Renegotiation and the Bailout Black Hole

The most immediate task facing the new government will be to engage in the process of revising the euro-zone bailout mechanisms.   There has been much ink spilled on the strategy the government should adopt, with threats versus persuasion the early dividing line.

I think it is fair to say that persuasion has won out for the moment.   But the persuasion branch itself divides into those stressing a focus on European blame/Irish credit on one side, and those stressing shared interests in fixing broken mechanisms on the other.   I would expect our European partners will listen (mostly) politely to our assertions on blame and credit, but those assertions will be ultimately dismissed as self-serving yapping.

The case for shared interests stands a better chance.   It is becoming clear how flawed the bailout mechanisms are.  I have previously referred to a “bailout trap”, whereby it is difficult to regain market access once a country enters a bailout.   The 10-year bond yield shows the markets continue to place a high probability on a longer-term Irish default.   But I think a “black hole” is actually a better analogy: not only is exiting the bailout a problem, but any country that gets anywhere close is at considerable risk of being sucked in, with Portugal most clearly in the danger zone, followed by Spain, Belgium and Italy.

Perhaps the most revealing news of last week was the threat from S&P to downgrade Portugal if EU leaders follow through on plans to impose burden sharing as part of the proposed ESM, as well as insisting on official creditor seniority (FT article here). 

 “We believe that if the source of external financing for the Portuguese economy were to remain restricted, the government would have to approach the EFSF to avoid an even more severe economic contraction,” . . . [Eileen X Zhang, S&P credit analyst] said.

S&P warned it would downgrade Portugal’s sovereign debt rating by one or two notches if European leaders decided later this month to require borrowers from the European Stability Mechanism – due to replace the EFSF in 2013 – to restructure their government bonds and make the ESM a preferred creditor.

Potential new private creditors see considerable risk of taking disproportionate losses in any future burden sharing, and stay well clear if there is a chance a country will succumb.  But as these private creditors stay clear (and yields rise), the fear of entering the “bail-out” becomes self-fulfilling.  

It is in no one’s interests to have this black hole spreading from the periphery of the euro zone,  ultimately threatening its destruction.  That is the case the new government should be making, and it should have no shortage of allies.

 

64 thoughts on “Renegotiation and the Bailout Black Hole”

  1. I will be absolutely gobsmacked if EU leaders who have ignored the advice of Joe Stiglitz, Ken Rogoff and Paul Krugman, amongs others, decide to pay close attention to what Enda Kenny has to say. Face it, they really don’t give a damn about our opinion. It’s up to the Irish government to find the best policy it can in the light of that regrettable fact.

  2. @JMcH

    Markets, rightly, view 45 degree upward slopes as 100% unsustainable.

    The Real_BIG BLACK HOLE is, was, remains in the EU KORE Banking System.

    Let’s get another €100 billion and then call it quits on €250 billion write-off as pay off for saving the Euro. If not, we get the hell out and keep it anyway. Nuff is EnUFF!

  3. @all

    Irish hard-line gets globally noticed!

    Shanghai St. Patrick’s Day parade canceled over fears of uprising

    http://www.irishcentral.com/news/Shanghai-St-Patricks-Day-parade-canceled-over-fears-of-uprising-117456053.html

    Moscow follows suit …. ‘apparently as part of the city’s effort to stop traffic jams.’ U putin us on?

    Any updates on Brussels or Frankfurt? Has this revolution started with the Exiles? What has Patricia the Irish Sovereign_in_Exile bin upto?

    If New York falls to the rebels – all is over (-; Unconfirmed reports that the I_em_F has come out in support in Washington …. & that HRH may postpone until Patricia_TISIE returns …

  4. figured it out …. they bin watchin the online, real-time vichy_bank/sovereign debt clock on the Páirtí Cumannach na hÉireann website …. well worth the link:

    http://www.communistpartyofireland.ie/

    just discovered that I owe €27,777, er 778, er 779, er 780, er 781 …. wow ….. may we have this on top of this blog pls? er €28,000 …

  5. The bond market was aware of the seniority problems about six months ago, roughly. It has been ignored as part of a “longer term” perspective within the EU.

