The IMF on Eurozone Policy

Attached are the four conclusions of the IMF’s Financial Stability Update just released, in so far as they concern the Eurozone, with my comments:

‘In the European Union, the steps listed below are needed to reduce uncertainty and help restore confidence in markets.

  • Further rigorous and credible bank stress testing is required along with time-bound follow-up plans for recapitalization and restructuring of viable, undercapitalized institutions and closure of nonviable ones.’

Comment: The IMF is suggesting new stress tests and ‘follow-up’ recapitalisation and re-structuring of banks. In that order, not in the reverse order.

  • ‘The effective size of the European Financial Stability Facility should be increased and it should have a more flexible mandate. For countries where the banking system represents a large proportion of the economy, it is now even more essential to ensure access to sufficient funds, going beyond national backstops whenever necessary.’

Comment: Means the EFSF is inadequate in size and function, particularly for countries with large banking systems, such as Ireland. 

  • ‘Euro area-wide resolution mechanisms need to be deployed and strengthened as needed. The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.’

Comment: Means the IMF wants to share bank losses with bank creditors and re-capitalise banks with EU-wide, and not just national, fiscal support. 

  • ‘The European Central Bank will need to continue to supply liquidity to banks that need it and keep its Securities Markets Program active, while also recognizing that this is a temporary set of measures and will not solve the underlying problems.’

Comment: Means that ECB has been overly restrictive on both counts.

Does anyone still believe that the IMF was happy with the design of the Irish bail-out?

69 thoughts on “The IMF on Eurozone Policy”

  1. @Colm McCarthy

    ‘Does anyone still believe that the IMF was happy with the design of the Irish bail-out?’

    Rhetorical I assume (-;

    Recent empirical evidence would suggest that it is unwise to underestimate the number of fools in Ireland, or the ability of said fools to elect other dangerous fools to positions of power and influence where they do, and have done, untold damage.

    As for the so-called ‘Irish bail-out’, it would appear that such dangerous fools are not entirely confined to Ireland, but that such foolishness is also alive and well in the European upper-echelons. That said, I do detect some sanity emerging in Germany ….

    Methinks the IMF ladies and lads, sound Kantian/American pragmatists, chewed a substantial amount of rough gravel, swallowed more than a modicum of tongue, in very, very, very, very reluctantly bowing to the power of such upper-echelon EU fools during the design phase. This was, and remains, a design to fail – leading to a conflationist vichy_bank/sovereign default in the not too distant future.

    When are the IMF coming back? We are sorely in need of a good dose of pragmatism – and some decisive action. They’ll Be BACK (-;

  2. At the end of the day it all boils down to where the losses are , when they are to be acknowledged and who is going to pay for them.

  3. The bond market gave the thumbs down very quickly. Weren’t those yields supposed to come down ? Where is that NTMA roadshow ?

  4. In addition to their self-created woes it is the further misfortune of the EU’s peripherals to have a dysfunctional external institutional support mechanism. It is clear that the EU’s Grand Panjandrums deeply resented being compelled to include the IMF in the arrangements to resolve the EZ crisis – one only needs to think how the Chairpersons of the Fed and the SEC and the US Treasury Secetary would feel if they were compelled to include the IMF formally in their crisis resolution activities. As a result the IMF has, to an extent, been marginalised and the game is not following its ‘playbook’ – as Colm’s post highlights.

    But then again, the IMF is dealing with a strange polity in the EU which, by its nature, finds great difficulty in effecting institutional change, has a glaring democratic deficit and where politicians in the major economies misled their voters into believing that they had everything under control – and are now petrified to confront their voters with the cost implications of their deception.

  5. Its a bit like “Ooh, I wouldn’t start from here! But the IMF isn’t Europe.

    “…..The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.’”

    Guys who are now in senior positions in the banking industry in Ireland used to see nothing wrong with conning people in their eighties into buying 5 or 7 yr fixed term insurance investment products with little early redemption value. Great comm.

    Fifteen years later there was a primetime investigation into it. It was lucrative business and the regulator wasn’t particularly bothered.

    Just a taster. People knew about the culture and didn’t just put up with it, they defended it

    There’s all the other stuff everyone knows about with the property bubble too of course.

    I think the Eurozone would be nuts to have a shared fiscal backstop without a shared regulatory regime and culture. The next question would be about a shared fiscal regime.

    Countries in which the chancer is admired present a moral hazard problem for their “partners”.

    The politics of Europe are likely to mean it takes some time before the “they had it coming to them, and they ain’t taking our banks down too” attitude subsides.

