22 replies on “Buiter et al. on the eurozone debt crisis”
[…] The Irish Economy » Blog Archive » Buiter et al. on the eurozone debt crisis irisheconomy.ie/index.php/2011/01/10/buiter-et-al-on-the-eurozone-debt-crisis/ – view page – cached The report by Willem Buiter and colleagues on the eurozone debt crisis is available here. […]
It is interesting that the report states that if we decided to unilaterally restructure unguaranteed senior bank debt, the EU couldn’t really do much about it. This tallies with the lack of protection for senior bank debt in the Memo of Understanding (as emphasised by Karl Whelan).
According to the government and many commentators on this site, such action would be seriously ill-advised. I also strongly suspect that Patrick Honohan would be against such action, having negotiated the “quid pro quo” of extended ECB liquidity facility for Irish banks.
However, as the report highlights, a restructuring in some shape or form is inevitable and should really take place sooner rather than later. According to Buiter, we have some cards left to play.
I wonder if a FG/Lab govt would have the stomach for such action.
…and exactly this
…In the euro area, the fiscal crises in the periphery are inextricably tied up with the fragility of much of the EU banking system, not just in the periphery, but also in the core.
… would have been strong leverage towards much better negotiation results on Irish conditions. – Penalty Premium on EU Interest rates? Utterly Ridiculous! –
I remain convinced that without a substantial agreed upon amount of debt forgiveness, the situation will stay peak critical, and all the hectic last minute activities are patchwork, band aids on a patient with internal bleedings.
While they consider a break up to be unlikely, it is impossible to predict irrational decisions that may be influenced by ultra right wings in countries such as France and Netherlands, Geert Wilders, Le Pen. The latter declared the Euro to be the enemy number one.
One thing is clear to me, social cohesion is at risk and a ‘monotheistic’ economical view on the problem will not be sufficient.
IMHO, Figure 4 in this article that appeared in the Bioscience Magazine in January 2011 illustrates the true nature of the underlying growth problem. Only by acknowledging these aspects in a global context we stand a chance to reform a system in the long run, a system that has obvious massive design flaws to begin with. We have to debug the code from the core, otherwise the patchwork is putting the patient on life support, and we may end up with a coma patient.
Following on from the EU Commission’s recent publications, the calls for an EU-wide bank resolution scheme continues to build up a head of steam. Swift progress is needed.
“As regards ‘carrots’, we see only one: a lower interest rate on the EU/IMF
facility. The current 5.8% average rate really is an invitation to sovereign default.”
Sounds about right.
@bazza – “I wonder if a FG/Lab govt would have the stomach for such action.”
Maybe not…. but a SF/Labour/FF one might 😉
@Georg
Great link. Thanks
“The facts are that the bulk of our energy consumption has to do with its conversion to political, economic, and military power and that the vast majority of Americans do not benefit equally from the nation’s energy use.” http://www.monthlyreview.org/101201dardozzi.php
@Zhou,
+1
..but do you envisage the ts&cs for senior bank bondlholders being altered retrospectively to allow haircuts?
@seafóid
The massive increase, smack in the middle of this ‘crisis’, I prefer the term heist, is a great worry to me as well. Brasil, Saudi Arabia, to name but a few, are purchasing like crazy.
@Paul,
I bet that this is not going to happen retrospectvely.
@Paul Hunt
There isn’t necessarily a need to alter T’s & C’s.
If the bank is insolvent then it becomes a question of the statutory mechanics of resolution including valuations, administration, powers to deal with assets and makle partial settlements etc. The priority or claims of creditors are not changed. The legal framework for assessing such claims and paying out is changed. For instance, an administrator might be allowed make a preliminary conservative assessment of how many cent in the euro would definitely be avaialble and to discharge such amounts to depositors on a preliminary basis.
@Zhou,
Thank you. Fair comment. I’m always surprised at the extent to which the lawyers and the economists huddle in their own silos when matters like this arise – in contrast to the extent to which the professions are entwined in North America. I think we need more law-conversant economists and more economically-literate lawyers.
