The first-order economic challenge facing Ireland is to regain creditworthiness. Both the State and the banks lost their creditworthiness over the second half of last year. Without international assistance – the EU/IMF funding for the State and the ECB as lender of last resort for the banks – the loss of creditworthiness would have been catastrophic. The primary (i.e. non-interest) budget deficit would have been forced to zero immediately and the banking system would have collapsed as people attempted to withdraw remaining deposits. Those who think that the burden would fall only on the public sector would be in for a rude shock. The real loss of sovereignty is not the bailout deal, but the general dependence on foreign funding.
A dangerous complacency seems to be creeping into the election debate about how to deal with our official funders. It is true that the present design of the support mechanisms, including though certainly not limited to the interest rate, will make it extremely hard for Ireland to regain creditworthiness. There is common interest in finding a combination of measures that work, possibly with some additional “concessions” in areas that are in our plans anyway, such as the redesign of fiscal institutions. (The new paper by Daniel Gros and Thomas Mayer provides a good analysis of the creditworthiness challenge as well as some ambitious proposals for redesigning the support mechanisms.)
The bottom line is we need to get on a path to restored creditworthiness, but in a way that also protects our “aid-worthiness”. This does not mean that we lie prostrate before official funders, but we have to protect our reputation for being willing to meet the conditions of support. Misplaced tough talk about renegotiation is likely to do more harm than good. We might hope that soft notions like goodwill do not matter; the reality is that they do. As bad as things are at present, they would be much worse if support is significantly curtailed. Politicians should be careful not to heighten the risks we face as they seek narrow political advantage for the election.
37 replies on “Aid-Worthiness”
Misplaced tough talk about renegotiation is likely to do more harm than good. We might hope that soft notions like goodwill do not matter; the reality is that they do.
If this is true there must be some evidence for it. Politicians routinely strike aggressive poses when talking about how they will deal with foreigners. But if the IMF has ever said “we heard too much macho talk from you during your election campaign, so we’re not going to lend you money”, I’ve never heard of it.
I’m not saying that such guff does any good, but when it comes to negotiations I know of no evidence that it does any particular harm either.
at the end of Karl’s renegotiation thread may be relevant here.
But “[p]oliticians should be careful not to heighten the risks we face as they seek narrow political advantage for the election.” is like asking the leopard to change his spots. What is even worse is that having ‘evil foreigners’ to scapegoat prevents focus on the reforms we should be getting on with, protects ‘insiders’ who are part of the problem and fails to address the germs of truth in the perceptions of other EU voters that has turned popular sentiment in the core EZ countries so strongly against us.
But what is worst of all is that Germany and France will have agreed a political deal to reform the EZ before we have a new government. We will continue to be represented by a Taoiseach that doesn’t even lead his own faction and are likely to have a multli-headed governing combination that will have spent the previous month kicking lumps out of each other – and which, in any mature democratic policy, would have its constituent factions sitting on opposing side of the political divide.
I think aid-worthiness is a broader question than domestic party positions on the bailout. Unfortunately, since the EU institutions (Council/Commission) choose to communicate with the public through bland press releases and sporadic leaks, we don’t really know the level or trend of our goodwill in Brussels.
But my guess is that even if the Eurocrats were taken in by our antics during the Celtic Tiger days (2004 probably being peak smug in this regard), the well has been shallow for a long time due to the Lisbon mess, the bank guarantee (the Minister’s explanation to Ms Lagarde en francais not withstanding), the banking crisis phone call from M. Trichet missed due to attendance at Gowran Park, the years of hiding behind the Brits on various EU-level issues (notably tax) and just a general sense in Brussels these days that when they answer the phone from Dublin, it’s to learn about a new problem.
Against that backdrop, new faces, no matter who they are, will surely get a bit of goodwill, though it should be a source of worry if MGQ is the Commission’s main intelligence source on who they will be dealing with.
I’ll buy the bit about ‘credit-worthiness’, as I was once subjected to such a question by a arrogant bank employee as I sought an overdraft facility for some house repairs. When I gently asked about the bank’s own ‘lender-worthiness’ all I got was a snort of derision. I promptly closed my account.
So where is ‘lender-worthiness’ gone to? It used to be there. Now that wouldn’t be a self-selected ‘rule-change’ would it? Like emitting credit without conducting due diligence to ascertain if there was a genuine asset to back their emitted credit or a confirmed and stable cash-flow to repay principle + debt. They would never do such a thing! No, never.
And then the arrogant illigitimi have the bare-faced affrontery to demand that those heading into penury hand over their money – or else, to pay off the bank’s debts because the bank, in order to extend its market share, simply junked its own ‘lender-worthiness’ criteria. Logic deficit somewhere.