  6. I’m sure we all wish the IMF had won the argument. In fairness, though, it is the euro zone taxpayer and not IMF officials that will get stuck with the bailout bill. It is interesting how we can summon great indignation at being forced to pay the price for the profligacy of the foreign creditors of the banks, but we don’t seem to have much sympathy for foreign taxpayers paying a price our profligacy. Recall the early reaction when it was just Greece that was in trouble.

    I think Dan O’Brien had it right in the closing lines of his op-ed today:

    “Given how much is in flux in Europe, it may be that the terms of the bailout improve in the months ahead. Though, it should be stressed, this will happen not because there is scope for Rambo-style Irish negotiators kicking down the door of the European Central Bank in Frankfurt to tell its cowering inhabitants to do as mighty Ireland wants. If the terms are improved it will be because it is in everybody’s mutual interests.”

    http://www.irishtimes.com/newspaper/opinion/2011/0125/1224288248288.html

  7. @ John

    From German deputy finance minister Joerg Asmussen today. “Debt brakes” + lower rates seems to be the new idea they’re running with, few mentions of the ‘brake’ today.

    *ASMUSSEN SAYS GERMANY AIMS FOR EU LIMITS ON DEBT, DEFICITS
    *ASMUSSEN CALLS FOR A FORM OF `DEBT BRAKE’ ACROSS EURO REGION
    *ASMUSSEN SAYS `WE HAVE TO LOOK’ AT LOWER RESCUE INTEREST RATES
    *ASMUSSEN SEES LOWER RATES IN RETURN FOR NEW FISCAL RULES
    *ASMUSSEN CITES TAX POLICIES, TRANSPARENCY, PENSIONS

  8. @seafóid – “At the end of the day it all boils down to where the losses are , when they are to be acknowledged and who is going to pay for them.”

    Everywhere, >2012, us.

  9. Eoin,

    There was talk last week of lower rates, rescheduling given more German control other European ecomomies. You will have noticed this bit:
    ……..SEES LOWER RATES IN RETURN FOR NEW FISCAL RULES
    ……..CITES TAX POLICIES, TRANSPARENCY, PENSIONS
    😉

  10. @John McHale,

    Your quote from Dan O’Brien’s op-ed is spot on. The levels of fiscal adjustment (and much of its composition) and whatever bank resolution mechanism will emerge are out of our hands – and have been for some time. I don’t think people in Ireland realise that, in the view of our peers, we have lost the ability to govern ourselves responsibly. Last weeks shenanigans won’t have helped much and ramming through important legislation without adequate scrutiny – even if its enactment is necessary – isn’t a good ad.

    Still, pace Mr. Bond’s information note, I expect the EU, very carefully, will make noises to ensure a majority of the next Dail will be prepared to administer the necessary medicine – and not head off on the ‘Charge of the Light Brigade’.

  11. @ John McHale,

    “but we don’t seem to have much sympathy for foreign taxpayers paying a price [for] our profligacy.”

    That’s a bit harsh. At present I see EFSF bonds placed at 2.8%, but Ireland paying 3% on top of this. Seems like a gain to foreign taxpayers.

    I’d have great sympathy if foreign taxpayers were asked to pick up our bill. That said, charity begins at home and domestic taxpayers are picking up a huge tab for banks as their creditors get safe passage.

  12. @Ahura,

    I certainly hope the interest rate will be lowered — though I think it is wrong to treat ourselves as totally riskless, even if an official creditor is taking on less risk than the non-official alternative.

    As per Dan O’Brien’s article, the rate could be lowered not because we go in making threats but because it is recognised that it is not in anyone’s interest for Ireland to have a bailout that traps it outside the markets, making us almost a permanent ward of the EU. I disagree with Paul Hunt, however, that we are irrelevant to the process. We should make it clear where the design of the programme makes it almost impossible for it to succeed — dialogue not threats. The perspective of the country that has actually lost creditworthiness — for example the detailed market knowledge of the NTMA — can get lost in the process.

  13. John,

    I am not suggesting threats, I can think of none that are both credible and feasible. And of course Dan O’Brien is right that we must work our way through this. But there is inadequate sight of an exit for Ireland under the current plan and that makes it a ‘temporary little arrangement’.

    The problem is not that the bank guarantee was immoral, as will be ranted unceasingly over the next few weeks. It was worse than that – it was a mistake. The IMF appear to understand this and our European partners appear not to, in public anyway.

  14. I would suggest that before asking for lower interest rates, it would be edifying to look at the Irish ten year bond rate, just south of 9%. Until that receeds, it is just whistling by the graveyard.

