On Renegotiation of the EU-IMF Deal

One of the features of political commentary everywhere is that it tends to be dominated by a smallish cadre of insiders who view themselves as “sensible people” and usually figure they know what needs to be done. For example, Washington DC-based political commentary tends to be dominated by folks (Paul Krugman’s Very Serious People) who think politics should be about bi-partisanship and dealing with a crisis in Social Security. In reality, wide political differences make passing bi-partisan legislation impossible and the crisis in Social Security isn’t such a big deal.

In Ireland today, the sensible people have decided that the election should be about two themes. First, that any talk of renegotiating the EU-IMF deal is simply misleading the electorate, with some columnists resorting to much stronger rhetoric. Second, that the electorate should be focusing on the fact that Fine Gael and Labour have different policies. (I’m not singling out any columnists in particular but a few random selections from the Irish Times opinion page should confirm these points).

On the EU-IMF programme, the sensible people seem to have missed that the deal was going to be up for some type of renegotiation even before the ink had run dry. I’ll offer the following observations:

1. The EU-IMF negotiators knew there was going to be an election when the deal was put together and met the main opposition parties during their time here to prepare for the inevitable change in government.

2. When asked in December about what might happen after an election, the IMF’s Ajai Chopra was very relaxed about the idea of the plan being changed saying “as long as the overall objectives of the program are agreed to by all, and that does seem to be the case, the specific policies as to how to achieve that can be discussed.” At a press conference on Thursday, IMF Caroline Atkinson, Director, External Relations Department, stressed the same message. Atkinson refused the opportunity to say that the deficit targets in the programme must be kept unchanged

3. When Mr. Chopra was asked about whether there was a possibility of the overall interest on the package being renegotiated, his answer was “For the IMF, no. This is the rate that is applied to all member countries.” This answer clearly leaves the door open to the idea that the EU rates could be renegotiated. Also, because Ireland’s IMF quota is just about to increase and is likely to increase substantially further in a year or so, the underlying interest rate at which the IMF will be able to lend to Ireland will be about 100 basis points lower than announced last November. This will make the IMF loan rates at least 100 basis points lower than the EU equivalents, even when controlling for the fact they are variable rather than fixed rates.

4. The argument that Ireland cannot unilaterally renegotiate the interest rate on the EU loans is, of course, correct but the implication that the interest rate shouldn’t be discussed in the campaign is a little silly. We are borrowing from the EFSF and EFSM at the rates that these organisations have set for their lending operations and so these organisations would have to change the rates that they set for all countries, not just Ireland. However, right now, they are only lending to Ireland and, at a time of great change in European institutions, the next Irish government would be remiss if they did not raise the issue of lowering the interest rate.

5. Much was made about Jean-Claude Trichet’s comments at his press conference this week that Ireland needs to “apply the plan”. Some seem to interpret this as somehow meaning that the man in charge of the EU-IMF programme had just said that nothing could be changed in the plan but this is simply not correct. M. Trichet is, of course, very keen to see key aspects of the plan implemented, particularly the banking sector measures, and so one wouldn’t expect him to say anything else. However, the ECB does not set the interest rates on the EFSF or EFSM loans and, frankly, I doubt if M. Trichet cares very much about this or about whether there are small adjustments to the fiscal plan.

On the other point being pushed by the sensible people, that Fine Gael and Labour have (gasp!) … different policies, it might be worth pointing out that the last time an Irish election produced an overall majority government was 1977. Coalitions, featuring programmes for government thrashed out between parties with different policies, are now the norm in Ireland. Since Fianna Fail have no chance of forming an overall majority government, perhaps it might be worth also emphasising that they too have different policies than any of their potential coalition partners.

52 thoughts on “On Renegotiation of the EU-IMF Deal”

  1. @Karl Whelan

    Yes +5 Sensible enough yourself!

    http://www.irisheconomy.ie/index.php/2011/01/28/further-reductions-in-imf-rate-are-likely/#comment-120840

    Fact remains – most of this so called ‘Bail-Out’ is simply redirected to the Vichy-Banks …. and Irish are failing abysmally to communicate this FACT to our European partners in EZ & EU…. First Elephant remains – Restructuring/Default on Vichy Bank Debt ……. Second Deficit Elephant remains ours …….. imho, we do not, nor will be have, sufficient resources to feed both elephants …. and main political parties are refusing to communicate this Fact to Irish citizens …… so how can one reasonably expect them to communicate said fact at European level?

  2. @ Karl

    the interest rate will without doubt be ‘renegotiated’ lower next month, although i use the term ‘renegotiated’ lightly, as i think at this stage the EU themselves want to reduce it, as the EFSF is clearly not working as-is. Something more like 4% is definitely possible, perhaps even probable. The only real question is whether we have to give something up in return, ie corporation tax. I believe there will be huge pressure to do so, but ultimately we do not have to as long as we hold our nerve. As i said, the EFSF as-is does not work, so its very much in the EU’s interest to figure out a way for it to work. We, Ireland, don’t have to ‘renegotiate’ very much, we can let Europe do most of the work themselves.

    I’m more skeptical about the deficit-reduction plans, i think they’ll have to be held in check for now, although in 18mths time they may be up for discussion if the world has settled down somewhat and we have started to make genuine inroads into the benchmarks we are supposed to be hitting.

    But you’re right – completely dismissing suggestions of our ability to renegotiate is not a sensible viewpoint at all.

  3. 1) As I understand it we are still “negotiating” the interest rate. I see it as a very spurious exercise, the competition as to who will be the best negotiator. Noonan v Lenny v La Burton?? Who knows? not much in it I’d say, certainly wouldn’t swing my vote. Now SF/IRA say they will kick the IMF/EU out, default on bank debt and close the fiscal imbalance with a wealth tax. Well at least that is a real choice compared to who has the best wheeling and dealing skills.

