The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
Here is the transcript of the press conference on Ireland.
The important answer is the one concerning private disagreement between the IMF/Irish authorities versus the EU/ECB concerning renegotiation with senior bondholders:
MR. CHOPRA: On this, Minister Lenihan has clearly stated, and I quote, “There is simply no way that this country [Ireland] whose banks are so dependent on international investors can unilaterally renege on senior bondholders against the wishes of the ECB.” So far the view of European partners has been that the systemic impact of reneging on senior bondholders would be too great. In light of this, any decision on senior bondholders will need to be taken in consultation with the European partners.
Note European partners here means non-Irish European partners that is EU/ECB. This response and the follow-up responses from Chopra indicate that the parties have publicly closed ranks around the final decision (no renegotiation with senior bondholders) but it certainly sounds like the IMF and Irish authorities were originally opposed to this decision and preferred senior bond renegotiation.
Chopra should have been asked about the minimum wage, where the IMF-EU agreement commits Ireland to a cut, but the parties likely to form a new government next year are committed to reverting to the current rate.
This crisis is destroying reputations by the dozen. Hanafin, Carey, Dempsey and Dermot Ahern have all been cruelly exposed as know nothings. Cowen is gone as is Lenihan who has reverted to crude bullying. AIB management have zero credibility. No senior Irish financial executive has. NAMA management are also tainted.
Olli Rehn came in with a big wave of credibility but that is now torn to shreds. Ajai Chopra looks like the next victim.
It’s only a question of how many bodies the EU is prepared to hurl into the ditch to defend the fantasy its is attempting to sustain. Something will have to give eventually, because the sovereign bond market won’t give up.
John Bruton seems to be getting a handle on the bigger picture that this IMF transcript is hinting at:
The bond market is a monster but the garlic is in the haircut.
Daniel Gros has a paper on one solution – here is a snippet
“The only way out seems to be a big bang: to deal with all the problem cases in one go. The argument against a restructuring of, say, Greek public debt has always been that this would lead to
contagion. But contagion is already a fact of life, and it gravitates towards countries with real problems. Portugal, with its combination of high external debt and poor growth prospects, looks
like Greece. Spain has the ‘Irish disease’: a real estate bust that leads to huge losses in the banking system. Every country is different, and some countries (Spain, for example) would under normal circumstances not need a bail out. But these are not normal circumsta nce, and it is not possible to deal with each country in sequence because each bailout leads the markets to expect the next one.
Only a big bang can resolve the impasse. How should this big bang look like? A sudden collective default would of course constitute a ‘mega Lehman’ and would have catastrophic consequences. However, it is entirely possible for the countries in question to make investors an exchange offer while continuing to service their payment obligations. There should thus be no technical default, but simply an offer to bondholders to engage in discussions about debt restructuring accompanied by a concrete exchange offer.”
The bonds will give.
I wouldn’t characterise the sovereign bond market as a monster; it’s simply seeking to remove those things that may or will impair the ability of sovereigns to service their sovereign debt. And that includes losses on bank bonds that may be imposed on citizens. The piece you cite from Daniel Gros is perceptive. The varying extents of sovereign and bank debt in the peripherals make it difficult to develop and apply a comprehensive solution. But, I agree, a solution will have to be found – perhaps along the lines indicated by Daniel Gros – because the bond market will not rest until one is found.
There is a very simple solution. The IMF and ECB are willing to lend Ireland money at 5.6%. With this money Ireland buys it own sovereign debt that is paying 8.9% for ten years and lives off the spread just like American banks until the sun comes out.
And how would public services be paid for in the meantime?
The whole point is that the borrowed money is NOT being used to pay for public services or debt. Public services are being cut to the bone. It is being used to pay the European banks and the Irish taxpayer is on the hook for it. Without the burden of paying off the banks, Ireland could muddle through. This is going to end with the worst possible case for the Irish people. After a few years (maybe less than one, the way the bond market is going) of paying on the loans, the country will default on them anyway. But, by then the country will be beaten down and take that much longer to recover.
I would like you to ask one question. Why is it that the USA can print money like crazy and not cut any real spending on a federal level AND bail out the USA banks that are in worse shape than the Irish banks? Ireland is being treated exactly as it was in the 19th century, but this time they voted for it themselves.
Respectfully I must disagree. Under the EU/IMF package 50 billion euro (85 billion less the 35 billion earmarked for the banks) will finance the budget deficit during 2011-2013 on the assumption that Ireland will not be accessing the private capital market during this period. Without this financing the fiscal correction through spending or taxes would need to be even larger than currently planned.
Not to turn this into a debate, but do you really think the banks only need 35 billion of the 80 billion?
Secondly, you write that Ireland “will not be accessing the private capital markets during this period”. That is an interesting turn of phrase. The reason is they CANNOT ACCESS the private capital market because the interest rates indicate a very high probability of default. The ten year bond is at 9%, in the same league as Argentina.
On the needs of the banks, maybe they’ll need more than 35 but that’ll mean less is available to finance the budget ( never mind buying back debt under your proposal).
Obviously Ireland cannot access the market at current yields, but that won’t necessarily be true for ever. Market expectations of default are not always borne out and countries do sometimes dig their way out with external support (e.g. Brazil after bond yields were over 20 percent in 2002 – but before everyone shouts at once I’m well aware that their exchange rate system is different from Ireland’s).
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