  15. @ John,

    It would be fairer to trap the 3% excess spread year-on-year in the spv as a loss reserve. So over 5yrs, it would build to 15%+. In the event of default, this reserve would be used before calling on the guarantors. On exiting the EFSF, the reserve would be used to pay down some of the debt.
    Perhaps a small premium to the guarantors is appropriate if it effects their borrowing costs.

    I agree that our bargaining position is weak. Our ‘threat’ is the consequences of a messy Irish default. Not great, but something.

  16. Sorry to post off point

    Does anyone know where on the internet I can get data on the level and variability of net profit margins across companies and/or sectors?

    I need it ASAP

  17. I personally have a lot of sympathy for taxpayers elsewhere in the EU on this. The pain of our banking collapse should have hit shareholders first, subordinated bondholders second and then senior bondholders/depositors, subject to our government taking on some or all of the depositor pain. It probably would have too, if banking supervision in Germany and France had not been almost as poor as that in Ireland.

    If the EU’s banking system had not resembled a house of cards, there’s little doubt in my mind that EU partners would have convinced Minister Lenihan that the bank guarantee was insane before it was signed into law, the Irish banks would have gone through a speedily invented resolution process, and losses would have gone where they belonged.

    Even now, there has to be scope to reduce the damage that other EU taxpayers take. The “rescue” package as currently designed seems to be structured to maximise the damage that EU taxpayers take, while maintaining a pretence that they will get their money back with loads of interest. There are any number of ways it could be improved to our benefit and theirs. Just about the only ways it could be made worse, that are in common discussion, would be by stretching out the astonishingly long 8 year adjustment period envisaged by the EU even further, or by killing our capability to service debts through raising our Corporation Tax rate.

  18. The IMF have always seemed to have much more of a handle on this than the Europeans.
    Is there any real reason why we need the Europeans involved in this at all?

  19. @Christy,
    You would be more likely to get a helpful response if you indicated what sort of companies/sectors interest you. Irish? Large? Public? It also matters whether you have a budget or need something free.

    I look to the CSO’s Census of Industrial Production and Services Enquiry for something approximating to sector level business accounts for Ireland. Depending on exactly what you mean by net profit margins you may find something that satisfies your need in those, although it will be a little dated. The Forfas Annual Business Survey of Economic Impact is also useful in the same way.

    If I was looking for actual information on profitability, and I had a budget to spend, I guess I’d try somewhere like Intercompany Comparisons.

  20. @Colm,
    “The problem is not that the bank guarantee was immoral, as will be ranted unceasingly over the next few weeks. It was worse than that – it was a mistake. The IMF appear to understand this and our European partners appear not to, in public anyway.”

    Fair comment on the Guarantee particularly as it relates to Anglo. However, to this day the EU/ECB seems to have a problem on imposing losses on bank creditors irrespective of guarantee.

  21. @ Ahura/John McH

    if we assume that a Greece, Ireland, Portugal and Spain EFSF requirement amounted to 300bn in total, and that instead of 3% margin, it only charged a 1% margin, what would this 2% ‘subsidy’ cost the EFSF?

    Simply: 2% x €300bn x (say) 7yrs = €42bn.

    Which basically amounts to 1% of the combined French and German GDP. Over 7yrs! So 0.14% of combined GDP per annum. And this doesn’t include the actual 1% margin they are still charging, or the fact that it would only cost them something if someone actually defaulted. Now that would be a true sign that the EU was serious about solving this problem, and it would be a true sign of solidarity.

  22. Tull makes a good point on the guarantee. The original blanket guarantee expired in September, yet the legacy seniors have not been touched. We can’t be sure how things would have evolved without the guarantee, but it seems a fair bet that legacy seniors would not have been touched regardless. The blanket guarantee was an awful policy decision to make, but paradoxically was, in all likelihood, inconsequential.

    @Colm The guarantee in force is now the ELG. I am guessing that you would not advocate reneging on this commitment. This is not a guarantee given to investors ex post that protects them from bad investment decisions. But rather a promise made by the State to investors who stumped up their cash because they took us at our word — not because they believed in our banks. Given that you are surely right about the ranting to come, I think it is worthwhile to be as explicit as possible on the distinction between the ELG guaranteed bondholders and the now unguaranteed legacies.

    Now for something that will really get me in trouble: In the context of a proper resolution regime, I believe that unguaranteed seniors in insolvent or critically undercapitalised institutions should be made to bear losses. It is unfortunate that the ECB/EU has made protecting seniors a condition of support. But the package of support must be taken in its totality. Combined the ECB and CB are providing somewhere around €150 billion in what is now quite extraordinary support to the main Irish banks. There is likely to have to be some give and take in any package, and if preventing a feared contagion is something that is a high priority for the ECB, then we might just have to get over it. This does not change the fact that the overall programme as currently constructed is not working and needs to be revisited in the interests of all sides. But complaints about Ireland having to bail out foreign banks almost certainly damages our cause. Taking into account the risks being run by the ECB, I think it is fair to say there is a sizeable expected net transfer to Ireland, with a big downside risk. We need to accept that there has to be some give as well as take.