    2) FG and Labour are more at odds in their “taxation vs expenditure” approach than I have ever known them. Labour are 50/50; FG are 75/25 in favour of reducing expenditure. It is really plain as a pikestaff that public service pay/pensions and levels of social protection are quite unsustainable. It is hard to see how Labour can buy into the necessary adjustments. At some stage, though not immediately, this will lead to a FG/FF arrangement to take the necessary steps.

  4. A 1% reduction in the interest rate on the EU funds of €45 billion would save €450 million per annum. The planned GGB deficit for 2011 is …….

  5. @ BW

    I think you have made an important point.
    If we do negotiate, come to a heated arrangement with bondholder or default there is no way we can do it with our current welfare entitlements, public sector pensions and maybe pay.

    But it shows the absence of leadership within the political class and intellectual incuriousity and probably cowardice, that they fail to speak these truths.

    And when that string is pulled the next know to untie will be all the mortgage default/renegotiation that will need to occur to tidy up the first mess.

    It is in these times that I appreciate the virtues of a Declan Ganley, rather than some gobshite whispering sweet nothings in yer ear.

  6. The labeling of people as Krugman did does not impress me much.

    ‘Very Serious People’ – does not seem to be a positive adjective in this context, it is possible to be seen more of an ironic/sarcastic dismissal of people instead of properly dealing with their arguments.

    The EFSM & EFSF rates are likely to be set high, it is after all a lender of last resort. Events can of course (& probably will) have an effect on the rates. Would a change of government as a singular event classify as such an event? I don’t know & my personal belief is no.

    I agree that it is no surprise that two different political parties have two different policies. Analysing the policies suggested by major political parties could & should be done. I might be cynical but I don’t hold politicians above saying things that might not be entirely true just to get elected. If anything is found to be giving unrealistic expectations I believe it is fair & proper to call them out on it.

    My (possibly cynical) belief is that politicians will take credit for good events outside of their control and they’ll blame circumstance for bad events that actually are in their control. They’ll do it for as long as they get away with it & to get as responsible politicians as possible I believe it best to not let them get away with it.

  7. I am not Irish and do not know a lot about Irish politics but it seems that Sinn Fein and Gerry Adams are only ones who show genuine willingness to fight. If you want to take the path of Iceland and fight, I don’t see another solution than to vote them.

  8. Karl,

    An excellent intervention – and I suggest that you think about penning an op-ed somewhere on this!

    The idea that a renegotiation would be both just and ultimately required has had widespread support among internationally renowned economics and policymakers – right and left, Nobel Laureates, former Chief Economists of the IMF, etc.

    I think there’s several drivers for why we see such a surrender faction:

    a. A lot of our policy people, commentators, media people and even politicians are actually heavily emotionally invested in the whole European project and the EU, etc. There’s a whole lot of baggage there that doesn’t compute with the behavior we’ve seen from our European “partners” during the last few years.

    For example, validation back home from being a “big man in Brussels”, chance to get a European job, hang out with the big boys/girls in the SPD/Christian Democrats or when they visit the IIEA, being an insiders in big important discussions, etc. View that “Europe” helped drag us from a parochial past into a modern. Status from being able to speak French, etc.

    The idea that these people can be our enemies and actually need to be confronted threatens this whole system of thought and a lot of self-worth for these people.

    b. There’s a “learned powerlessness” that, I think, must stem from a combination of our colonial history and small size and long history of poverty.

    c. Allied to b., with the notable exception of Northern Ireland, we’ve never had a real foreign policy based on long-term hardnosed national self-interest.

    Its all being based on a spurious combination of differentiating ourselves from Britain (good bye Sterling!!), begging a few cents in structural funds added to by a dash of sanctimony around irrelevant issues (e.g. Gaza, anti-nuclear stuff).

    As a result, our decision-makers, commentariat and policy people have never had to build the muscles required for hardnosed foreign policy again people who, for example, send their soliders to die in places like Iraq or Afghanistan or go toe-to-toe with China or Iran.

    Partly to this this, there is no hard well-defined concept of “national interest” that motivates

    You can see this, for example, in the fawning attention and support given to Obama (despite his attack on our tax regime) while we had 2 of the most pro-Irish candidates ever to stand for election fo

    d. Also, to be frank, there’s still a tall poppy thing in Ireland. I have no doubt that a lot of this is motivated by the idea that the Gilmores, Kennys, et al are “getting above themselves” in questioning our masters.

    All of this, combined with a recruitment mechanism that ensures that our politicians and civil servants aren’t usually the sharpest minds we have, lack business or financial experience, have little true foreign exposure, etc – have left us in this sorry state.

  9. Colm,

    You are of course right that a one percentage point reduction would only be one small step, and it is well to stop politicans getting carried away. But there are different ways to look at it. A one pp reduction would lower that average interest rate on the outstanding debt by about a quarter of a percentage point when the European money is fully drawn down. From the point of view of debt stabilisation, a quarter point reduction in the average interest rate is equivalent to a quarter point increase in the growth rate. I don’t have to tell you that quarter point increases are not easy to come by in the current environment. It takes on all the more importance given that we are staking close to the edge.

    Ireland needs to be fully engaged in the discussions, making it clear what we are doing to regain creditworthiness and the unnecessary additional challenges we face give certain design flaws in the support mechanisms. Karl is right that the main impetus for changes will be because they are in the interests of the more powerful European countries. But I think we can play a role in focusing the discussions on real solutions — the EU seems to have a wonderful capacity to go off on tangents. However, it would be more constructive, in my view, to drop the word renegotiation.

  10. I am really appalled by the Irish Times on this. Back in November they were in despair at the ineptitude of the elite and now they are right back onside. The same sensible people who said the car was on the right path just as it was being driven into the ditch are now back observing the vehicle declaring everything is fine.

    Ireland just doesn’t do accountability.

    It is a pity to see the Sunday Tribune go but in Shane Coleman the government will lose a very important stenographer.

  11. It is of course a reasonable position for political parties to argue that various terms of the bailout deal should be renegotiated.

