Olli Rehn in the FT

Olli Rehn has an interesting piece in the FT this morning.   One noteworthy part is the admission that the current and proposed financial support measures are not up to the task.

In parallel, we must ensure that the financial support mechanisms put in place last May are fit for purpose. The effective lending capacity of the current European financial stability facility should be reinforced and the scope of its activity widened. Here we need to review all options for the size and scope of our financial backstops – not only for the current ones, but also for the permanent European stability mechanism too.

38 replies on “Olli Rehn in the FT”

So….. he’s obviously expecting some more countries to come into the net and need bailing out then? Portugal, Belgium, Spain, Italy. Crikey, there will only be Germany left at this rate. Back to the DM for them then.

This is an interesting piece. Whats got to be frustrating for people like John wriging above is that they have been strong if critical supporters of this as “The only game” for Ireland. We had a chance to get a decent assistance from europe and we blew it. Rather, the people who negotiated it blew it. Who on earth advised them

Commissioner Rehn writes:

‘Another round of bank stress tests will be conducted in the months ahead. We will draw lessons from the 2010 exercise and make these tests even more rigorous. They will also benefit from the new EU architecture of financial supervision, which began this year. The results will guide the necessary restructuring of the banking sector.’

Unfortunately this fails to clarify what ‘restructuring’ will entail. Unless restructuring imposes losses on bank creditors, there will be sovereign default in several countries. If radical solutions (inflation, Euro break-up) are infeasible or ruled out, a choice will have to be made. Which is the worst outcome?

I wonder if the new stress tests will include the scenario that Irish banks unilaterally restructure their senior debt? The consequences for German banks would be interesting.

If such a scenario will not be considered then the new tests will be about as reliable as the old ones.

I noted a distinction between “unsustainable debt” and “credit (that) reaches the real economy”.

The Mundell-Fleming model states that a country cannot simultaneously have an independent monetary policy, a stable exchange rate and free capital flows

How about a new MF style model. The Eurozone cannot simultaneously have economic growth, budgetary discipline and bank bondholders repaid in full.

I’m inclined to think the bondholders will be burnt but in the typical EU fashion where you only react when the crisis has reached boiling point and the market is in pandemonium, erasing much of the gains to market confidence from burning bondholders.

At this stage a decisive approach such as a Eurobond combined with letting the bondholders go may be just the action required rather this incremental attempt at putting out fires.

Jan. 12 (Bloomberg) — European governments are considering
aid for Portugal, debt buybacks, lower interest rates on rescue
loans and guarantees against excessive debt as part of a package
to quell the financial crisis, according to two people with
direct knowledge of the talks.

In terms of Ireland correcting its finances and turning corners at the speed of light, I read this blog post by Constantin Gurdgiev and thought ‘oh, bugger’.


From the link:
“This implies that the Exchequer deficit was:

2010 = €18,745m
2009 = €17,641m

And thus Minister Lenihan’s tightly controlled public spending measures in 2010 have managed to increase Government deficit by €1,104m on 2009 levels.”

I’ve read through CG’s analysis and (as usual) it seems sound. Anyone willing to contradict him?

@ Ahura

the big dyanamic were as follows, so you can apportion blame or credit to them as you deem appropriate

– total receipts up by 560mn (due to increase of 1.85bn in non tax revenue due to CBI surplus, and bank-guarantee fees)
– voted department expenditure down by 720mn, despite a 2.7bn increase in social welfare
– interest on the national debt went up by 1.55bn
– capital spending was cut by 4bn for Anglo and 3bn for NPRF
– capital spending increased by 725mn for INBS/EBS (which Dr G didn’t mention and somewhat said was not included)

So the one thing that was reasonably controllable (ie public sector spending) decreased by 720mn (-1.55%), despite the spike in social welfare costs. This was entirely, and more, offset by the increase in interest costs, which its fair to say are more or less out of the control of the Minister (notwithstanding that you can argue the two are often related!). Net of social welfare costs, which are to some degree out of the control of the minister, voted expenditure was down by 3.4bn, or 7.2% of total voted expenditure.

Thus, Dr G’s statement that “And thus Minister Lenihan’s tightly controlled public spending measures in 2010 have managed to increase Government deficit by €1,104m on 2009 levels” is somewhat disingenuous as he strips out the one-off measures in 2009 (Anglo/NPRF) but doesn’t allow for one off measures in 2010 (EBS/INBS) and the uncontrollable aspect of national debt servicing and social welfare increases.