  23. Hope the politicians know that in the public mind this Finance Bill equals the universal social charge. Any politician supporting it would be signing their own political death warrant.
    It’s a very simple question on the door steps – did you vote for the universal social charge? You can’t squirm out of that.

  24. @BeeCeeTee
    I think you are right. You(Ireland) need to obtain through renegotiation either a lower effective interest rate or a reduction of the principal of your debts (perhaps by purchasing of your debt on the market by the EFSF).
    Your main asset in the present situation is the size of the Irish economy which makes a bailout relatively affordable by the rest of Europe (which could probably not bailout Spain).
    But I am afraid you will have to wait a year or two so that the European negotiators of 2010 will not lose face completely and so that the exact situation of Portugal ,Spain and maybe even Italy and Belgium can be ascertained .
    I understand that until a new ,more sustainable, economic model for the Irish economy can be found ,you will try to keep the Corporate Tax Rate at its present level, but do not expect that the German or the French voters can accept you to keep it at the present level for a very long time and pay for a new bailout . The fiscal sovereignty on the corporate income tax is certainly dead ( it does not exist anymore on the VAT ), not only for the Irish ,but also for the Dutch ,the French and the Germans. I do not think that the bank regulations will remain the responsibility of the individual states central banks either.

  25. @BeeCeeTee
    While it’s possible that the fragility of the Euro banks was a factor in the EU not opposing the guarantee more vehemently, I don’t remember it that way.

    What I remember was the Irish govt running the guarantee out asap and the EU complaining that it was not consulted. It was a done deal before it could be challenged or thought about. I suspect that a major motivation behind the guarantee was a mistaken belief that it was vitally important to have the Irish banks under domestic Irish control, probably with an additional desire to protect major Irish creditors…..whatever the cost.

    Unfortunately, the cost turns out to have been somewhat higher (ehem) than expected.

    On Colm’s point, the guarantee was probably based on slightly immoral principles at the time – beyond what any systemic bank protection scheme normally implies. As I say, I’m inclined to believe that the motivations went well beyond simply protecting the financial system. However, whatever the immorality of the decision at the time, the practical implementation of the guarantee now that the bluff has been called is gigantically immoral in its impact – which is where the mistake comes in.

    Charging people a few hundred euro each to bail out the banks is immoral. Destroying the economy to bail out the banks (and their creditors) is a mistake.

  26. @ Dominique
    “…..but do not expect that the German or the French voters can accept you to keep it at the present level for a very long time and pay for a new bailout ”
    Can you tell them that they are paying us to bail out their own banks and charging us for the privelege!!

  27. @Eureka
    As far as I know the decision not to liquidate the Irish Banks in 2008 was an Irish decision.
    If you know the precise exposure of French Banks please tell us.

  28. @ Dominique
    “As far as I know the decision not to liquidate the Irish Banks in 2008 was an Irish decision.”
    I’m afraid another French man called Jean Claude Trichet had quite a bit to do with it too!!

    BTW it’s not meant to be personal. A political decision has been made that European banks should be bailed out by taxpayers. It’s only a question now of deciding which taxpayers. Any wonder we are fighting amongst ourselves whilst the bankers are laughing all the way to Davos!!

  29. I wonder did any poor soul watch the Prime Time Punch and Judy show.

    I have to admit Pat Rabbit gave me a series of painful belly laughs – he is good with the one liners – his best was you can’t pluck money out of thin air , the man is obviously not a banker or maybe he is bankers friend – who knows now as the difference between Gombeens leading bankers and bankers leading Gombeens has been narrowing for many decades.

    I have a great scepticism with Sinn Fein policies as they seem as closely aligned to pointless fiscal policey as the rest of them with just a hint but not so much of monetory Independence – God help us and save us.

  30. @ DJR

    The guarantee was an Irish decision, moreover a decsion that was eloquently described by Colm as “stupid” partiularly as it applied to a non systemic bank connected to the regime and known to be insolvent.

    The precise exposure of the French or German banks at the time is unknowable, though not zero. Look at the multi billion cheques paid by the US govt to bail out Societe General and you will get an inkling that the French banks might have been over exposed to risky stuff.

    However, the real fear in Brussels, Frankfurt, Paris etc in September 2008 was that a small bank on the Western seaboard of the union could take thw whole system down. This is because of the relatively thin (still) level of capital in European banks, the lies told about the risks held and the over reliance on wholesale funds. That is why senior bond holders are put above taxpayers in all countries of the EZ.

