I am coming to the same conclusion but who is going to buy. Even the vulture funds are staying away. Wilbur is very quiet.

the 5b does not appear to be a realistic number on 30b exposure
and given the latest from the IMF I would be more pessimistic –
‘The IMF report says the banking problems have eroded the State’s credibility ‘at a gathering pace’. It adds that the banking crisis, low economic growth and concerns about the public finances are feeding on each other.’


How does this end ? If a couple of EZ countries join Ireland it would be better for Ireland, I suppose. A Jubilee 2012 debt cancellation programme ?

“who is going to buy. Even the vulture funds are staying away. Wilbur is very quiet.”
Wilbur wouldn’t be very quiet if he was in a bidding competition, so my guess is that money is being lined up with the appropriate loss-mitigation guarantees. Profit will be guaranteed at a certain level, I reckon. It will not be so much ‘loss-sharing’ as ‘with profits’.

It is distasteful and would have been unnecessary two years ago if the banks had been dismembered then and assets sold at closer to what were then considered firesale prices and now would be considered good prices…

However, I still think it is necessary. The Irish banks are broken and as such need to be broken up. Who takes the losses is the only question that remains.

PS It could be that the good bits (the retail franchises, for example) will be ‘gifted’ in return for taking some of the loss making bits at par. Save face for our grand fellows, dontcha know…

sorry been in motion for the last few hours. ECB and Bk of England agree 10bn swap facility for Irish central bk. Clearly depo run in the Irish banks has been particularly nasty in terms of UK based sterling corporate deposits.


re What makes you think the ratings downgrade is a bad thing? If we can just get the yield over 20%, then buybacks will solve the sovereign and bank debt problems.

Has the ECB beaten you to the start on this little money making idea. I think its great. Let the yields go to pot now that we are borrowing at 6%. Then buy back the debt at a 30% discount when it collapses. But buy it with what?

The ECB buy it, clearly. We’re bust. Then when the burden sharing happens, the ECB won’t be making a loss. So we’ll all be saved. Apart from all those pension funds that sold at a loss… Sorry Ciaran…

don’t know if you heard an interview with M noonan on M Ireand or Newstalk the other day when he said that the German and French banks had already divested temselves of Irish Sov debt on the 2nd market and it is now owned mainly by the hedge funds. Does that have any implications for the buyback idea?
I have a feeling that there is something intrinsically unworkable about that strategy. Just my gut as usual – sounds too much like a silver bullet.

I also wonder why L B-S devotes an article to the threat of a sovereign default while ignoring the banking crisis which would be the main cause of any such default – at least in our case.

Even better. Once no-one ‘important’ is holding Irish sovs at par, then the losses can be imposed. Who is going to weep for hedge funds? Not the hurlers from the ditch, anyway…

The remaining issue is the ECB, I suspect. It is probably holding too much that it bought with real money. It may be that this is of up to three year duration? (Since the feeling at one time was that Ireland was going to be insolvent in short order or stay solvent over the long term, so the short end was more risky, so this was more likely to be offloaded and anyway fit with Central Bank obsession with short-term rates). Perhaps that is why the fiction is being maintained until 2013?

The thing is, once we are no longer systemic, we will be permitted to negotiate a haircut. The rating downgrades help this as they force a firesale from the ‘important’ holders.

What will the downgrades mean for future FF attempts to rise from the dead? Will the brand be so tainted they won’t be let anywhere near power?

@Brian Lucey
‘Looks like were now a threat to the IMF. Who said we had no cards to play’

We could also be a big threat to the EU judging from analysis in the WSJ today headed-
Whats Next: Possible paths for Europe.

Three articles examine the options under the headings
Closer Fiscal Union: A collective guarantee
Debt restructuring: A hit for bondholdsrs
Extreme measures:The Euro breaks up.

All the articles are by Marcus Walker. Not sure if they accessible on the net.

On the bondholders he speculates that European governments will allow countries in crisis to restructure in 2012 0r 2013 when their banks have had time to beef up their balance sheet while shaky but solvent governments will have had time to improve their finances.

@cet. par.

So Marcus Walker thinks the European banking whales are going to trade their way out of the hole over the next two to three (or even four) years? Does that seem at all plausible?

@Brian Lucey
Um, for us to be a threat to the IMF, don’t they have to have given us the money already? Not much of a threat to bankrupt someone who hasn’t yet given you a penny…

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