Although having to go to the IMF was unforeseen by the government the weekend before it happened, you have to remember there has been no unforeseen financial or economic deterioration since Croke Pork. The bacon slicer will not be used.

There is an election soon. Current spending is what buys votes, limos, ministerial pensions and, basically, success in Ireland.

@Colm McCarthy

There seems to be an odd assumption around Europe that it is always somebody else’s banks that are insolvent – its probably something to do with trusting ones golf buddies. The mod seems to be that some seniors somewhere might get done over, but every bank will require nothing more than maybe just a bit of a capital increase. The two are inconsistent.

Why should current spending be cut if you can still go out and borrow from the EU or IMF? If that looks dodgy you can just start defaulting – first the subs, then the seniors, then the sovs. Obviously the banks will keep functioning because the ECB will just keep “funding” them or they will get bought by some Asian superpower of something.

What a smaaaaart economy it is.

@Michael Hennigan

I get the feeling Rehn and co won’t be able to hold out until 2013. The fortress is under siege and the markets just don’t have the patience.

@ Frank

i suspect that the rates would be lowered on all particpants in the scheme, including current ones. Couldn’t see it being enacted otherwise.

@ B Eoin B,

I think the main point is the official deficit reduction of c. 6bn isn’t quite what it seems.

The (voted and non-voted) current expenditure increased by 783m. Day to day running costs went in the wrong direction. That social welfare increases were significant is only relevant if you view it as a temporary blip.

Your point re EBS&INBS seems fair. We could add to that loans to NAMA and Greece*. That gives us 1.37bn. The 7bn (2009 nprf & anglo) minus the 1.37bn gives an adjustment of 5.3bn, which pretty much accounts for the deficit reduction. To me, austerity measures should impact the current
expenditure and (tax) receipts. There’s little evidence of this.

(*did we actually lend Greece 346m ?)

Oh for an income statement, funds flow and balance sheet instead of these darned ‘tennis club’ accounts.


In light of tightening in cds, Pgl getting its bonds away and the bounce in EU banks, it may be that Rehn’s comments (to the extent they matter) are being taken to oppose the notion of senior haircuts. The mechanism being simply a bigger bailout fund and more of the same.

The fact that they are considering items may only indicate that somebody has raised them.

Q: “Will you take your foot off my neck please?”
A: “I’ll certainly consider you request”


Was thinking of the “step out” facility, but thats for the 8bn or so efsf guarantee.

What’s 346m between friends anyway?!

Should Ireland consider not drawing down any further IMF/EU money in the basis that it is unsustainable and we would be better off cutting drastically and restruturing senior bank debt forthwith?


“cutting drastically and restruturing senior bank debt forthwith”

There was a lot of cheap talk a few weeks ago about restructuring / defaulting. There was very little talk about the cutting drastically bit that would accompany it – therefore Ireland was assumed from the outside, to have no position from which to negotiate. People are not stupid.

The reaction to the Pgl bond issue was interesting, if only to point up the resonances in the reaction of some in each country that the market frowns on.

Is there an Irish equivalent to this guy?

” Ricardo, Lisbon | January 12 11:23am |

just been released data for the two auctions of today . Yields were 6.7%, demand was 3.2 times higher!!



Yields actually came down from the 10-year bonds from 6.8% in Novemeber to 6.7% NOW!






I’d prefer we didn’t draw anything until we have new negotiators.

The bilateral loans could be a bit awkward. I’m not clear why we sought loans directly from other countries.

There seems to be growing consensus, as reflected in Citi’s comments, Colm McCarthy’s comments above and the Commission’s shifting position, that there will ultimately be default/restructuring. This comes down to a call on whether the situation is manageable (as per the Governor of the Central Bank) or is not manageable (as per some banks and independent economists.

If that it is the case that ultmately the situation will not be manageable, then shouldn’t we look for default now on our terms. The Brits and other bilateral lenders have eyes on our national and natural assets – probably our gas fields. They are not naive and they are not anything other than self interested. My view is that if I cannot afford to have the lifestyle I am living then I have to change my lifestyle rather than accessing credit.

Obviously, one is damned if one does and damned if one doesn’t and the preference is for a concerted EU response. However, if it appears that there is no EU repsonse coming or that it is touch and go, then Ireland needs to ready itself for unilateral action. By readying itself, it may force the issue. I suspect that was the message in the rushed ratification of the pre-Christmas bank resolution legislation.