    It has been the “I wouldn’t start from here” strategy.

  6. @ John
    We should also be preparing ourselves for an outcome where we, and we alone are willing to act in our own interest.
    Such preparation would have to acknowledge the reality that it is unlikely that International lenders post burning/default would lend to a country with our pay, welfare, pension, etc, etc costs when put in comparison to the European averages.
    There seems to be no mapping out of the potential choices, cost-benefits, alternate actions or possibilities.
    This week it was “How does Enda get out with his European friends?” and “ECB rates rises on the way”!
    What will it be next week?

  7. I’m disappointed that there has been no serious discussion about the various threat points Ireland has with regard to the EU, and they have with regard to us.

    If Ireland is actually insolvent, then the EU is simply trying to get the ECB money back, but not allowing sovereign bondholders to be burned. Paying unguaranteed bondholders reduces our ability to repay sovereign bondholders. Repaying the ECB (by a quick sale of bank assets) removes one bargaining point we have, and reduces our ability to repay sovereign bondholders.

    If we welch on ECB we ‘save’ over €100bn. If we do that we may as well welch on everyone and save even more. The cost of this action is we basically immediately need a primary surplus.

    If we continue with the deal we will probably default in 3 years time anyway, so face similar problems then.

    I would prefer we negotiate some sort of receivership. We make a national recovery plan, and if the ECB agree they will get 80c in the Euro, or maybe even 100c. If they don’t, we just get our defaulting over and done with. I’m not saying we should be aggressive in negotiations, just let them know we can’t repay them, and if they go along with our plan they will get most of their money back. The ECB aren’t likely to cut off their nose to spite their face.

  8. @ J McH

    I like the Black Hole analogy. I guess the aim is never again to have the (implicit) conditions of the early EZ years. Then people thought that Irish sovereign risk was equivalent to German. They further thought that Bank risk was equivalent to sovereign. the result was an ineterst rate landscape which defied reality.

    What has transpired is that people in making these implicit assumptions of a fallback have so far been proven correct. The Irish sovereign stepped in to bail out the banks and the EU stepped in to bail out Ireland.

    The new regime will be one where if a country or a bank wants to lower its cost of funding it will have to earn it my fiscal rectitude and responsible credit policies respectively and not because there are implicit safety nets of the Too Big To Fail variety.