    It is also reasonable to point out that overpromising can create problens when expectations are not met

    Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, chief economist, Deutsche Bank, have written a policy brief advocating debt reduction wihout default:

    http://www.finfacts.ie/irishfinancenews/article_1021566.shtml

  12. Forgive me, but I sense some Hopium smoking here.

    1. Can we repay our debts? No. Income is insufficient. QED.

    2. What do you do when both you and your lender accept the reality of situation? You either ‘negotiate’ or … ??

    3. Sovereigns are just that sovereign. So guess what … ??

    4. We could exit this debt predicament, but this requires such leaps of imagination, faith and hope, that its plain incredible. Energy and credit costs (economic nutrients) are too high.

    5. There comes a time when you either face up to the challenge and take resolute action, or continue with the wishful thinking, sit in the corner, sulk and mutter to yourself. Time’s up.

    6. This debt predicament is not a ‘game’, with some sort of virtual equilibrium. Its a tad more serious. Think: Why did that mother die from hypothermia? Want someone to torch themselves before you get your ‘sh1t together’ -as they say?

    BpW

  13. One issue is that Brian Lenihan, a barrister, has been skilled at sucking the hacks into wordgames, the latest about whether there is something called unilateral negotiation, which is his characterisation of the FG/Lab position. And when the pol corrs get a headache from that stuff, it’s easy to revert to the horserace reporting e.g. aren’t FF handlers playing a blinder on the debates? Just like Bertie played a blinder against Enda in 2007. How’s that working out for y’all?

  14. Given the amazing speed of deposit withdrawals from Irish banks, I find myself wondering not for the first time (a) what exactly is the net cash position of the Irish banks and (b) what would be their position in the event of the ECB deciding to play bouncer in the event of any ‘serious’ bailout re-negotiations? The likelihood is that Ireland can renegotiate SFA. Any renegotiation is dependent upon the flexibility of the more solvent EU nations.

    Regarding the cash position of the banks, I was told by an accountant recently that a particular bank branch in a provincial town was so low on cash that the bank manager phoned the local supermarket asking if it could bring its lodgment forwards that day.

    Just had a look in the tin box under the bed, and it is miserably bare.

  15. Lenihan must still have some sort of a caste spell over the journos based on historic outperformance of his caste and race memory of pecking order and entitlement but the brahmins have condemned the nation to the first rich world sovereign default since 1948 . The truth is that Lenihan and the rest of the post 1921 catholic elite have destroyed almost everything. It is written in the share prices.

  16. @Alchemist.

    Ireland does neeed to regotiate. It needs to renage, yes renage, on any committments given to pay private bank bondholders. The banks should be folded up. The bank bondholders should not get one more cent.

    If that means an exit from the euro, so be it.
    We need to draw Barry Eichengreen’s bright red line with a pen, before the line is drawn in blood.

  17. @ Karl Whelan

    I believe that ‘Very Serious People’ was invented as a term by economist Duncan Black (aka ‘Atrios’), someone whom Krugman knows well

    @ Jesper

    Very Serious People’ – does not seem to be a positive adjective in this context, it is possible to be seen more of an ironic/sarcastic dismissal of people instead of properly dealing with their arguments.

    I disagree. It seems the perfect antidote to We Are Where We Are and There Is No Alternative. In the US case, highlighting the hypocrisy and sleight-of-hand in well-off Washington insiders whose main preoccupation is in cutting state benefits to elderly, the poor and the sick is the very least of what such damnable types deserve.

  18. Karl, I don’t think anyone who more or less understands this IMF EFSF EU bailout thingy (ie excludes many loudmouth journalists) has any problem with the fact that details will be changed by a new government. I actually think certainly the IMF and possibly the EU would be a bit alarmed if there were no rearrangement of how to implement the plan – as this would make it look anti-democratic.

    Similarly I don’t think anyone in the markets expects that a new government will not say they think the interest rate should be reduced, length increased etc – on the basis that it may be self-defeating to keep it as it is.

    Where there is a problem is in the impression that politicians are seeking to give – that once elected they will threaten to tear-up the agreement if the EU does not sit down and do some tough negotiating, this time with people who will actually play their hand.

    It is dressing up a REQUEST as NEGOTIATION.

    There is a dual deficit problem – bank insolvency and structural deficit. The EU/IMF credit line is as much a bail-out of the current public sector payroll as it is of the banks and any government that did not access it would be ousted y the public sector.

    Europe knows the new Irish government has no choice but to access the credit as it has not prepared the population for the alternative. So there is no NEGOTIATING position, just the capacity to argue a case and make a request.

  19. I actually think certainly the IMF and possibly the EU would be a bit alarmed if there were no rearrangement of how to implement the plan – as this would make it look anti-democratic.

    So, it was all a cunning plan the first time they rammed it down our throats, then?

  20. Our elite are too dependent on foregin credit – they want their bank accounts to remain in Euros and that pretty much sums up our predicament.
    Iceland was blessed with a collapsed Krona so therefore most sections of society including the middle class has nothing left to lose.
    You have to be at least serious about rejecting the Euro as that is the basis of their power – without that you have no negotiating postion.
    It seems that Ireland is governed by a section of people who deposited money from bank credit and not people who owe bank debt – the huge distortions and failures in the domestic economy is primarily due to this one fact.
    I am in favour of hard money but hard currency simply destroys all activity.
    The masters of the Euro have two options – destroy the periphery to feed a yield on overvalued debt much like Volcker did to the US to save the dollar or recognize reality on a new Euro balance sheet.
    As long as there is no coherent resistance bankers will nearly always endeavor to keep the value of paper alive and kill production.

  21. @remnant

    Interesting analysis of the claimed colonial mentality while invoking foreign notables to support your case.

    There is no acknowledgement of where the main responsibility lay and the failure thus far to reform a broken corrupt system.

    You were likely a Fianna Fáil cheerleader during the good times but as with East European apparatchiks after the fall of the Berlin Wall, it’s easy now to change coats.