“Ireland needs to ready itself for unilateral action”

Who is going to get the public generally and those on the public payroll more specifically, ready and willing for this unilateral action? Where is the leadership?


I don’t think the situation is manageable. I’d expect the head of the central bank to say things are manageable – I view it as part of his job. And perhaps you could argue that things are workable for the next two years.

My question on the bilateral arrangements is why did the Irish opt for it?

There is another option than outright default. And that it to get cheap funding. I’d suggest an ECB QE programme to purchase Irish debt (which they could do at a discount) and restructure this debt at a low coupon (zero percent preferably). In return, the Irish sovereign would commit to paying down x% principal each year. I’ve been flogging this one since November.


I have spoken in favour of QE and of purchse of sovereign bonds by QE and thereafter resturcturing. In essence it is the same point as I made – well and good if the EU/ECB gets its act together but if it is 50/50 as to whether that will happen then we better get ready to pay our own way.

We don’t have to get civil servants ready. Wehave a parliamenary democracy. The parliament makes the decisions. The civil servants can fall in line or strike. Sin é.


btw, I hope Ricardo has some mayonnaise to go with his own hat which he will shortly be munching (along with us)

zhou, there is an election shortly which will install a new gov. They, whoever is elected into gov, will have pandered to the public sector swing vote in order to win. The fact that they are a new gov will effectively prevent them doing too much different from their pre-election guff for a while. That while could be long enough to wipe out any opportunity to take the initiative.

There is no public appetite for an internal devaluation – maybe there will be in a year or two. As far as I am aware there are about three economists in the country who have suggested pay rates in the civil service are too high and should be reduced (not the same thing as leaving pay untouched and laying off staff with big redundancy payments).

If the politicians are too cute to lead and the academic economics fraternity is effectively silent for reasons of genuine lack of certainty over the strategy, not wanting to be unpopular, self interest as public sector employees, seeing no utility in being first movers, or whatever – then it seems that nothing will happen.

Instead of experimenting – as doubters would call it – in this way, a slow drift in the direction of experimenting with a strategy of waiting to see if JTO is right will ensue.

For Ireland, matching against Rehn’s four points is interesting.

(i) We have to do a fiscal retrenching, for sure. It’ll be hard to backslide because we can’t borrow any more money, but I doubt we’ll retrench efficiently. The area where DMcW is right is the insider/outsider split.

(ii) I see no evidence of structural reform in Irish political planning. It’s on no manifesto, and on a European scale there is little evidence that the national leaders will want to threaten their protected national sectors in order to allow growth.

(iii) On restructuring the banking sector, as CMcC said already, the word needs to become a plan

(iv) Finally, the point on better governance of affairs, Rehn mentions fiscal balance but nothing else. If we look at the fiscal balance of a selection of countries (and ignore the tax composition) then Ireland and Spain don’t deserve to be in the company they’re in today [http://www.google.com/publicdata/explore?ds=ltjib1m1uf3pf_&ctype=l&strail=false&nselm=h&met_y=govdefct_t1&hl=en&dl=en#ctype=l&strail=false&nselm=h&met_y=govdefct_t1&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:non-oecd&idim=country:IRL:ESP:FRA:DEU:ITA:PRT:DNK&tstart=567993600000&tunit=Y&tlen=20&hl=en&dl=en] Greece and Portugal have been borrowing without halt. Ireland and Spain were trying. So, unless we assume that Rehn’s restructuring of the banks includes a restructuring of bank monitoring then fiscal governance is not enough governance.

@ Zhou,

A bare-arsed default is an option we should try to avoid. We would face an array of nasty sanctions that may negate the benefits from the lower amount of debt. Anyway if an outright default is the eventual outcome, it’s not clear that an early one offers more than a delayed default. A ‘restructure’ would require EU engagement which isn’t on the cards at present and will come with strings attached.

Given our weak hand, our options are limited. There are a couple of things that could enhance our position: 1. Scapegoating the current government (even instigating criminal investigations etc) would help portray the Irish state are the victims of a renegade cabal. Whether justified or not, it would provide cover for more brazen proposals. 2. It would also be useful to assign some of the blame on the ECB’s German-centric interest rate policy and get the ECB/EU to accept a share of responsibility (all the PIIGS could pile in on this one).

Even if we achieve significant debt forgiveness, there is still significant pain to come in order to move from a budget deficit to surplus.

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