  9. I’d have thought that “the most immediate task facing the new government will be to engage in the process of… ” reversing the rise inpublic debt down, not “revising the euro-zone bailout mechanisms”. Getting the public debt down includes getting the Irish budget deficit into single digits as a percentage of national income, and limiting liablity of the taxpayer for contingent bank risks.
    Indeed thre is a risk putting the cart in front of the horse. The European authorities hve made it clear that if the Irish government shows evidence of fiscal responsbility, it will be easier to avail of more favourable borowing terms.
    Remember Ireland is planned to have by far the biggest level of borrowing per capita of any country in the OECD area again this year on a per capita basis, and that’s even before a penny is spent on banks. This shouldn’t be too much to ask – the first steps in an austerity programme for Ireland ought to be the easiest ones.
    Portugal now has the choice of going to the EFSF or not. Ireland had that choice late last year. If Portugal can be convincing on its fiscal programme for this and the coming years, it can avoid that fate.
    As Portugal has a choice, S&P and the other rating agencies prefer to wait and see what the outcome is. Spain also has had choices to make. The Zapatero goverment has of late taken somewhat stronger measures to control central government spending. It has been rewarded with relative stability on the debt front.
    By the way, Country Analysis at EIU.com is free and its Feb. report on Portugal offers an independent assessment of prospects. Portugal’s capital spending of late includes this http://www.strategypage.com/htmw/htsub/articles/20100806.aspx as it does for Greece too.
    Both Greece and Ireland had the opportunity to eschew public loans in favour of serious austerity. Instead they went the hysterity road. Public debt is still rising fast, both current and contingent. Governmen bond holders see their interests subordinated to the international lenders, and fear that all this easy access to cash is just serving to raise moral hazard.
    So naturally, a call on international support leads to downgrades and higher yields for government bonds that find themselves crowded out. But there is no inevitability in this process. At some stage (we can over when precisely), there was the option for Greece and Ireland to embard on austerity e.g. do a Latvia.
    They choose not to, and must live with the consequences. So it is out of the EFSF and into the ESM. I think what this is likely to entails has been known for some months. The EU Heads of State made some important decisions of late which will facilitate restructuring, but NOT default. There are very substantial differences here. The governments (the bigger ones at least) understand them, as do many investors. I’m not sure everyone does though. For more, see the op-ed by Bundesbank economists in FAZ this week http://www.faz.net/s/Rub3ADB8A210E754E748F42960CC7349BDF/Doc~E91F3FE991911488883FC3FA14345AC72~ATpl~Ecommon~Scontent.html (Bundesbankchef Axel Weber and economists Jens Ulbrich and Karsten Wendorff).
    In 2010, we already steps to complete the “bail-in” of commercial lenders in Greece. The lessons of that for bond holders are salutory.
    “Bail-in” can also mean that lenders are beign taken for a rise. The ECB has judged that it wants to limit its risk expoures, and is rushing for the exit. Some in the periphery of Europe might not like it. But that is the choice it has taken, and it is not likely to reverse it (certainly won’t if left to its own devices).
    So in sum, eliminate the primary budget deficit as quickly as possible to be in a better negotiating position.

  10. So it’s good to burn bondholders and it isn’t.

    The risk of default will be built into the price post 2013 as it has been since Aug 2007.

    S&P appears to be a little alarmist as the ratings agencies have been since their pre-crisis failures were exposed.

    The FT reports Portugal sold €1bn in short-term Treasury bills in two auctions on Wednesday, paying higher interest rates than in similar auctions earlier this month. But demand remained solid at 2.6 and 3.1 times the amount on offer.

    Trichet had opposed Merkel’s bail-in proposals.

    Nevertheless, there was never a chance to revert to the situation in July 2007 when the yield on 10 year Irish bonds was lower than German bund equivalents.

    There is no likelihood either of a eurobond as countries oppose the necessary economic harmonisation.

    Again I would say that for a developed country more dependent on foreign direct investment than any other and with an international offshore financial centre, it is prudent to allow the agreed fiscal and EU-IMF programs to proceed rather than precipitating a massive crisis now.

    If the global recovery takes hold despite the risks from higher oil prices, then some Irish jobs maybe saved and created.

  11. @ Ciarán O’Hagan

    Out of curiosity: you say:

    “So in sum, eliminate the primary budget deficit as quickly as possible to be in a better negotiating position.”

    How would you suggest this be done? The prospective government parties had different, but not I think ultimately intractable, positions on tax rises vs cuts and time-scale which were well rehearsed during the campaign. Would you have different rates and a different time-scale in mind?

  12. The fast path to a positive primary balance is obvious, if politically difficult.

    Cut public sector pay. Cut welfare payments. Raise taxes on what is undertaxed relative to comparable countries (notably, average to low incomes).

  13. @Ciarán O’Hagan

    So in sum, eliminate the primary budget deficit as quickly as possible to be in a better negotiating position.

    Except of course that our experience up to now with the ECB and Merkelism gives no indication that after a blitz-austerity program the terms of the punishment bailout would be any different. Surely the pressure to maintain the payments would increase if we managed to austerity ourselves to a recovery of some kind?