@Paul Hunt
Are you referring to the ELG, or to pari passu?
@zhou_enlai
Is it really that straightforward to use administrative powers to work around pari passu? I note that the UK’s Banking Act 2009 is specifically designed not to establish depositor priority partly to make sure that it complies with the European Convention on Human Rights.
@all
Likely it will be more difficult now for the ECB to yank our funding than it was in the run-up to the EU/IMF deal, because the ensuing crisis will more obviously look like ECB retaliation rather than Ireland simply going broke. That’s not to say that that unilaterally permitting haircuts on senior bank debt would or will be fun or easy – there’s no doubt it remains a very scary ride. (Buiter et al. acknowledge that Irish bank haircuts will cause the matter to hit the fan across Europe.)
But it’s worth emphasising that even if the next Irish government is unwilling to take unilateral action on bank seniors, and even if you think it shouldn’t take such action, there’s no reason why it shouldn’t bang the drum long and loud for agreed EU action on bank haircuts. All it has to say is that it wants to see the new bank resolution framework put in place before 2013!
Unfortunately there’s a divergence here between the national interest and the preferences of Irish voters on the one hand and the preferences of the Irish establishment on the other. Bluntly, an Irish government can’t be relied on to make the case for the restructuring of bank senior debt, even on the basis of an EU agreement involving no international confrontations. It will be tempted to keep quiet on the possibility of bank restructuring, and instead keep rattling the cup for Eurobonds, or some other EU grant mechanism which will make the Most Precious Darlings whole without any nasty senior burnings. I note the recent surge of enthusasism for Ruairi Quinn as Finance Minister.
Munchau in the FT:
“The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be.”
Portugal is next up for treatment. Its banks will also need emergency liquidity, presumably. What is the ECBg oing to do then? My kingdom for a horse of dodgy core bank debts.
@anonym
Who cares about the national interest, whatever that is? Always a wretched fig leaf for the acts of scoundrels. I care about my interests as it has been obvious for a very long time that no one in government or opposition cares a jot for the travails of the ordinary subs-senior bond sub-banker sub-legal eagle, etc. types. It is ‘the banks’ and ‘perks circle’ all the way. The citizen is a disposable instrument in Ireland.
@ Paul Hunt
I would be interested in studing economics and law but I don’t know where one might apply it and make a lot of dosh at the same time! The lawyers who specialise in drafting and analysing these kind of debt instruments and bonds are likely making a lot of money as it is. It shoudl also be noted that academic lawyers do not generally have access to such instruments so it is hard to study them outside of prvate practice.
@ anonym
Bank resolution would not cut across parri-passu. Parri Passu is a private right. The legilation would not reduce such private rights but rather would dictate how they would be enforced.
@anonym
Of course, legilation could ban the creation of future private rights which operate on parri passu and could make collective action clauses compulsory. However, I think Citi are looking at the immediate situation and I suspect the Commission is too notwithstanding their guff about 2013. They understand the time-inconsistency issue.
The Neue zürcher Zeitung on Sunday revealed that the Swiss Confederation has organised a crisis meeting on Friday involving representatives of all relevant segments of the economy to plan a response to the situation with the Swiss Franc (the beloved Stutz) which is now trading at 25% above its long term value against the Euro.
Suggestions include a link to the Euro, membership of the Euro (!), capital controls (!) – it’s an appalling vista. This crisis is a vortex that sucks in everything.
The most significant figures in the report are on page 12, which gives the forecast GDP growth rates between 2010 and 2015 for 12 countries. The forecast growth rates are:
U. States +18.5%
Ireland +15.1%
U. Kingdom + 14.9%
Hungary +14.8%
Germany +9.9%
Belgium +9.2%
Japan +8.4%
France +6.4%
Italy +5.0%
Spain +3.0%
Portugal +2.9%
Greece -0.8%
If JTO made these forecasts, he’d be sneered at as a ‘Pollyanna’. Since William Buiter has somewhat more status than JTO, perhaps he’ll avoid that fate. What’s become of Morgan Kelly’s theory that the big bad developers have destroyed the Irish economy for a generation? Not according to these forecasts.