  31. The blanket guarantee was an awful policy decision to make, but paradoxically was, in all likelihood, inconsequential.

    I find it very hard to see how Irish Governmment bond yields could have soared quite so high if there was no explicit bank guarantee in place. If you take the banks out of the picture, how do we end up needing the IMF?

  32. Taken from JCT interview October 2008 http://www.ecb.int/press/pressconf/2008/html/is081002.en.html

    Question: On Tuesday you were saying that you were hoping that the parliament in the US will approve the package. So what do you hope that the governments in Europe will decide to come out of this very difficult situation, a sort of fund? There are many options which are at stake. Can you maybe say which would be the best for you?

    And with these very, very high liquidity injections, you give the idea that no solvent bank will go away without money. Do governments need to give the message that no bank will fail in Europe like Lehman in the US?

    Trichet: First of all I would say that all authorities, all entities, whether public or private, have to be up to their responsibilities, particularly in this period, which is demanding, as I already said. And all governments – but not only governments – have to be up to their responsibilities. Of course we are not the United States of America as far as the institutional framework is concerned.

    In responding to your first question, I was also responding to your second question. All governments have to be up to their responsibilities.

  33. “All governments have to be up to their responsibilities”
    It is reasonable to infer that this means no bank will fail.
    It is great to read the language from this man. No wonder he got away scott free with credit lyonnais. Those tatty suits are actually coated in high grade Tefflon

  34. @Eureka
    I assume his assumption was that Governments responsibilities lie with the fractional reserve class of cretins

  35. Correction they are no longer fractional reservers as they refuse to use their reserves to cover their losses.
    What are they now ?
    Risk free profit cretins I presume.

  36. John McHale

    Whether the guarantee was ‘inconsequential’ is for the history books. I think it foreclosed options, screwed us in the bond markets and weakened our negotiating position. It also undermined public support for fiscal adjustment, most of which is still to come. Finally it has fuelled Looney Tunes political parties and candidates.

    It is all very well to argue that the ELG bondholders rank ahead of the unguaranteed. But would you rank them above holders of Irish sovereign bonds if it comes to a choice, as well it might?

  37. @Colm Mccarthy
    Looney tunes – I like it – we have the biggest collapse in the history of collapses and yet you refuse to question the basis of the system – in fact its more then just impressive , Irish Papal conservatism is priceless – we should bottle it and sell it to to to the credit producers , yes they have the money now so lets just tip the hat to our betters who have a monopoly on those dark arts.

  38. @Hugh,
    I don’t think you can take what any of the main players were saying at the time of the guarantee at face value. It’s hardly likely that EU authorities would have shouted aloud about how fragile the German banking system was. But with the benefit of the information now in the public domain it is almost inconceivable that its fragility was not foremost in shaping their actions.

    Actually, there was sufficient information in the public domain at the time for anyone paying attention to strongly suspect that the German banking system was potentially in deep trouble. Both its poor capitalisation (evidence of compromised regulation) and its exposure to peripheral debt were well known, even if the exact size of the exposure to peripheral debt was outside the public domain (as it remains).

  39. I hope readers will take a moment to scroll up to see the context around the “inconseqential” comment.

    On your question, in terms of the costs of default, I would see a sovereign bond default as more costly, but I don’t think there is much between them.

  40. @ Colm

    ‘Whether the guarantee was ‘inconsequential’ is for the history books. I think it foreclosed options, screwed us in the bond markets and weakened our negotiating position. It also undermined public support for fiscal adjustment, most of which is still to come. Finally it has fuelled Looney Tunes political parties and candidates’

    How about ‘it has fuelled political movements which are rightly critical of the status quo but may need more time to orientate themselves on economic issues’ ?
    Lets face it. Times is going to be tough. The less name calling the better.

  41. JohnMcHale, CMcC
    Given that the Governmant had had ample time for reflection before introducing it – it would appear that the ELG was not only a mistake but even worse a crime. The original guarantee bought some time to come up with a well thought out and well advised solution – but they used it to paint us into a corner. More scrutiny required on that one.
    Of course Colm is right at the end of the day any guarantee which is not possible to honour is just foolish – and moreover when we finallu have to face that fact – we have tainted our reputation for nothing,

  42. No point in regrets. We have to look to ournegotiating position.
    Has anybody any idea the political damage it would do if Ireland was to shun the eu in favour of an IMF only bailout!
    Relying on Europe is folly!