    Of course if the European banking crisis comes home to roost or the next glorious crisis in capitalism arrives just after we finish asset stripping the country our capability to manage our debts could become even worse then it is now, our ability to negotiate would have evaporated completely and we be faced with god only knows what kind of social problems.

    What if appeasement fails?

  14. Eliminating the primary budget deficit is a negotiating twofer. It’s what Merkel wants, but it’s also a necessary first step to any of the various independent paths we might choose to take if pushed hard enough.

  15. @Shay

    I think you are wrong. Eliminate the primary deficit and, if you lot are too dozy to do it, I will volunteer to go to Brussels for you pro bono, and tell the EU what the bailout arrangement is.

  16. @Grumpy
    I’d say the bond market on the whole “was aware of the seniority problems” (subordination, bail-in risks etc) right from the very start. As it became increasingly likely that Greece, followed by Ireland, and now maybe Portugal, would be in receipt of “aid”, yields rose. The surprise is rather that the Europe’s authorities thought that they were solving fiscal problems in making it easier for the peripherals to run large budget deficits.
    If you accept this line of reasoning, the only way out of the fiscal mess today is to engage in serious austerity, not the pretend variety (hysterity), unless you entertain interminable restructurings, inflation, or else fiscal transfers from the cash rich to the cash poor. Not that Ireland is a poor country by any means, indeed living standards remain rather high on many counts relative to EU averages. And this is another of the ironies, we’ve never had a risk in the OECD of a rich country having to restructure (outside of currency crises).
    @ Gavin Kostick
    How to cut budget deficits? These are key political choices. Economists say that measures that hit incentives least are the ones that work best e.g. tax pensions and cut lump-sum benefits. No surprise there. What I do find surprising is the apparent lack of willpower to take the needed actions till now. Ireland has a constitution and a corpus of law that is very protective of property rights (including pension “rights”) and against retroactive legislation, relative to continental Europe. Politicians have an opportunity now to show some leadership and put the rules of the game to a referendum (and I’ve no doubt that the vast majority of the electorate would be very happy to vote for change if the right leadership is shown).

    @ Michael Hennigan
    “it is prudent to allow the agreed fiscal and EU-IMF programs to proceed” This policy might well result in Ireland having the biggest budget deficit in the eurozone year after year. Prudent is not the term I’d use. And the IMF was most circumspect in its conclusions to its own December report on Ireland’s adjustment programme.

    @ Shay Begorrah
    “after a blitz-austerity program, the terms of the punishment bailout would not be any different”
    I’ve heard the contrary said in Europe over the past few days. I think Mr Bini Smaghi – if I remember correctly – affirmed explicitly that Ireland could apply for easier terms once it is shown to be making progress. That’s a logical too – Ireland’s bargaining position becomes much stronger one the primary budget deficit is eliminated, as we noted in the previous thread to this one.
    @ BeeCeeTee Austerity (or “appeasement” as Shay prefers to call it) is not primarily for the benefit of Brussels or Frankfurt. Rather it is in the best interests of Irish taxpayers first and foremost. A quick move towards a primary budget balance better supports Irish economic prosperity over the coming decade, I’d argue, than the policy of hysterity of the outgoing administration. We’ve had exchanges on fiscal multipliers before on this blog. I’m still amazed that the EU country with one of the lowest fiscal multipliers in Europe continues to bleed so much on this front.

    @ Kevin Donoghue
    I wouldn’t put the likes of Ken Rogoff and Paul Krugman in the same camp. The former spoke this week at the Bundesfinanzministerium; the latter has been encouraging EU peripherals, in his public press articles, to engage in pump priming, if I remember correctly (which they are still doing, in my books).

  17. @BeeCeeTee

    “The fast path to a positive primary balance is obvious, if politically difficult.

    Cut public sector pay. Cut welfare payments. Raise taxes on what is undertaxed relative to comparable countries (notably, average to low incomes).”

    I’m not sure this is obvious for two reasons.