The main conclusions one can draw from these forecasts are:
(1) Relatively low-tax more-flexible English-speaking economies to reassert their superiority over the relatively high-tax less-flexible continental EU economies.
(2) Irish economy to achieve second highest growth rate of the 12 (after the U. States).
(3) Media analyses in which Western Europe is divided into two groups: (a) core (supposedly high-growth) and (b) periphery (supposedly low-growth) are false. The real division in Western Europe over the next half-decade, according to these forecasts, is: (a) low-tax more-flexible English-speaking countries, ie Ireland and U. Kingdom (high-growth) (b) northern continental European countries (moderate-growth) (c) southern continental European countries (low-growth). It would also be better if the media stopped using the ridiculous term ‘periphery’. It reminds me of English politicians talking about the ‘mainland’. The population of Germany and much of the continental EU is falling. The population of the U. Kingdom is rising. It is forecast that, in a few decades, the U. Kingdom will have the highest population of any EU country, including Germany. The U. States population is also rising rapidly and, in a few decades, will be 6 times that of Germany. Ireland is closer to the U. Kingdom and the U. States that any of the continental EU countries. Some periphery!
The report says: “Again, Ireland stands out, with international liabilities equivalent to almost 16 times 2009 GDP.”
Would his conclusions have been different if his data did not include the inter-company obligations of units of foreign banks?
@Zhou,
I think my point is a bit broader than the potential to generate individual wealth! 🙂
Lawyers draft the contracts without often having a full understanding of the economic implications; economists, to the extent they are involved, often advance their contentions based on an idealised model of reality. But the engagement is fruitful – once both sides recognise the limits of their disciplines and capabilities (and recognise conflicts of interests). This is a link to a forthcoming book which highlights the perils of hubris: http://www.du.edu/korbel/news/2011/01/DeMartino%27s_Book.html
Good point from some of the above comments. The overstatement of irish banking sector size (as most of it owned by Germany/Belgium/France) shows the lack of analysis of critical issues as mentioned by MH above. As regards Irish economy after this classic banking crisis the ex-bank/commercial real estate sectors are in a BOOM. Tech, agri. drugs, chemicals, services of this English speaking island should ensure tax revenues remain solid at say core level of EURO25billion. The number of global policy makers who are eager to BUY EFSF IRISH debt increases daily. EU Contagion One in April-May last year led immediately to collapse of stocks and the EURO. EU Contagion Two in Oct-Nov triggered the involvement of EU/IMNF/ECB while stocks and the EURO rallied. All the negative newsflow is wrong and a lagging factor. Global policy maker support is to ensure that we do not revert to Contagion One episode. Portugal may well tap bailout funds but as Buiter states Spain or Italy bailout would be signicantly more serious as 10 times or greater the Irish solution. So lets asset strip now and sell to highest bidder. Core IRISH assets are now hot and super high yielding. If SPAIN collapses then LATAM collapses and then ITALY collapses while ASIA (bankrupt in 1997) would continue to behave strongly due to top down macro population stats over next few years as Lewis Point supports. ASIA and commodity rich nations through G20/IMF should continue to step up to the late and insist/produce a PUT OPTION for ALL PIIGS. In the meantime flip your pension into IRISH GILTS now before they are all sold out to your nearest Asian friend.
You said that for conserving the European Union, the liquidity facilities will
have to increase greatly in size to over €700bn of loanable funds to at least €2 trillion and at least half of these should be pre-funded to be available. The ECB will be called upon to offer funds in the short run. It might be possible for the ECB to fund the enlarged facilities through securities purchases or loans that would be joint and several
guaranteed by the EA member states, thus creating a capped E-bond or Eloan. To prevent the liquidity facilities from becoming transfer or subsidy facilities, their enhancement would have to be accompanied by the restructuring of unsecured bank debt (subordinate and senior) of insolvent banks and of the sovereign debt of those sovereigns for whom default makes more sense than fiscal pain and continued debt and crisis overhang.