  22. There is an electoral campaign going on ,so it is only natural that Ireland is currently engaged in navel-gazing ,but I think it would be worthwhile that you would consider some foreigners point of view ,only because it is with them that you will need to talk about your present predicament.
    • I agree that it is totally unfair that Irish taxpayers will have to save the skin of foreign bondholders, but this is not a relevant subject any more: an Irish government decision to give a blanket guarantee to the bank creditors made private debts into public debts .For the European public all Irish debt now is a sovereign debt.
    • Trichet is a convenient scapegoat ,but please consider the horrid situation he is in now: the central bank was not supposed to have any sovereign debt on its balance sheet, now it is awash in Greek and Irish sovereign debt. Private Irish Bank debt should be a part of its assets roughly in line with the share of the Irish economy into the Eurozone economy. In order to maintain the liquidity of your banks he has to loan them money so that their depositors can take that money out and run and the Irish assets on its books balloon out of proportion. Trichet’s only hope is to find somebody( the EFSF and EFSM) in whose lap he can dump the whole mess.
    • Germany accepted the creation of the Euro only with a no bail-out clause. Now Merkel has to explain that the German taxpayer will have to rush to the rescue of a country which ,not too long ago boasted of a standard of living far above their own and whose populace engaged in the type of wild real-estate speculations that are an anathema to the daughter of a protestant minister (Germany is a country of renters).
    • Sarkozy will run for re-election next year and its prospects are not too good .France desperately needs to keep its AAA rating otherwise the interest payments on its sovereign debt will go through the roof. The next budget will certainly entail tax increases ,in spite of the French tax rates being among the highest in the world. Putting pressure on the Irish corporate tax rate is a good diversion and is sure to be popular all through Europe.
    • It is dangerous to promise a bail-out renegotiation for electoral purposes when there is next to nothing that Ireland can bring to the negotiation table .Using foreigner as scapegoats is convenient but it is also risky because the foreigners might remember it.
    I think that the Irish bail-out will be repackaged because an Irish default is in nobody’s interest ,but this will happen irrespectively of the political programs of the Irish politicians.

  23. National pride demands negotiations so negotiations there will be.

    The things the EU might want from Ireland:
    -better financial regulation
    -a few countries want Ireland to increase their corporation tax

    What Ireland is willing to concede:
    -nothing

    An experienced negotiator knows to give nothing for nothing. The EU negotiator might have more than a little experience and be aware of that.

    The Irish negotiating team will know that if the threat of default is executed then the Irish government will run out of cash to pay wages (including theirs). I’m guessing that the EU team receiving them will be aware of it as well.

    Probable outcome is what?

  24. @Dominque
    The balance sheet is not awash with sov debt – please get your facts straight , I believe it is over 70 billion on a nearly 2 trillion balance sheet.

    The ECB oversaw a massive increase in currency on their watch while not increasing their balance sheet – this may be ok if you consider that they were not guarrenting this money creation.
    Yet they have implicitly forced a policey of non bond default in the Euro zone and well as deposits yet maintaining a illusion of 2% cpi inflation.

    They maintain this illusion by deflating wages with respect to currency creators who were allowed to criminally increase asset prices via monetory inflation.
    Therefore the currency might not lose any buying power per unit but wage earners do via deflating wages – this is in fact a form of inflation not recognized by the CBs directly – it is in reality the same phenomena as the relative altitudes of the two parameters change but remain at the same distance.
    The ECBs primary policey is that holders of capital always win wether on the way up through almost hyperinflationary asset price inflation or on the way down via wage deflation relative to capital.
    The duplicity of this evil organisation is truely amazing – the fact that it is not challenged in a robust fashion yet accepted like the word of God itself is astounding.
    Even now they continue to bang on about fiscal tightening yet most of the money creation was private in nature over the past 10 years of it rule !!

    I just do not know what to say to your verbal cattle prods – I suspect you get a sick kick out of seeing us dumb bulls get slaughtered in this satanic abattoir

  25. @DJ-R

    When you start from a wrong premise unfortunately the rest of the argument becomes spurious. You say:
    “• I agree that it is totally unfair that Irish taxpayers will have to save the skin of foreign bondholders,”

    which I think is universally agreed at this point. After that though you jump to the conclusion ….

    “..but this is not a relevant subject any more: an Irish government decision to give a blanket guarantee to the bank creditors made private debts into public debts. For the European public all Irish debt now is a sovereign debt.”

    but to believe that is to believe that it is possible to legalise the conversion of black to white. This law can and should be rescinded. If it is possible to pass a law which suddenly makes me resposible for my neighbours debt without my permission – then it should be even easier to remove it. With the law gone the overall debt situation will remain the same but it will no longer be possible for Barrosso, Bini Smaghi or yourself to rub our noses in that one – the moral authority will be returned where it belongs, and the situation will be clarified also in the eyes of the wider european public. I suspect that when the ordinary people of Europe are told the truth we would see a lot more support from that quarter. You have been critical of our leaders for whining – and I agree. It is time to stop whining and do something positive.

    A legal challenge/referendum should sort it out. Like it or not you can’t argue with democracy.