    (1) In purely economic terms, if it were done it may not lead to the desired outcome – the over-plucked goose may simply expire. Lots of economists have lots of opinions about this.

    (2) “Politically difficult” is an understatement. It would be an outrage to democracy, and an Irish public, having got rid of one lot of scoundrels may not be in a mood to stick around for the next five years to have another go.

    Then we’ll all be singing http://www.youtube.com/watch?v=5iAIM02kv0g

  18. @Ciaran, I’ve been trying to make that very point here on and off for quite some time. It’s good to see you making it so eloquently. I find incomprehensible that none of the academic economists posting here appear to appreciate it (with the possible exception of Colm McCarthy, if I read a little between the lines).

  19. @Ciaran O’hagan

    Lets try that again.

    What if we pursue aggressive austerity measures and external factors dampen economic growth in Europe or worldwide making it more difficult to repay our debts and less likely that the debts will be restructured?

    I only mention negative external factors because in the case of the banking crisis one just happened, its causes were not addressed and it has in fact been made a European priority to pretend that the crisis is of another kind to the one it actually is. Add to that the strong possibility of spikes in the prices of oil, food and mineral resources and you have a world economy that has seldom been more precarious.

    So austerity, rapid debt repayment and export growth represents a move from an economic outlook based on wildly optimistic assumptions about continuing domestic growth to one that is based on wildly optimistic assumptions about the growth and stability of the world economy.

    I see no possible way that this can go wrong.

  20. Ciarán O’Hagan: I wouldn’t put the likes of Ken Rogoff and Paul Krugman in the same camp.

    Nor would I. All I’m saying is that since EU leaders blithely ignore them both, as well as Joe Stiglitz, who is in another camp again, it is idle to suppose that Enda Kenny will get much of a hearing. (Incidentally you are mistaken about Krugman’s views on what peripherals should do, but that’s of no relevance to this thread.)

    I say ditto to your views on getting the primary deficit into line ASAP. If we want our sovereignty back it will have to be paid for. Inevitably the strong will ensure that the weak do most of the paying. That’s politics. I’m fairly bloody-minded about it. To the extent that my vote can influence anything I will try to load the burden on those who can afford it (myself included); but above all I want Lorenzo B-S off our backs; if that means the widows and orphans have to suffer, so be it.

  21. @MH-ff: “If the global recovery takes hold despite the risks from higher oil prices, then some Irish jobs maybe saved and created.”

    Michael, if oil prices (aka: Primary Energy) DO NOT retreat below $90/bl asap – we are all in the s**t hole. It may take a few years, as the domestic consumptions of the primary producers catch up somewhat, but when their production supplies come close to their domestic demands all hell will be let loose.

    The real predicament is not with the quantity of crude available, but its quality: They (the primary producers) can pump plenty of crude crude – whereas its the light crude we need. This latter is in short supply and its production is declining. Crude crude devours copious quantities of itsels to produce the light stuff. More in, less out!

    The big losers: transport, energy production, agriculture and food – that’s us. I really wish that more commentators on this site would try to grasp this awful vista. I know its almost unthinkable, but its what’s going to occur.

    The good-olde-days of ‘growth’ are drawing in. Enjoy what remains.

    BpW

  22. Brian Woods 11

    ‘The new regime will be one where if a country or a bank wants to lower its cost of funding it will have to earn it my fiscal rectitude and responsible credit policies respectively and not because there are implicit safety nets of the Too Big To Fail variety’

    Don’t think so, at least not where banks are concerned, The new regime will be the old regime witth a few knobs on. The big EZ banks will remain TBTF, and the ECB will continue to contort itself to protect them in their struggle against global competitors. Subversion of democracy is routine for big financial service players. Rectitude is for little people after all.

  23. Shay Begorrah/Brian Woods

    +1

    @ Ciaran O’Hagan

    ‘Not that Ireland is a poor country by any means, indeed living standards remain rather high on many counts relative to EU averages’

    There are question marks around our level of economic development. So much of it is an MNC enclave or frankly bogus. As you no doubt agree, there are very significant legacy problems of governance and institutional functioning.