22 replies on “Buiter et al. on the eurozone debt crisis”
[…] The Irish Economy » Blog Archive » Buiter et al. on the eurozone debt crisis irisheconomy.ie/index.php/2011/01/10/buiter-et-al-on-the-eurozone-debt-crisis/ – view page – cached The report by Willem Buiter and colleagues on the eurozone debt crisis is available here. […]
It is interesting that the report states that if we decided to unilaterally restructure unguaranteed senior bank debt, the EU couldn’t really do much about it. This tallies with the lack of protection for senior bank debt in the Memo of Understanding (as emphasised by Karl Whelan).
According to the government and many commentators on this site, such action would be seriously ill-advised. I also strongly suspect that Patrick Honohan would be against such action, having negotiated the “quid pro quo” of extended ECB liquidity facility for Irish banks.
However, as the report highlights, a restructuring in some shape or form is inevitable and should really take place sooner rather than later. According to Buiter, we have some cards left to play.
I wonder if a FG/Lab govt would have the stomach for such action.
…and exactly this
…In the euro area, the fiscal crises in the periphery are inextricably tied up with the fragility of much of the EU banking system, not just in the periphery, but also in the core.
… would have been strong leverage towards much better negotiation results on Irish conditions. – Penalty Premium on EU Interest rates? Utterly Ridiculous! –
I remain convinced that without a substantial agreed upon amount of debt forgiveness, the situation will stay peak critical, and all the hectic last minute activities are patchwork, band aids on a patient with internal bleedings.
While they consider a break up to be unlikely, it is impossible to predict irrational decisions that may be influenced by ultra right wings in countries such as France and Netherlands, Geert Wilders, Le Pen. The latter declared the Euro to be the enemy number one.
One thing is clear to me, social cohesion is at risk and a ‘monotheistic’ economical view on the problem will not be sufficient.
IMHO, Figure 4 in this article that appeared in the Bioscience Magazine in January 2011 illustrates the true nature of the underlying growth problem. Only by acknowledging these aspects in a global context we stand a chance to reform a system in the long run, a system that has obvious massive design flaws to begin with. We have to debug the code from the core, otherwise the patchwork is putting the patient on life support, and we may end up with a coma patient.
http://www.aibs.org/bioscience-press-releases/resources/Davidson.pdf
Best
Georg
Following on from the EU Commission’s recent publications, the calls for an EU-wide bank resolution scheme continues to build up a head of steam. Swift progress is needed.
“As regards ‘carrots’, we see only one: a lower interest rate on the EU/IMF
facility. The current 5.8% average rate really is an invitation to sovereign default.”
Sounds about right.
@bazza – “I wonder if a FG/Lab govt would have the stomach for such action.”
Maybe not…. but a SF/Labour/FF one might 😉
@Georg
Great link. Thanks
“The facts are that the bulk of our energy consumption has to do with its conversion to political, economic, and military power and that the vast majority of Americans do not benefit equally from the nation’s energy use.”
http://www.monthlyreview.org/101201dardozzi.php
@Zhou,
+1
..but do you envisage the ts&cs for senior bank bondlholders being altered retrospectively to allow haircuts?
@seafóid
The massive increase, smack in the middle of this ‘crisis’, I prefer the term heist, is a great worry to me as well. Brasil, Saudi Arabia, to name but a few, are purchasing like crazy.
@Paul,
I bet that this is not going to happen retrospectvely.
@Paul Hunt
There isn’t necessarily a need to alter T’s & C’s.
If the bank is insolvent then it becomes a question of the statutory mechanics of resolution including valuations, administration, powers to deal with assets and makle partial settlements etc. The priority or claims of creditors are not changed. The legal framework for assessing such claims and paying out is changed. For instance, an administrator might be allowed make a preliminary conservative assessment of how many cent in the euro would definitely be avaialble and to discharge such amounts to depositors on a preliminary basis.
@Zhou,
Thank you. Fair comment. I’m always surprised at the extent to which the lawyers and the economists huddle in their own silos when matters like this arise – in contrast to the extent to which the professions are entwined in North America. I think we need more law-conversant economists and more economically-literate lawyers.