  43. Colm

    ‘Whether the guarantee was ‘inconsequential’ is for the history books. I think it foreclosed options, screwed us in the bond markets and weakened our negotiating position. It also undermined public support for fiscal adjustment, most of which is still to come. Finally it has fuelled Looney Tunes political parties and candidates’

    Looney Tune Economics is what got us here. Fractional reserve system. Central Banksters. Interest rates at around 1% (0% in US). Moral hazard everywhere.

  44. @AMcGrath

    “Of course Colm is right at the end of the day any guarantee which is not possible to honour is just foolish – and moreover when we finallu have to face that fact – we have tainted our reputation for nothing,”

    Any guarantee which is not possible to honour is immoral. We should never have done it. That’s why we feel so bad in this country. We know we have all be made look like a shower of chancers.

  45. @ Eureka

    Has anybody any idea the political damage it would do if Ireland was to shun the eu in favour of an IMF only bailout!

    Stay in the bath longer and you may realise that this is a a non-starter.

    Why would the countries with big quotas bailout banjaxed European countries alone, when there is an existing joint mechanism?

    @ David O’Donnell

    Recent empirical evidence would suggest that it is unwise to underestimate the number of fools in Ireland, or the ability of said fools to elect other dangerous fools to positions of power and influence where they do, and have done, untold damage.

    Well said.

    “Rise and Follow Charlie”

    The worst start for a new government is that it would spend the first weeks trying to string a strategy together and allow whatever impact that can be made in Europe dissipate.

    The CB, NTMA, NAMA and the DOF have about 2 months until the commencement of the 31st Dáil to have a credible command of the facts and proposals to make.

  46. Prof. John Kay in the FT today: “It is sometimes tempting to think that guarantees that are not called upon do not cost anything, although this mistake is not one that banks themselves make. Guarantees, implicit or explicit, mostly do not cost anything. But when they do cost something, what they cost is usually a lot. The implicit guarantors of Fannie Mae and AIG – US taxpayers – have discovered that. Irish – and German – taxpayers are beginning to learn the same lesson.”

  47. “Why would the countries with big quotas bailout banjaxed European countries alone, when there is an existing joint mechanism?”

    Well, if you don’t ask you’ll never get. It’s quite obvious from what the IMF officials have said in public that they think the solution imposed by the EU is not a solution. They pretty much had to accept it in the face of the combined determination of the EU folks to act in the short term interests of the core, and of the Irish Government to engage in a happy-happy make-believe that would allow it to prioritise the desires of the core over the needs of its citizens.

    A new government should at least try talking direct to the IMF, on the offchance that it is prepared to act in a principalled way when given the opportunity.

  48. Many countries (e.g. Finland) gave bank guarantees in 2008. So why did Ireland’s bank guarantee end in catastrophe? Let’s look at some elements of the Finnish guarantee:

    1) It was only applicable to banks that were solvent
    2) There were limits on the amounts guaranteed (overall/monthly/by debt class etc.)
    3) Only new short-term and medium-term debt was guaranteed (no existing, no sub)

    Other countries (e.g. Denmark) also explicitly reserved their bank guarantee program for solvent banks. If a bank became insolvent then it was to immediately enter a winding-up process, and would be removed from the guarantee program. These guarantee programs were designed to be solutions to a liquidity problem and had inbuilt constraints on being expanded to become solutions to an unbounded solvency problem. While there would have been some taxpayer loses due to the guarantee in a bank that was later declared insolvent, these would have been limited in time and in extent.

    If we had just copied what Finland did the framework in which all subsequent decisions were made would have been quite different. There still would have been a massive fiscal deficit, but there were would have been a coherent framework for resolving the banks which imposed a clear bound to taxpayer exposure in a clearly insolvent bank. By simply pointing to the framework that had been agreed and approved by the EU Commission in late 2008, a bank wind-up program could have been started with the aim of imposing losses through the chain of unguaranteed creditors.

    Now at this point the ECB/Ackermann etc would no doubt have jumped in and tried to prevent hitting seniors in return for providing liquidity to the remaining Irish banks, but the negotiating position of the Irish government would have been an order of magnitude stronger, and I believe that a common EU-wide approach might have been possible, which is what the IMF are now pushing. At least people would have seen that the government was doing the job it was paid to do by representing the interests of the taxpayer, and following through on a reasonable strategy, that was based on those used by the Nordic countries (who all had to fix their banks in the early to mid 1990s and so had some experience in the matter).

    Instead we got a bizarre solo run followed by months of delusional thinking about the true state of solvency of the banking system followed by years of ineffective ad-hoc measures that never worked. And it is not over yet. A truly epic fail.

  49. @ BeeCeeTee

    Well, if you don’t ask you’ll never get. It’s quite obvious from what the IMF officials have said in public that they think the solution imposed by the EU is not a solution.