    I doubt that the polis will buy into your austerity medicine unless firm, and manifestly fair, steps are taken on the political front. The old just society theme needs to get another runout. Accountability.

  24. @ PQ

    TBTF they always will be, but next time round bondholders will lose even if the bank is saved from failure

  25. @all

    Apologies – I need to interrupt for a second.

    I’m researching local government re-organisation and funding. Is that anyone’s area of interest? Love to hear from you if so….

    sarah dot carey at yahoo dot com

    tx!

  26. Was that Sarah Carey of Sarah Carey Irish Times fame?
    Did we just get a trailer of next weeks article?

  27. @Al

    Be careful Al, quite often people pretending to be Sarah Carey trawl the Irish bit of the Internet for victims and then lure them out for a coffee before killing them. Say nothing in email that might let him or her guess where you live or encourage a long comment piece on how inadequate you are.

    I have seen this too many times.

  28. @ Ciarán O’Hagan

    There is a lot of fat still in the system but the attitude in Ireland is that it’s invariably up to the Government to make a move.

    Despite the self-inflicted generational calamity, no group in receipt of tax funds has said that more could be done with less.

    ‘Intransigent unionism’ meets southern vested interests.

    A legacy of the Ahern years is that ‘independent’ TDs get an annual tax-free allowance of over €40,000, in addition to many other expense payments – – mobile phone, office, staff, travel. It’s effectively a ‘gift’ because there is no requirement to account for what it is used for. The Bord Snip report has over €5bn in cost cut proposals.

    The media largely reflects the conservative well-heeled of the Left and Right who are resistant to change – -unless it arrives like manna from heaven.

    @ All
    In the world beyond, the old order is rapidly changing and the Economist reports this week that western expats are no longer in demand in Asia.

    The expectation in advanced countries of successive generations doing better than the preceding one, has also been upended.

    Lion’s share of US productivity gains go to shareholders; Real median wage of American male down 28% since 1969

  29. I’m pleased to see the debate here seems to be veering towards a more rational understanding of Ireland’s standing the EU and its position in EU and global economic terms.

    I’ve raised these points previously, but for what it’s worth…

    Firstly, a combination of a limited ability to boost economic performance dramatically, demographic trends and voters; expectations requires EU governments to create significant fiscal space in the medium to long term. Secondly, a requirement to provide even more fiscal space in the short term to deal with the ‘Great Unmentionable’ – the continuing EZ banking crisis – is driving efforts to boost economic performance and to reduce fiscal deficits aggressively. These two are the drivers of the Merkel-Sarkozy Deauville accord and the Barroso-Rompuy ‘Competitiveness Pact’. Quite simply the sovereign bond market has to be brought onside.

    Thirdly, the pace at which this is being progressed is obviously not quick enough for Ireland, but Ireland has the capability to do much more to help itself. And evidence of this self help might contribute to more movement at the EU-level. While the price level for Irish household consumption is 20% above the EZ average level, while the level of pay and transfers are similarly above the norm, while the tax take is proportionately lower than other EZ members and while the fiscal deficit remains close to double digits, Ireland’s demands for renegotiation or relief will be laughed at by our EU partners.

    It is Ireland’s double misfortune to have been governed so badly for the last decade and to have to deal with centre-right governance generally throughout the EU, but we have to play the game that’s in front of us and the ball is in our court.