  26. Hello,
    This is the first time I have submitted a comment to this website. I discovered it last September and I find it informative, educational, and entertaining. For a project I am carrying out on the retail sector I have been reading the IMF report as well as Central Bank and ESRI forecasts. I am having a problem though and I hope someone out there can give me guidance. In essence I believe the projections for retail sales in the coming years are riduculously optimistic. For example, the ESRI’s last quarterly comment shows private consumer expenditure declining by only 0.75% in 2011 and 0.50% in 2012. Where I work everyone was shocked by the cuts in take-home pay when they got their January payslips. The cuts ranged from €100 to €260 per month in the department where I work. What surprised me additionally was the level of economic ignorance out there viz. when I commented to colleagues that we will have the same cuts and more for the next 3 years at least, they all seem shocked. I believe PAYE workers should look at their take-home pay in December 2010 and take 40% off that to see where they will be in 2014 given the direct and indirect tax increases coming in the next few years. Everyone I know is cutting their spending and saving like mad. Economists note that precautionary saving rises in a recession and, as far as I can see, there seems to be a belief that, at some point, people will start spending again when they see a stabilisation or partial recovery of the economy. The problem I have with that is that I do not see that ‘tipping point’ happening for at least 5 years. In the case of my own household we are saving as much as possible as a contingency against such possible expenses as unexpected healthcare costs, home repairs and maintenance, the need to change an ageing car in the next few years, etc. I wouldn’t want to have to take out a bank loan for any of these and I hope to be in a position to pay cash if or when such costs arise. So I do not expect to start willingly drawing down my savings in the next 3-4 years. So, my (long-winded) question is: how can retail sales be projected to only fall by such small percentages? I expect them to fall by 5-10% in the next few years. Am I missing something in the economic literature? Any help or pointers appreciated.

  27. @A McGrath
    Now that our banks’ deposits have collapsed we are paradoxically free to repeal the guarantee. And we should. We need to redraw the red line between sovereign and bank.

    We should also promise the EU huge political, administrative, economic and most importantly financial reform, for their sakes and even more for ours. The IFSC will have to adapt and I am sure it will. In return we must state what we need long term. We probably won’t get it. We will probably need to campaign long and hard before we do. We need to agree to any inadequate deal now under protest and stress that it can only be an interim arrangement agreed because they have a gun to our heads.

    We also need to keep the low CT rate for the medium term or we won’t be repaying anyone. In the long term I think we need a lowish CT rate to compensate for our small, peripheral status but it shouldn’t be among the EU’s lowest as that distorts the economy.

    The Knights who said “Only Game In Town” have now become the Knights who say “No Renegotiation”. Are they insane? If we don’t get this deal changed we’ll go bankrupt. We need to renegotiate continuously, although it is unlikely to be done in one go.

    A lot of journalists fear that there will be a re-run of the divided Lab/FG coalition. They are mentally marooned in the mid-nineteen eighties. On a dark and stormy night they went into the hot tub time machine and never came back. We are committed to a 3% deficit and have a deal with the IMF . The I M F. We’ll be balancing our budget. NO QUESTION.

    And by bigging FF up these journalists are making it more likely they will get the outcome they want to avoid. FF will oppose any cuts by the next government relentlessly. And any tax rises. And any privatisations. It’s the nature of the beast. The opposition have allowed FF an almost total free pass on austerity. It won’t be reciprocated.
    FF WILL DECLARE TOTAL WAR.

    The serious people will give out to them, as they did in the eighties, but FF will carry on regardless. They attack Labour now for not cutting enough? IN OPPOSITION FF WILL DESTROY LABOUR FOR CUTTING TOO MUCH.

    FF have RUINED Ireland. As completely as you can without an actual war. Why are the media still dancing to their tune?

  28. @Dominique

    I agree that it is totally unfair that Irish taxpayers will have to save the skin of foreign bondholders, but this is not a relevant subject any more: an Irish government decision to give a blanket guarantee to the bank creditors made private debts into public debts .For the European public all Irish debt now is a sovereign debt./

    If a government has to authority to make a specific decision it follows that a government has the authority to reverse that decision. Or to make an alternate decision to simply not pay another cent to the bondholders.

    This is a relevant subject and will remain one. It will remain a subject of economics and a subject of history long after this Eurpean elite, Sarkozy included have been limoged.

  29. @ Michael Hennigan – Finfacts

    “Interesting analysis of the claimed colonial mentality while invoking foreign notables to support your case.”

    Here’s what I actually wrote
    “The idea that a renegotiation would be both just and ultimately required has had widespread support among internationally renowned economics and policymakers – right and left, Nobel Laureates, former Chief Economists of the IMF, etc.”

    _you’re_ the one assuming that there couldn’t possibly be any Irish people among this group?

    “There is no acknowledgement of where the main responsibility lay and the failure thus far to reform a broken corrupt system.

    You were likely a Fianna Fáil cheerleader during the good times but as with East European apparatchiks after the fall of the Berlin Wall, it’s easy now to change coats.”

    Silly ad hominen – you know nothing about which Irish political party (if any) I support(ed)

    If you think the Irish political and business world is uniquely corrupt please check out the antics of some of the “core” EZ establishements – Helmut Kohl’s secret accounts, French government blowing up anti-nuclear protestors, etc.Clearstream scandal, etc.

  30. @ Jesper

    .”The things the EU might want from Ireland:
    -better financial regulation
    -a few countries want Ireland to increase their corporation tax”

    Well I think there’s a few things in addition to that:

    a. The ECB likely wants all of its deposits back from AIB/Anglo/BOI at some stage.

    b. Our sovereign debt repaid – punch a hole in some “core” EZ bank balance sheets if we went walkabouts on that.

    c. Us to stay in the Euro. Our exit would likely cause a lot of rethinking among peripheral European countries or even Germant. Bye bye global reserve currency – plus the beginning of a run on the ES, PO, GR banks.

    d. They also probably want things like any successor to the Lisbon Treaty passed – unless they’re willing to throw unanimity and the rule of law.

    Moreover, the maximum “give” we are expecting is actually quite modest spread accross all of the EZ’s taxpayers (e.g. a couple of hundred euro per capita).

    In addition, I’m assuming there’s at least some statesmen/women there who want to pursue the European project and realise that you can’t build a common Europe or political union on the basis of a constant threat to impoverish and pulverize the economies of smaller members. Goodwill is required.

    The EU is not sustainable as the “prison of the nations” no more than the Hapsburg Empire, British or Third Reich,

    @ Dominique Jean-Raymond

    Our silly ex-government gave guarantees on bank debt. However, in November, they had a gun put their heads by the ECB re. bank senior bond debt when they tried to walk away from this.

    There’s also the question of Trichet’s message to Lenihan in Sept 2008 – which I think historians will examine carefully.

