The estimate for Q4 GDP in the UK has come in at negative 0.5 percent (well below expectations of mildly positive growth), with the deviation ascribed to the terrible December weather.
Ireland’s Q4 GDP number does not come out until March but we should not be too surprised if a similar undershoot happens here, in view of the similar weather in December.
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.
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.
Comment: Means the EFSF is inadequate in size and function, particularly for countries with large banking systems, such as Ireland.
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.
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?
The debate about the banks has gone off the boil. But, as John Ihle argues in yesterday’s Sunday Tribune, the next six months will be a very active period in the restructuring of the Irish banking system (article here).
Fixing the credit system and minimising the cost of the rescue to the State have been the focus of the debate. The first has strangely faded from view. The second has acquired an ominous twist: tension between the ECB (which bears increasing risk as funder of last resort of the banking system) and the State (which is effectively on the hook for bank losses given limits on creditor loss imposition). The ECB wants to shrink the balance sheets of Irish banks to minimise its exposure, even at the cost of “fire sales”; the State wants to minimise bank losses to give it a fighting chance of regaining its creditworthiness. Like the ECB, the Central Bank of Ireland is increasingly on the hook for funding the banks through its Emergency Liquidity Assistance, although things are complicated by the fact that first on hook for losses on this assistance will be the State itself.
This basic funding versus capital tension is most likely behind the conflict pointed to by John Ihle between the Central Bank/Financial Regulator on one side and the NTMA/Department of Finance on the other. How this conflict plays out will have a significant impact on how the restructuring unfolds.
Some of my students today complained – softly – about the workings of the Back to Education Allowance. Like many such schemes globally it allows for some mechanism to maintain welfare payments whilst returning to full time education at both second and third level. Laudable enough, although I haven’t seen this evaluated in terms of impact but then again what is new for Irish policy.
Even as we are distracted by political upheavals at home, the debate on how best to reorient the euro zone’s bailout mechanisms continues. The proposal gaining most traction, with at least a degree of German support, is to allow countries in difficulty to use EFSF funds to buyback their own debt on the secondary market. The initial focus is on Greece, but any new mechanism should be available in time to Ireland. (Wolfgang Munchau provides a critical analysis here.)
The attraction of buybacks is that they allow a country to reduce the face value of outstanding debt without a formal default. A disadvantage is that they can be gamed by bondholders: it makes sense for bondholders to hold out for a higher price if a buyback is really expected to improve creditworthiness. One partial solution that I mentioned previously is for countries to buy back the debt accumulated by the ECB through its Securities Markets Programme (see here).
Writing on Friday before the latest developments, Arthur Beesley reminds us of the stakes:
[T]he debate merits serious attention across the political spectrum in Dublin. Political activity for the next . . . weeks will centre on the election, but neither the Government nor the Opposition can afford to lie low on this front.
The debate on Greek debt takes place amid an intensive negotiation of key reforms to the European Financial Stability Facility (EFSF) rescue fund, including lower interest rates. Any inattention here would hamper Ireland’s argument for a rate cut, which is already difficult. But the Irish dimension does not end there, far from it.
. . .
[S]etting the election date brings clarity as to when a new government is likely to take office. From the perspective of European talks, the timing is tricky enough. Polling day is March 11th. EU leaders are working to make final decisions on EFSF reforms and a new permanent bailout fund at a summit only 13 days later.
There will be time – just about – to install a new taoiseach. By then, however, the really tough talking may well be done.