  30. @PH
    I agree with you.
    What upsets me is the country is four years into the crisis and our new gov’t is not up front and centre laying out the facts and possible solutions. In countries with competent gov’t taking over in the conditions we are now operating in the gov’t would declare an end to policy paralysis less than five minutes after taking office. The depth of the problem would be made clear and the party with the most seats would make a Unilateral Declaration of Governance. We Fine Gael will govern as if we have a majority, the country is in serious trouble getting worse every month the time for endless internal negotiation and watering down the policies that must be implemented has to stop. Clearly we can be voted out when any bill (money bills) that requires a majority is voted down by the opposition. The opposition then has the opportunity form a coaliton gov’t or we go to straight to election. The Canadian gov’t has been operating under these conditions since 2006 under a far right gov’t that has moved to the centre in order to stay in power. The people of Canada like minority gov’t and will punish any party that takes it down. Irish politicians are enamored with the spoils of power and the first thing they do is solidify their place on the gravy train and ensure that the trip lasts five years. As I see it Brian Cowen had a slim, sober man inside him yearning to get out, he is now out and we appreciate the sobriety but unfortunbately genetically we have a Brian Cowen clone operating with the leader (Gilmore) of the claque that cheered on Bertie and Brian as they ran the country over the cliff. Indeed they even complained about the paucity of the stimulus measures. If I was not Irish I would not be so emotionally entangled and disgusted at the level of gov’t incompetence, cowardice and selfishness I am witnessing. I comfort myself with the statements made by Trichet, Barroso, Rehn and others that the security blanket (ECB/IMF) is about to be pulled which will force reality and the need to emerge from reverie upon our governing as usual government. I might add it is inconceivable to renege on ECB/IMF debt but it is well within the bounds of international propriety to give the bank bond holders a 66.66% haircut. Political instability is to be welcomed at this stage and will help the negotiations, solidifying a dysfunctional gov’t in a stable coalition is the last thing we need.

  31. @ MH-ff, PH and MH: Thoughtful and insightful comments, few are a tad short, but no matter at this stage. Its a lot ‘better’ than previously. Very welcome.

    You are drifiting slowly and inexorably toward a ‘political dimension’ and course of action, and you are correct in this. The key construct is the stability of our governance system (we call it democracy). If this is seriously challenged and found wanting, then the more powerful vested interests may attempt to assume control.

    However, there is still is some way to go in respect of our debt predicament and our parallel Reference Frame mindset in respect of the attributes of a ‘developed economy’. In other words, our economic Model-in-Use. There is a real, intractable predicament here. We actually cannot resume ‘growth’ as we know (or knew) it. It is simply not possible – for reasons that would take several pages to explain. OK, we will get a Dead Cat bounce: Faux growth from that well-worn ploy, QE.

    This is the key predicament, the complete inability (so far anyway) to comprehend the vast change in economics and finance that have occurred (slowly, and almost invisibly) for the last four decades, both in western developed economies generally and in east Asia in particular. Some commentators have recognized this tectonic shift, have signalled the unpapatable outcome, but so far little heed has been paid Politically). Heeding them requires the recognition of that ‘awful vista’, but the real difficulty arises when mitigation is required: The need to make the paradigm shift from one model of economic activity to a transition model, and later to the penultimate model. We are smack back in the political dimension again.

    I must assume that many persons in both the financial and political world are acutely aware of the situation, understand its implications, but are keeping silent.

    BpW

  32. Pursuing aggressive austerity measures will unfortunately hurt economic growth big time, at first. At some stage the US will have to cut its deficits, and the impact of that will be felt worldwide. Ireland is small beer on the global scale. Its small size means that external demand will provide more of a buffer than it would for the US. That is also is why it makes more sense for Ireland to bite the bullet now.
    Policy makers everywhere in the West are desperately seeking easy ways out of the fiscal crises. Unfortunately a resolution of today’s troubles will involve serious pain. It is an illusion to believe we can avoid a drop in living standards. Challenges like demographics and globalisation are well known. No surprise to see Japan and Greece first entering crisis in Asia and Europe, both at the forefront of demographic change. Ireland, the UK the US have had some of the highest borrowings in the West, and payback time is here with a vengeance (+Michael Hennigan above cites additional evidence).
    If debts are paid back, despite mediocre growth (at best), obviously debts will not need to be restructured, but the public will need persuading. That requires strong political leadership and an acceptance of structural reforms. Not obvious, neither in Ireland or elsewhere.
    If debts are not paid back, that entails default of some kind. Savers will be hit, with inflation making most sense (an idea that the IMF’s Blanchard has been championing).