    There’s still a bit of private senior bond debt left. I say we renege on this ASAP, withdraw the ELG and see how the argument with the French and German public opinion goes.

  31. @Remnant

    “There’s still a bit of private senior bond debt left. I say we renege on this ASAP, withdraw the ELG and see how the argument with the French and German public opinion goes.”

    If the market gets even a suspicion this is on the table then the deposits are gone – and the only way to replace them is by Honohan printing Euros as Irish government debt – claims which are nothing to do with Eurosystem.

    The “contents” of the Irish banks would then be “Irish Euros” and effectively there would be a parallel Euro that nobody would accept at par. It is genuinely difficult to work through this but you would possibly have effectively left the Euro at that point.

    If you are on the public sector payroll you could then forget about Croke Park, and probably a lot more at that point.

  32. @Remnant

    There’s still a bit of private senior bond debt left. I say we renege on this ASAP, withdraw the ELG and see how the argument with the French and German public opinion goes.

    +1

  33. @Grumpy

    Deposits are not Senior Bank Bonds, and the world already recognises that there’s major holes in the banks a balance sheets and that the sovereign guarantor is broke – so what difference does it make?

    To make this work – of course, we’d need to put in place the banking resolution framework ASAP (e.g. bring back the 100K desposit protection, tough-luck ECB + take a ticket!!!). We’d had this debate as well – but announcing a super-austerity plan to reduce sovereign borrowing needs.

    At this stage, I’m thinking leaving the euro isn’t such a bad idea.

  34. @remnant

    ELG covers deposits over 100,000. It makes a difference if you ditch it.

    You would need stand-by banks as discussed on previous threads, but the public sector would not stand for it………yet, maybe in a couple of years.

  35. 1. We have form in overestimating our hand, as the Treaty rejectionists did in 1921.

    2. Whatever can be agreed, it will only be in the context of a multi-country framework.

    3. Leaving the euro and such nonsense is for the pub stool; maybe Vladimir Putin would bail us out because the IMF would not provide a rescue separate from the current mechanism.

    4. Deposits of course are relevant if the banks would be downgraded to junk.

    5. We can make a big song and dance about defaulting on senior debt but Standard & Poor’s said this week that the total debts of the six Irish banks — Allied Irish Banks, Bank of Ireland, Irish Life & Permanent, Anglo Irish Bank, Irish Nationwide and Educational Building Society — is close to €275 billion, more than 170% of Ireland’s gross domestic product.

    6. We will not have to change our 12.5% corporate tax rate.

    However, how can we argue that American companies which earn large revenues from the German market, should pay tax on that revenue in Dublin rather than Berlin?

    Bloomberg reported last year that Google revenues from the United Kingdom totaled $840m in the third quarter – –  representing 12% of revenues  —  but the US firm paid no corporate taxes in the UK even though it has 850 employed there.

    http://www.finfacts.ie/irishfinancenews/article_1020847.shtml

  36. FACT Ireland is Bankrupt FACT Highest paid Public Sector and SW in World FACT Germans/French/IMF will not renegotiate until SW/PS/Croke Park fantasy addressed – All of these golden handshakes pension payments to retiring incompetent politicians and civil servants need to be reversed – No sign of anyone of the political agents for change who will be running the country further into the ground proposing to address this.
    Embarassing to see the lack of alternative ideas bar SF to deal with the wealthiest in Ireland who gained most from the Celtic Tiger years – Suggestion Hire 2,000 graduates to go through the dealings of all transactions made by the banks from 2007 til the present day to claw back retrospectively all the cash transferred out of state or to wives sons daughters cousins etc of all people who had aloan over 500,000 who are no longer paying their loans but holding on to their trophy assets while the Middle class in the private Sector subsidize the Social welfare , the Public Sector and the wealthy in Irish Society – Make the details of each persons assets and liabilities of NAMA public so we know who these are – to consider business plans and pay these chancers a salary is GUBU FARCE paid for by USC and emigration of the soon to be Paddy Proletariat Middle Class

  37. @MH

    However, how can we argue that American companies which earn large revenues from the German market, should pay tax on that revenue in Dublin rather than Berlin?

    Your argument is valid. But so is the argument that private banks gambling debts are not the responsibility of ordinary citizens, regardless of whether the bank was a borrower or a lender. Yet nobody is listening to that argument at present.

    However, it is the non-economic issues that act as a major deterrent to the Irish population accepting the fate prescribed for it.

    1. At the bank level, the burden is not being shared. Most financiers who tend to be the better off or manage money on behalf of the better off are getting off scot free. There is no equity in this arrangement.
    2. Within Ireland the burden is not being shared with even a degree of equity. The well paid senior public servants working and retired, university professionals, health professionals, senior bank staff, senior politicians are all being cosseted. Nowhere was this more evident than in the application of the USC or the decision not to cut off section 23 tax freebies. In effect the reparations bill was handed to working poor.
    3. The cost of us bailing out the bondholders is too high. This cost is being felt every day, every week not only in terms of less money but more crucially in terms of the social cost. Life long businesses failing, emigration, the debt burden, the lack of hope, and regrettably suicide are the real cost factors. These will ultimately be the factors that will propel the country to default.

    Leaving the euro should not a first choice and may sound like pub talk nonsense but there is life outside of the euro.
    If the European response to Ireland not paying private bondholders is to tell us to leave the euro, then not only is it an option but it is a good solution.

    To be part of a currency union or club, that has reams of legislation against government supports to private industry but decides that banks be exempted on the QT from such legislation and that they must be supported with hundreds of billions of citizens money is one Schizophrenia too far.

  38. Excellent and thought provoking thread. We are moving into a zone of greater uncertaintly and turbulence.

    @ Seafoid’s bleak view of our prospects for recovery rings true, and @ Alchemist enquires about the cash position at our banks.
    I doubt that Joe Lee is surprised by what has transpired. We didn’t listen to him.