@Paul Hunt
Are you referring to the ELG, or to pari passu?
@zhou_enlai
Is it really that straightforward to use administrative powers to work around pari passu? I note that the UK’s Banking Act 2009 is specifically designed not to establish depositor priority partly to make sure that it complies with the European Convention on Human Rights.
@all
Likely it will be more difficult now for the ECB to yank our funding than it was in the run-up to the EU/IMF deal, because the ensuing crisis will more obviously look like ECB retaliation rather than Ireland simply going broke. That’s not to say that that unilaterally permitting haircuts on senior bank debt would or will be fun or easy – there’s no doubt it remains a very scary ride. (Buiter et al. acknowledge that Irish bank haircuts will cause the matter to hit the fan across Europe.)
But it’s worth emphasising that even if the next Irish government is unwilling to take unilateral action on bank seniors, and even if you think it shouldn’t take such action, there’s no reason why it shouldn’t bang the drum long and loud for agreed EU action on bank haircuts. All it has to say is that it wants to see the new bank resolution framework put in place before 2013!
Unfortunately there’s a divergence here between the national interest and the preferences of Irish voters on the one hand and the preferences of the Irish establishment on the other. Bluntly, an Irish government can’t be relied on to make the case for the restructuring of bank senior debt, even on the basis of an EU agreement involving no international confrontations. It will be tempted to keep quiet on the possibility of bank restructuring, and instead keep rattling the cup for Eurobonds, or some other EU grant mechanism which will make the Most Precious Darlings whole without any nasty senior burnings. I note the recent surge of enthusasism for Ruairi Quinn as Finance Minister.
Munchau in the FT:
“The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be.”
Portugal is next up for treatment. Its banks will also need emergency liquidity, presumably. What is the ECBg oing to do then? My kingdom for a horse of dodgy core bank debts.
@anonym
Who cares about the national interest, whatever that is? Always a wretched fig leaf for the acts of scoundrels. I care about my interests as it has been obvious for a very long time that no one in government or opposition cares a jot for the travails of the ordinary subs-senior bond sub-banker sub-legal eagle, etc. types. It is ‘the banks’ and ‘perks circle’ all the way. The citizen is a disposable instrument in Ireland.
@ Paul Hunt
I would be interested in studing economics and law but I don’t know where one might apply it and make a lot of dosh at the same time! The lawyers who specialise in drafting and analysing these kind of debt instruments and bonds are likely making a lot of money as it is. It shoudl also be noted that academic lawyers do not generally have access to such instruments so it is hard to study them outside of prvate practice.
@ anonym
Bank resolution would not cut across parri-passu. Parri Passu is a private right. The legilation would not reduce such private rights but rather would dictate how they would be enforced.
@anonym
Of course, legilation could ban the creation of future private rights which operate on parri passu and could make collective action clauses compulsory. However, I think Citi are looking at the immediate situation and I suspect the Commission is too notwithstanding their guff about 2013. They understand the time-inconsistency issue.
The Neue zürcher Zeitung on Sunday revealed that the Swiss Confederation has organised a crisis meeting on Friday involving representatives of all relevant segments of the economy to plan a response to the situation with the Swiss Franc (the beloved Stutz) which is now trading at 25% above its long term value against the Euro.
Suggestions include a link to the Euro, membership of the Euro (!), capital controls (!) – it’s an appalling vista. This crisis is a vortex that sucks in everything.
The most significant figures in the report are on page 12, which gives the forecast GDP growth rates between 2010 and 2015 for 12 countries. The forecast growth rates are:
U. States +18.5%
Ireland +15.1%
U. Kingdom + 14.9%
Hungary +14.8%
Germany +9.9%
Belgium +9.2%
Japan +8.4%
France +6.4%
Italy +5.0%
Spain +3.0%
Portugal +2.9%
Greece -0.8%
If JTO made these forecasts, he’d be sneered at as a ‘Pollyanna’. Since William Buiter has somewhat more status than JTO, perhaps he’ll avoid that fate. What’s become of Morgan Kelly’s theory that the big bad developers have destroyed the Irish economy for a generation? Not according to these forecasts.