    Ask of course unless it would make the situation worse!

    Last May, Republicans criticised the IMF’s involvement in the Eurozone rescue fund as a bailout by the US.

    Now, with an impending battle with Obama on the deficit, Ireland bypassing europe would likely be unwelcome by both the WH and Congress.

    Here we are again with a lot more eagerness for outsiders to solve our problems than we have in addressing issues that are under our own control.

  50. @Michael H,

    “Here we are again with a lot more eagerness for outsiders to solve our problems than we have in addressing issues that are under our own control.”

    +1

    What is it that causes us to consider focused international attention and intervention as being more than sufficient compensation for parading our inability to govern ourselves responsibly? It was exactly the same surrounding the Good Friday power-splitting (Sunningdale for slow learners) Agreement.

    It’s like a child who feels it has to do something really off the wall to attract its parents’ attention. When will we grow up?

  51. @ Paul Hunt

    As Polonius in Hamlet said: “Though this be madness, yet there is method in’t.”

    When Haughey became taoiseach, a British businessmen remarked to me: Everyone in the country appears to be on the make from the prime minister down!”

    Later, lawyers as public contractors became multimillionaires investigating shenanigans many of us had been aware of or at least strongly suspected.

    In the current situation, it appears that too many of the comfortable do not want to rock the boat; why change if the foreigners can sort it out by restructuring debt?

    The 2 ‘independents’ can set out their demands on the Finance Bill and since the last general election, in addition to a raft of other allowances, they collect €280,000 in special tax-exempt funds and literally can spend it on whatever they like – – no audit, no questions asked.

    Meanwhile, desperate people among the invisible unemployed are at their wit’s end.

    http://www.finfacts.ie/irishfinancenews/article_1021454.shtml

  52. Maybe in such August company I should hesitate but it seems to me that The US, The IMF and Sinn Fein are all singing from the one economic growth model sheet.

    Gerry Adams on RTE Morning Ireland yesterday morning suggested the financial institutions/players (central/national banks, shareholders, Bondholders, investors et. al. ) should look after themselves. Though I agree that the pace of this should be managed carefully – nothing rushed.

    The IMF suggested the same according to yesterdays statement when they suggested the ECB should increase the size of their fund to deal with the crisis and put less pressure on the ordinary taxpayers of Europe to maintain and increase consumer demand.

    The US need to boost their economy by increasing consumer exports so they too need cash in European consumers pockets (25% of US exports). They have seen how pumping the banks full of capital has not, in two years, filtered down to the ‘real’ economy – time to try something else.

    Banks in Ireland, the UK and Europe in general are not lending to SME businesses that require working capital to maintain and fund growth and investment. Investment is being funded by cashflow or the business’ are stagnating and will eventually die in the current economic environment.

    Ireland/Europe needs to keep cash in ordinary peoples’ pockets and tax it from there. The consumer physcology of ‘cuts, unemployment, closure etc.’ is traumatising consumption and therefore the economy.

    Yesterdays oversubscription for the bonds is an indication of how these things will work.

    It’s all about risk and interst rates – you all know the format.

    Investors need to invest, banks need to bank and consumers need to consume – it’s how our world works.

  53. @Paul Hunt
    Govern ourselfs ? – I was under the impression that under the Euro system the Irish Central banks chain of command went far beyond Dublin to the halls of Frankfurt.
    Why you concentrate on the Irish fiscal pygmy while leaving outside the shadow bank ogre from these discussions is beyond me.

  54. @Michael H,

    Agree completely. And to continue my child behaviour-related analogy, when we get the parents’ attention and they try to get a grip – ineptly, as parents are often wont to do – we throw a ‘Kevin-the-teenager’ wobbly and cry “It’s sooo unfair”.

    The support package reflects the institutional frictions between the IMF and the EU and the legal, institutional and politcial constraints under which the EU is operating. I agree it is not fit for purpose, but it is a ‘holding job’ until something more comprehensive is worked out at the EU level. It has two objectives – to provide the necessary sovereign support that the bond market is unwilling to advance and to provide incentives to implement the internal reforms that will minimise reliance on the support.

    A rational polity with a sensible system of governance would acknowledge the deficiencies of the package and strain every sinew to extract itself from the circumstances that occasioned its provision. But what do we do? Bitch about the package, harden even harder the hearts of our peers on whose support we rely and evade or postpone tackling the reforms that would accelerate our escape and allow us to avail effectively of the eventual EU-wide reforms.