    @ Keith Cummeen

    ‘The ECBs primary policy is that holders of capital always win, whether on the way up through almost hyperinflationary asset price inflation or on the way down via wage deflation relative to capital’

    I don’t always follow your arguments, but you are on to something there. Trade Development and Foreign Debt Michael Hudson. Economic relations are structured for the benefit of creditors and creditor nations.

    @ Michael Hennigan
    I doubt that you are as far apart from @ remnant as it may seem. S/he has tried to provide a ‘back of a stamp’ political economical analysis of the power structure obtaining in Ireland.

    There are core states, banks and NFCs and there are peripheral ones, as Immanuel Wallerstein has shown. EU solidarity has its limits.

    I think the ordinary citizen understands that we used to be ruled by an Ascendancy class, and that was largely replaced by a native Catholic elite. They tried to play with the big boys and big businesses, and got duly creamed. Game over.
    Without an an analysis of the realities of power, political sovereignty is of limited value.

  39. @Paul Quigley

    Its got to do with their 2% CPI inflation target , if you can explode the money supply and then implode it and yet keep the relative value of paper withen certain parameters it transfers huge amounts of wealth to people who reley on compound interest to live in this world.
    The wage earners and business investors get destroyed of course.

    I think of inflation more as the monetory supply which is now created chiefly by the commercial banks or more accuretly not at the moment.

  40. Removing the guarantee is being put forward.

    The merit of that argument depends a fair bit on how much would no longer be covered.

    Bonds that have expired have been repaid, I don’t think anything has been rolled over except when supported by a state guarantee. Bonds that were issued with an explicit state guarantee might need to be honoured, not to sure what can be done about that.

    The promissory note. Not to sure what can be done about that.

    Bonds repo’d with the ECB. Not to sure what can be done about that.

    Anyone got a reasonably accurate number of what is left?

    Default is what many wants. The core could access the fund & recap the banks using that. As long as the injected equity would have a ROI of more than 5.8% then the core would make a profit. Ireland would have some serious reforms to do & maybe many in Ireland would want that? Still, there would be the risks (certainty in my opinion) of tax increases & less availability of public services. Light touch regulation probably would have to go though, I’m sure if the Irish public were to have say they’d probably agree.

  41. @Bunbury

    Don’t know what the theorists say but a quick walk about in any provincial town would confirm shop closures. I had to take a trip to the south east recently and counted 12 shops closed in short stretch of ‘main street’ in one town. Not likely to get any better if pay packets continue to contract and emigration continues. A local councilor recently told me that one plane winging its way to Australia had 30 young people from three towns in Meath on it.

    Not one political party has spelled out in any reasonable detail a four year plan that explains how future ‘adjustments’ to the deficit will be implemented. No one seems to grasp that until Ireland starts making things that SE Asia wants to buy, there won’t be a recovery. Ireland has drank heavily from the knowledge economy wineskin and it hasn’t worked except for bloating third level staff numbers and churning out thousands of graduates with questionable quality degrees for nonexistent jobs.

  42. Eamon Gilmore on RTE interviewed about this subject. It was quite clear that the Labour party plans to ask for the interest rate and timetable to be altered and nothing more. Asked what bargaining chip he would have – basically that the government would have an electoral mandate. Awesome.

    Note to journalists, try asking this question – more than once if necessary:

    “With regard to “renegotiating” the EU / IMF deal, don’t you have a fundamental problem in that the other side know perfectly well that a new Irish government would have no alternative but to accept whatever terms were offered – because if it did not have that credit line in place, then it would be unable to pay public sector workers or government contracts.”

    The capacity for waffle in Ireland was and still is amazing.

  43. Karl’s initial post about the EU/IMF deal makes a number of valid points – and the EU/IMF have as much interest in ameliorating aspects of the deal as Irish citizens have. but what seems to be roiling most people is the extent to which certain bank investors have escaped unscathed and continue to be protected.

    And accompanying this (again evidenced in this thread) is a widespread perception that the planned fiscal adjustment would be considerably less severe if these investors were burned. Indeed many sovereign bond market participants are keen to see the burning of these investors as they would make a killing in the ensuing mayhem; and, behind them, investors of ‘good money’ also seem to be keen as it would remove a major element that is impairing the Irish sovereign’s ability to service sovereign debt.

    But we would be fooling ourselves if we think something along the lines of the planned fiscal adjustment could be avoided – accompanied by major structural reforms and reforms in the process of governance.

    While this crock of gold of burning bondholders is out there in sufficient attention is being paid to the reforms required – and it allows the ‘insiders’ to protect their ill-gotten gains.

    And while the political factions jostle and throw ‘shi’ite shapes’ for partisan advantage, Germany and France are moving close to finalising a comprehensive deal for reform of the EZ. And the broad outlines may be agreed by end March when we’ll be lucky to have a government in place.

    Even if we hadn’t taken ourselves outside to play these necessary, but increasingly irrelevant, games – the timing of the election in the context of what’s happening in the EU being FF’s final f**k up – we are struggling against deeply ingrained popular perceptions held by many core EZ country voters. Some on this thread – notably D J-R – have provided a flavour.

    These voters believed they have contributed to help lift Ireland out of economic backwardness previously and are now damned if they’re going to contribute to resolve the implications of serious Irish misgoverenance. There’s little point telling them that their savings and their banks contributed to Ireland’s lunacy. Being, generally, well-gov, they are appalled by the extent of misgovernance in Ireland and the laxity of its financial regulation that brought out the worst in some of their greedy bankers. They also perceive that Ireland’s low corporate tax rate is stealing tax revenue from them and that Ireland didn’t contribute to the EU as it should have during the boom years. They also perceive that Ireland’s public officials – both elected and appointed – are paid better and do less and for a shorter working life than thier counterparts in the core EZ countries.

    And these perceptions are being reinforced by the MSM and politicians in these countries who dread to confront their voters with the way they screwed up the design of EMU and are hiding/’warehousing’ huge bank system liabilities as well as the financial dodginess of many municipal bodies.