Response: Default on our bank guarantees fast. Teach some bankers a very nasty lesson about ‘lender-worthiness’. The IMF loan is a different matter.
“. . . but the general dependence on foreign funding.”
What did Mr Keane have to say? “Just get over it!” We must reduce this dependency PDQ. Its known as living within your means. Bit old-fashioned, but safe. A 30% decrease in wages and salaries would ‘do-the-trick’. No? Perhaps, but I should not like to try this. So what is to be reduced? I have no idea myself. Just posing a question to see if there are any practical proposals.
“Politicians should be careful not to heighten the risks we face as they seek narrow political advantage for the election.”
Listening to the recent guff, the pols are in full ‘auction-politics’ mode, again!
@ Brian Woods
A 30% decrease in wages and salaries would ‘do-the-trick’. No? Perhaps, but I should not like to try this.
OT perhaps, but I’ve always been fascinated by the squirming of representatives of the middle-class/business lobby when their demands for hairshirts for workers are met with the reasonable retort: what about a maximum wage, if we have to “cut our costs”?
@ John McHale
Election rhetoric can rebound domestically on politicians when they attain power. However, the likes of Jean-Claude Trichet and top European Commission officials are familiar enough with election campaigns to be unfazed by what is currently being said in Ireland.
As there are many claims being made as to what Ireland could do in respect of defaulting, without regard to consideration of downsides, it would help if you would provide specifics on:
1) the steps Ireland can credibly take to regain creditworthiness
2) what policies/reforms the new government should implement that would likely improve the political backdrop in Europe to making concessions in respect of debt?
The only hope for Ireland is to devalue. Otherwise, it is going to be a deflationary death spiral for what you own and are paid, coupled with inflation for what you need with default at the end. This is already happening. Since you cannot devalue, welcome to the abyss.
Worrying about the tender sensitivities of the troika is a waste of time. If they are so soft how come they saddled us with all the bank debt? You should be telling THEM to be more kind to US.
We need full disclosure of all that has happened since the guarantee. Without that we can’t have an honest debate.
The link is to a Canadian Financial Forum with an interesting snippet on a Merrill Lynch employee and his comments on the big 3 Irish banks.
A link to Barry Ritholtz blog from the link above. The comments are interesting.
@ EWI: “what about a maximum wage, if we have to “cut our costs”?”
Spot on. I would peg it at x 6 times the Average Industrial Wage. You pay 100% tax after this. Not indefinetly, but for perhaps 3 yr. Its a ‘suck-it-and-see’ situation.
Now I already hear shrieks of anguish, “They’ll leave the country”, or “No one will work for that!”. Is that so?
Well I always understood that if you were rational (like econs insist we are – despite evidence to contrary), then getting Eur 150,000 for sure (less, 30% to include all deductions), was a tad better that 100% of zero. There are lots of folk willing to work for that level of pay.
@JW: “Since you cannot devalue, welcome to the abyss.”
I would only insert, ‘and unwilling to default’ – otherwise, welcome indeed!
@ OV: The time for debate is over Oliver. We know what our future holds, for sure, if we do not thrash the bank guarantees. No uncertainty there. There is risk in default: we must accept it.
Its not an alternative of ‘Default and be damned’. Its, ‘no default and penury for those of modest means, or default and less penury for all’. Hobsonian. It comes down to political courage: Which is sadly lacking.
You need to brush-up on your sub-editing skills. This thread is just asking to be entitled “Eire-Worthiness”.
Mickey Hickey has a link:
If you have never worked or an investment bank, suggest you read it – and the comments.
There are plenty of people who could barely beleive it when it became apparent Merrills had been sort out for advice about banking policy in 2008. Understandable that former teachers, lawyers, and publican’s might not realise…….
Not a criticism – but you should know that (ist link) is a direct quote from Michael Lewis VF piece – the subject of the much commented thread the other day. It was the first I had heard about this guy Philip Ingram. The most amusing thing I find is that there are many people labouring under the delusion that the US have solved their subprime crisis with TARP/QE when all they have done is kick their particular can down the road – and that is some can. Bailing out our banks pales in comparison to what the Us Treasury have done.
The original link to the VF article was not correct – this is better
I have little doubt the IMF approaches all of this with cold rationality. However, I don’t think this applies to European governments or electorates — or possibly even the ECB — for reasons nicely captured by Paul Hunt. There is history there. And those SDRs seem like monopoly money to electorates — but not the euros put on the line.