The main conclusions one can draw from these forecasts are:
(1) Relatively low-tax more-flexible English-speaking economies to reassert their superiority over the relatively high-tax less-flexible continental EU economies.
(2) Irish economy to achieve second highest growth rate of the 12 (after the U. States).
(3) Media analyses in which Western Europe is divided into two groups: (a) core (supposedly high-growth) and (b) periphery (supposedly low-growth) are false. The real division in Western Europe over the next half-decade, according to these forecasts, is: (a) low-tax more-flexible English-speaking countries, ie Ireland and U. Kingdom (high-growth) (b) northern continental European countries (moderate-growth) (c) southern continental European countries (low-growth). It would also be better if the media stopped using the ridiculous term ‘periphery’. It reminds me of English politicians talking about the ‘mainland’. The population of Germany and much of the continental EU is falling. The population of the U. Kingdom is rising. It is forecast that, in a few decades, the U. Kingdom will have the highest population of any EU country, including Germany. The U. States population is also rising rapidly and, in a few decades, will be 6 times that of Germany. Ireland is closer to the U. Kingdom and the U. States that any of the continental EU countries. Some periphery!
The report says: “Again, Ireland stands out, with international liabilities equivalent to almost 16 times 2009 GDP.”
Would his conclusions have been different if his data did not include the inter-company obligations of units of foreign banks?
@Zhou,
I think my point is a bit broader than the potential to generate individual wealth! 🙂
Lawyers draft the contracts without often having a full understanding of the economic implications; economists, to the extent they are involved, often advance their contentions based on an idealised model of reality. But the engagement is fruitful – once both sides recognise the limits of their disciplines and capabilities (and recognise conflicts of interests). This is a link to a forthcoming book which highlights the perils of hubris:
http://www.du.edu/korbel/news/2011/01/DeMartino%27s_Book.html
Good point from some of the above comments. The overstatement of irish banking sector size (as most of it owned by Germany/Belgium/France) shows the lack of analysis of critical issues as mentioned by MH above. As regards Irish economy after this classic banking crisis the ex-bank/commercial real estate sectors are in a BOOM. Tech, agri. drugs, chemicals, services of this English speaking island should ensure tax revenues remain solid at say core level of EURO25billion. The number of global policy makers who are eager to BUY EFSF IRISH debt increases daily. EU Contagion One in April-May last year led immediately to collapse of stocks and the EURO. EU Contagion Two in Oct-Nov triggered the involvement of EU/IMNF/ECB while stocks and the EURO rallied. All the negative newsflow is wrong and a lagging factor. Global policy maker support is to ensure that we do not revert to Contagion One episode. Portugal may well tap bailout funds but as Buiter states Spain or Italy bailout would be signicantly more serious as 10 times or greater the Irish solution. So lets asset strip now and sell to highest bidder. Core IRISH assets are now hot and super high yielding. If SPAIN collapses then LATAM collapses and then ITALY collapses while ASIA (bankrupt in 1997) would continue to behave strongly due to top down macro population stats over next few years as Lewis Point supports. ASIA and commodity rich nations through G20/IMF should continue to step up to the late and insist/produce a PUT OPTION for ALL PIIGS. In the meantime flip your pension into IRISH GILTS now before they are all sold out to your nearest Asian friend.
You said that for conserving the European Union, the liquidity facilities will
have to increase greatly in size to over €700bn of loanable funds to at least €2 trillion and at least half of these should be pre-funded to be available. The ECB will be called upon to offer funds in the short run. It might be possible for the ECB to fund the enlarged facilities through securities purchases or loans that would be joint and several
guaranteed by the EA member states, thus creating a capped E-bond or Eloan. To prevent the liquidity facilities from becoming transfer or subsidy facilities, their enhancement would have to be accompanied by the restructuring of unsecured bank debt (subordinate and senior) of insolvent banks and of the sovereign debt of those sovereigns for whom default makes more sense than fiscal pain and continued debt and crisis overhang.