  55. @Paul Hunt
    The function of the fiscal / bank life support is to keep the patient alive long enough so that capital / blood extraction can continue.
    The internal reforms that you allude to will indeed improve effeciencey but this new found surplus will be merely used to service interest to feed consumption elsewhere – the whole euro economic model has no space for capital creation as this would effect the profits of the bankers who reley on the minimum reserves necessary to maintain the artificial profit margins that private utilities owners always seek to maintain their lifestyle at the expense of the Industrial ecosystem.
    I sincerely hope you merely lack vision as a conscious effort to sustain such darkness is beyond my imagination.

  56. @Keith Cunneen,

    Both your hope about a lack of vision and your alternative of an effort to sustain darkness are unfounded. We’re already moving off-thread here, but the points you raise are fundamental and I have strong views. For now it is probably sufficient to highlight the gross inefficiency and inequity of the structure and operation of global financial capitalism and the serious detrimental impact it continues to have on global economic welfare. These issues remain to be addressed and are being tackled only in a fitful manner as the forces who benefit from a maintenance of the status quo wield mighty weapons to prevent reform.

    In this context there is very little Ireland can do except attempt to get its own house in order and to support any multnational efforts to address these unresolved problems.

  57. @Paul Hunt
    There was once Industrial banks in this country……….
    We can at least stick a finger in the eye of the ECB and create our own credit rather then the ECBs /ICB liquidity life support – what gives those bozos the right to have a monopoly – they have lost any patrician elements withen their circles , if indeed they ever had it – enough with this feudalism

  58. @ Paul Hunt

    There is a current discussion on academic freedom underway in The Irish Times.

    It would be good to say that it’s a good thing rather than say as George Bernard Shaw reputedly said about Christianity, that it would be a good thing.

    We will surely know that Ireland has made progress if a repitition of a situation like the current quiet controversy about ‘unlawful’ payments at UCD, prompts staff with tenure to break cover.

  59. @Michae; H,

    We’re going way off-thread here, but I don’t think you’ll get any traction seeking to bait academics in this fashion. We should be grateful for the efforts of those on this board. Greedy and stupid things are done in the best governed institutions. Matters of this nature are best dealt with by clear disciplinary procedures or by the courts if the matters occasion their attention.

    In my view, the Dail, rather than tenure, should provide the best protection of academic freedom and the expression of views that might upset the powers-that-be by inviting testimony from those who have a case to make and evidence to support it. This could be heard by Dail Cttees and be contested by any others offering expertise and evidence.

  60. Paul Hunt’s post at 1.14pm inst.

    Couldn’t agree more with you – re my initial posts this morning that appear not to have passed ‘moderation’ and posted on this thread.

  61. I’ll take the last one back and put it down to a busy day !

    Great debate and glad I found this site today for my first post on the web.

    Well done one and all !

  62. I would urge you all to read the latest blog from Jesses cafe American – it relates to Obamas latest double speak but I feel it somehow encapsulates the false “competitiveness” mantra of this blog.
    This anti – humanist maosist giant gerbil wheel will be the death of us all both spiritually and physically.

    Jesse’s Café Américain

  63. @Keith:
    “This anti – humanist maosist giant gerbil wheel will be the death of us all both spiritually and physically.”

    That’s OK: I was planning on dying anyway.

    bjg

  64. @Paul Hunt
    MH does make a very valuable contribution, from the right of the political spectrum (the blog could do with a left wing equivalent). The contributors rarely respond to off thread comments so this is probably not the forum if he wants a response on this but he has been allowed to raise it.

  65. @Brian J Goggin

    Yes death and taxes………. although it matters wether the taxes pay for utilities or interest and indeed the manner of ones death is important for some.
    It can be tough for ones sanity to stare into the great lidless eye for any degree of time – perhaps it is best to let the orcs come and scour the shire – oh I forgot they have came and went and yet are somehow still with us.
    There is something very sad about FF functionaries don’t you think – they seem to be missing something of substance somehow , perhaps we all are now – it looks pretty much over from my perspective.
    Roll on the dark ages for a rest.

  66. @Oliver,

    No problem with MH’s contributions – either on or off-thread – and not because I generally agree with them. But this thread is about how the institutional and procedural frictions between the IMF and the EU – and the EU’s internal constraints – have offered up a support package that is economically damaging to Ireland. It raises an important question about the extent to which – or not – a viable Irish exit strategy will figure as these frictions and constraints are addressed and resolved in the corridors of power in DC, Brussels, Frankfurt, Paris and Berlin.

    MH’s point is for the future and in a broader context. I might have more sympathy for the protesting academics’ desire for continued tenure to secure freedom of expression if those among them with competence and expertise had been more active in expressing dissent at the expanding catalogue of policy and regulatory failure during the last decade.

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