I don’t have any silver bullets. But no harm to recap the major elements:
a. Make a credible commitment to the plan to reach a primary budget surplus by 2014/2015 (it could be stretched out later if we are well on our way). All things considered, the Irish political system did a reasonable job in getting the four-year plan in place, passing the 2011 budget and creating the expectation it would survive the inevitable change in government. The campaign has brought some perhaps unavoidable backsliding. Of course, we will be in trouble if it becomes apparent that divisions in the coalition make it impossible to keep to the targets. But I think there are enough grown-ups involved to make this work. However, I hope the main parties will keep in mind during the campaign that they carry some heavy responsibilities in terms of shaping perceptions of political capacity to see this through. I think Paul might be a tad too cynical on this point.
b. The new stress tests must not reveal large new banks losses. Just as importantly they must give markets enough information so that they can form their own judgement. Michael Murray has a nice piece in the SBP today on the importance of detailed balance sheet information (unfortunately no link until tomorrow).
c. Although it is largely beyond policy, a reasonable outturn on growth is essential. Unfortunately, the uncertainty about the path of the economy is again a real creditworthiness killer. The signals are still mixed and it will probably take a number of quarters before we get a good sense of the underlying growth path. But I still think the pessimism is being overdone. To cherry pick one stat: nominal GNP grew at an annualised rate of over 7.5 percent over Q2 and Q3 of 2010. Of course, these numbers should be treated with great caution given the volatility of series and the likelihood of revision, but they do cast doubt on Wolfgang Munchau’s no-nominal-growth-for-a-decade scenario that seemed to gain such sway late last year.
Of course, we should pursue growth-enhancing reforms where we can: e.g, tilting the fiscal mix towards capital spending and limiting increases in marginal tax rates; pursuing competitiveness in the non-traded sectors; driving productivity improvements in the public sector.
d. The fourth element is the design of the bailout mechanisms themselves. I think it is becoming increasingly recognised that these are seriously flawed. There is a good chance they will be revised as long as we don’t blow the remaining goodwill. But we need to be involved in the discussions on how they are revised. There are already signs that Germany and France are going off on tangents, e.g. with the focus on competitiveness. It is best that we go along here as there are many elements of the competitiveness and also fiscal discipline agendas that make sense. But there also needs to be some fundamental rethinking in issues such as the interest rate and de facto seniority of offical creditors. This is where our voice needs to be heard. I hope the NTMA is active in the internal discussions of what needs to be done to turn market sentiment around, and that this message is being clearly communicated.
I would indeed make a lousy sub editor.
“the banking system would have collapsed as people attempted to withdraw remaining deposits. ”
How much of them leaked out anyway ?
I see Sarko and Angela are bringing the same world class troubleshooting skills to the question of the Egyptian succession with Israel in the role of the European banks.
“The new stress tests must not reveal large new banks losses.”
Err….ang on there a mo. Why not? If they are there, then are you SERIOUSLY advocating that we further fudge, kick the can etc. And many many people, yr scribe inc, think there may well be large new losses, new in that they havent been dragged out as of yet.
Come on Brian, you must know that is not what I meant. I was listing what I see as the requirements to get out of this. Indeed, my emphasis on providing enough information for markets to make their own judgements should have made it clear I am suggesting more transparency not less.
Ok, so it’s “please god the tests won’t”. Wanna bet they won’t? Or that if they don’t, they’ll be believed?
I thought that was odd phraseology too – given the track record.
Just took a look at the offending part b again. Must admit that I can’t see that interpretation for the paragraphh taken as a whole. But hope it’s clear now.
The new stress tests must give markets enough information so that they can form their own judgement that there will be no new large banks losses.
Original looked a bit like a necessary outcome – to be extracted regardless because otherwise…..
This is no longer cynical, it is just necessary realism when dealing with banks and particularly Irish Banks. The regulators, Irish included, have very little credibility left. The market now almost assumes it is being lied to now, until proven otherwise.
You guys probably remember this – Water Munchau before the last round of stress tests.
“I get the funny feeling that these tests are devised in such a way that the banks will pass them. But this is not going to help much. Since everybody knows that large parts of the banking sector are in deep trouble, a good pass result may bring the opposite of reassurance. It would signal to the outside world that the EU is treating its debt crisis, which is a banking crisis at heart, as a public relations exercise.”
Plus ca change !
Not everybody would agree on “the reasonable job” part. Certainly not those who are bearing the brunt of the reparations.
Our establishment are not going to default, the best we can hope for is that they do a good enough acting job to make the EU think they might. “We don’t want to but we may be forced to by our notoriously militant population.” Oh wait, that’s Greece or Iceland.