    If we are to have any success in re-gaining some respect and some traction in the corridors of power throughout the EU, we must confront the germ of truth in each of these perceptions.

  44. @Oliver Vandt

    Thanks for that link. It does look like FG have a problem with a slightly duff leader they cannot get rid of. Looks like Irish democracy is going to turn FG’s conundrum into the country’s conundrum – with a clear mandate from the people.

    Inspirational.

  45. @ The Alchemist

    No one seems to grasp that until Ireland starts making things that SE Asia wants to buy, there won’t be a recovery.

    As a resident of SE Asia, I would say, the concentration should be on the single currency area because beyond MNC output, which is increasingly localisd in Asia, Ireland has nothing that SE Asia particularly needs.

    There is a Guinness brewery already in Kuala Lumpur!

    New Zealand’s Fonterra is responsible for almost 40% of global trade in dairy products.

    @ Paul Hunt

    It likely seems like the proverbial old gramophone record, but it is an inconvenient truth that there is still no constituency for change; the well-off ‘Democracy Now’ soufflé folk had nothing radical to offer to upset the status-quo applecart and the arguments for restructuring appear to be seen as a way of protecting existing bubble-period privileges.

    The fact that the new Fianna Fáil leader, Micheál Martin, remains a teacher at Presentation College Cork, 21 years after he last taught there, suggests how backward Ireland remains.

    Three public pensions is handy indeed when the majority of private sector workers do not have an occupational pension.

    Why do issues like this not seem to matter?

  46. @grumpy

    The solvent Northern half of the EU must worry that any ‘renegotiation’ – loosening of the chains – would lead to more more rather than less public sector pay recklessness. Without selling a substantial reduction in public service numbers to the EU technocrats, odds on a rate reduction would seem slim. Indeed, there must be a fear that any fattening of public sector wages will spillover once again into a property stimulus. The recent HSE redundancy offer was astonishing by private sector standards. Gold and platinum plated pensions at 50, and yet the uptake was miserable. All of the political parties are trialling in the Croke Park sweepstakes with the jaded old nag ‘Voluntary Redundancy’ handicapping all other runners. It is a complete shambles.

    @MH

    On the food front, I learned recently that Ireland is importing a large quantities of cheese (mattress sized slabs in fact) from Australia. Much of it is turning up sliced, diced and legally repackaged as processed in Ireland.

  47. @Olivar Vandt

    “To be part of a currency union or club, that has reams of legislation against government supports to private industry but decides that banks be exempted on the QT from such legislation and that they must be supported with hundreds of billions of citizens money is one Schizophrenia too far.”

    A good point – there was uproar at any suggestion of subsidies to old semi states which were actually performing a useful function and giving reasonable employment – but we are manadted to support a banking system which is now seemingly incapable of functioning without a guarantee – which instead of being a last resort and almost unthinkable option, it is now universally regarded as inevitable that these guarantees will have to be honoured.

    @Jesper
    I’m in favour of revoking existing guarantees also. They were only introduced on the understanding that we would never need to honour them. That paradigm has shifted – as I said above. All we have to do is imply criminal irresponsibility on the parts of our former representatives. Hance the need for a referendum.

  48. @AMcGrath,

    while I do think Ireland should default & reform I also believe that anyone selling insurance which he/she knew was beyond his/her means to pay out on & never intended to pay out on is guilty of fraud.

    When something goes wrong the system or the people in the system failed.
    In Ireland the same people are operating the system -> The people must be ok
    In Ireland the system stays the same -> The system must be ok

    Since neither the system nor the people in the system did anything wrong it means that nothing bad has happened. & if nothing bad has happened, then the conclusion would be that business as normal should continue. Business as normal includes paying back borrowings. Reform or enjoy the fruits of an unreformed system which includes to pay up.

  49. @MH
    “The fact that the new Fianna Fáil leader, Micheál Martin, remains a teacher at Presentation College Cork, 21 years after he last taught there, suggests how backward Ireland remains. ”
    Three public pensions is handy indeed when the majority of private sector workers do not have an occupational pension.

    Why do issues like this not seem to matter?”

    They do matter – we are just so awash with issues and scandals that some things slip through the cracks. They are also of course preventing other qualified people from being employed fulltime. But now, pre the election might as good a time as any to highlight this particular one. It’s not just FF here although I believe Mary Hanafin is in the same boat, as is Brendan Howlin of Labour and I guess every (ex?) teacher in the oireachtas. Let’s compile a list for doorstep.

    While I’m off topic – I saw what appeared to be an interesting solution to our banking problems on Friday IT. It appears that peer-to-peer lending is now facilitated by online companies (Zopa the example) – none here yet – but seems like a no-brainer.

    http://www.irishtimes.com/newspaper/finance/2011/0204/1224288982985.html

  50. @Dominique Jean-Raymond

    I think it was Paul Hunt who warned/advised me that these arguments tend to go round in circles!

    So, “I think that the Irish Bail-out will be re-packaged because an Irish default is in nobody’s interest”, from Dominique, seems to bring us back to just before Christmas when he was alerting us to the fact that we were perceived to be fiscally dumping and this might become a bit critical.

    Oh and I chipped in a question I got from an English ex-senior EU Commission audit official: “Did Ireland become a net contributor to the EU during the Celtic Tiger years?”

    So, (again), now we need to appoint the right people to negotiate the Re-Packaging of the deal! ‘Cos renegotiation wasn’t really on the table unless we really meant ( or threatened convincingly) to default. Ummm and it’s too late now!

    Has anyone noticed that the “Europeanisation” of all this has actually been ANNOUNCED and it’s called ( by Angela…oh and Le Petit Nicolas) the “Pact for Competitiveness”?

    It’s scheduled for March and whatever Irish government is elected ( after saying whatever they like beforehand!) can then get on with administering the “Pact”.

    And maybe having a look at what sort of ( industrial!) strategy we need to deal with on-going unemployment and emigration!

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