Gawd, lads, I am really scared. I am one of great unwashed luckily to be still employed and what really frightens the holy bejasus
what frightens the bejasus outa me is that all ye economists can’t agree. What hope have the poor ignorant half witted politicians. Sure they havent a clue. Just like me. And you economists who have more theories and disagreements than solutions. My solution never a borrower or a lender be. Pay back what we owe = govt debt. We lent money to our banks. No more. Withdraw it ie withdraw guarantees. If that means living on €19bn less per year, then we must and can do so. Just do it until sovereign debt paid off. If Europe wanna help let em help but we don’t take any more loans. We can live on €19bn less. Why can’t we? Even if we have to use what’s left too keep every body housed and fed. If we have heat good and shelter we will not riot. Whose gonna support a riot for flat screen tv and Spanish holiday. Let us all eat spuds if we have to. But we won’t have to. We will be poorer but actually better off. Better if we do it ourselves, tho.
@ OV: True about the default bit, but what if those who have significant debts, mortgages, etc. – for whatever reasons, cannot actually repay? If they have a reduced or worse, a social transfer income, and interest rates increase, and food prices increase, and energy prices … … This is the predicament. Silly me to be worried about the math! And I haven’t even dealt with the nasty little matter of Neg Equity and what that will do to asset values. Thanks for comment.
Thanks also for reminding me that those ‘Oscars’ are being given out soon. Perhaps we should prepare our own from spun-sugar and hand them out to our political wannabees.
Eventually, if we had pols of sufficient courage we would have a constitutional prohibition on deficit budgets for current spending. The Market and special interest groups will not like, but tough.
@SO’R: Looks like you may have a similar thought to my own: Structural Regression of our economy to some prior level.
“Certainly not those who are bearing the brunt of the reparations”.
This is why the Irish crisis is so fiendishly difficult. The people must be shafted but they have the vote. It is the a similar story with Egypt. The people don’t want the old system but they mustn’t be given any say.
“And I haven’t even dealt with the nasty little matter of Neg Equity and what that will do to asset values.”
What’s wrong with “negative equity”? Just because we attach a fancy monikor to an everyday natural consequence of the type of economic system we choose to live in – it suddenly becomes like some kind of unforeseeable calamity people have to be rescued from. Prices fluctuate – nobody put a gun to anyone’s head to buy property. We are talking about adults making adult decisions. There are lots of “Negative Equity” SUVs still splashing the peasants and blocking the views of ordinary motorists at every junction in Ireland. Should we bail those guys out also? It is this infantilising of adults which resulted in the blanket guarantee. Instead of applying the priciples of capitilism by revoking those ridiculous guarantees which we could never afford in the first place, you are actually suggesting we add some more. When are we going to grow up?
Walter Munchau has some more comments about the latest round of stress tests in todays IT:
“Of the two critical issues of crisis resolution – bank recapitalisation and sovereign debt restructuring – we are regressing on the first and possibly underestimating the consequences of the second. It is hard to estimate the exact amount it will cost to recapitalise the European banking sector. I have heard a credible estimate of €100bn-€200bn. Last year’s bank stress tests came up with a puny €3.5bn – a deliberate attempt by Europe’s regulatory authorities to misrepresent facts and mislead the public. Everything I hear about the next round of stress tests tells me they will once again try to hide the truth. ”
His main point is that they’re always a failed cosmetic exercise (a bit like Donie Cassidys hair !) since they are only introduced to try to reassure the markets – and therefore always doomed to fail since even if they are successful they will be presumed to be again hiding the truth..
FT – not IT – sorry
Is Walter Munchau any relation of Wolfgang Munchau? Or Walter Mitty?
Wolfgang it is seafoid – that’s not the first time I have renamed him – or as the kids say nowadays – whatever!
@ AMcG: Note your somewhat rambling comments. You ricocheted around quite a few topics.
Negative Equity (NE) is a significant financial and economic matter and, is regrettably, an highly emotive one as well.
There are (were) two sets of signatures on mortgage and loan documents: Borrower and Lender. So, who is the expert here? Who knows the market? Who has estimated the risks? Due diligence? Verifiable proof of income status? Who did the valuations? Moral Hazard would not be a problem?
The consensus is that, at a minimum, 25% of NE owners will go on to default and re-possession. So what happens to them? Irish mortgages are recourse type. Personal bankrupcy is a very unpapatable option. Many dispossessed owners will end up on Local Authority housing lists – and paying off their original mortgage (or some agreed portion of it) for a long time. That would do wonders for their cash-flow situation.
Would a Rational Choice consumer, rationally decide to enter a contract that they know they cannot fullfill? They might, but you can figure this one yourself.
“When are we going to grow up?”
Not anytime soon I’m afraid!
“There are (were) two sets of signatures on mortgage and loan documents: Borrower and Lender. So, who is the expert here? Who knows the market? Who has estimated the risks?”
The questions you should be asking are
“Was advice given?”
“Who gave advice?”
“What advice did they give?”
“What qualifications or experience did the adviser have that would reasonably make him or her competent to advise on geared retail investment”
If the answer to the first question is “no” then it was an “execution only” situation and the investor did not obtain advice.