    @ Paul Quigley
    I agree that there are questions around Ireland’s level of economic development. Ireland abroad is often portrayed as rich simply because it has a high income (still). But that does not equate to wealth. What is sure is that visitors to Ireland that I accompany are often surprised by the apparent high level of conspicuous consumption, and other spending (drink).

  33. @Shay

    hee hee. Damn! Foiled!

    I find if I suggest somewhere around Grafton St and then slip a little something into their Earl Grey, I can have a gullible economist bundled into an estate car and whisked away. I’ll have to come up with a new ploy.

    @Al

    No, not next week’s column, but a speech I rashly agreed to give. But no doubt the research can be used on the double so worth going for it. It’s going to be a huuuuuge issue. (If the new government is serious about reform).

    @JohnMcH

    sorry for gatecrashing the post.

  34. @Ciaran O’hagan

    Lets try that one more time:

    What if we pursue aggressive austerity measures and external factors dampen economic growth in Europe or worldwide making it more difficult to repay our debts and less likely that the debts will be restructured?

    No answers forthcoming because in that situation we have simultaneously eliminated domestic growth and have no way of replacing it while having let our infrastructure and human capital degrade very seriously in the name of meeting private capital’s commitments. Imagine the fun we will have with a much higher rate of unemployment, deteriorating public infrastructure and services and a fixed exchange rate.

    In that case all our good behaviour, taking one for the international banking system and wealth holders, making “painful” sacrifices and keeping the EU’s political train on the tracks has the possibility of leaving us financially, politically and socially worse off than confronting the underlying international structural problem now. Instead the plan is that we grit our teeth and pray that Merkelism will both magic away the European financial system’s inherent flaws and make our debt burden lower and not higher while the next global shock still leaves us with someone to export goods to.

    Everyone here realizes that there needs to be adjustments at a wide range of levels in Irish society (especially those undeserving poor and feckless public servants it seems), reduced living standards and much less discretionary spending but no one will admit that the suffering entailed, suffering that will again disproportionately affect the less well off, could count for nothing if we do not confront the failed economic consensus that brought us here – this is our fight every bit as much as restructuring the Irish economy.

    Is anyone willing to take up that challenge or will we rely on other people to do our fighting for us?

  35. @Barmy Army

    India 30-2, 7 overs, chasing Ireland 207: tuff but manage_able (-;

    @Shay Begorrah

    Send in Katie Taylor ….

  36. Meanwhile, back at the ranch, the FG / Lab deal is done and having been predictably told where to go on bondholder burning it is clear the government’s first priority must be to ensure that the forthcoming alteration to the interest rate on the EU element of the bailout can be spun as the “renegotiation” of “not a penny more”/”Labour’s way or Frankfurt’s way” fame.

    Presumably FG think they have placed Joan burton in a position of having enough rope to hang herself wrt the extent to which the public sector will cooperate with a reform agenda if only it were administered by a like minded party.

    This means Croke Park – or perhaps CP lite – will be the centerpiece of the non-tax part of primary deficit strategy. It will be an experiment which will constantly be about to deliver real and significant cost savings and must not be dumped just before it solves the reform problem. Probably this means 12 – 18 months before a rethink, so the bondholders will get 100% of their money.

    Basically this leaves the country back at the position where it will take whatever it is offered and do what it is told in order to keep the credit line open. It has placed itself strategically to have zero negotiating hand.

  37. @Celtic Phoenix

    That’s a very interesting development. I expect that Nick Rowe and Scott Sumner will be blogging about it before long. If things get much worse in Ireland we may need some such home-grown “monetary policy” to offset our (unavoidably) tight fiscal policy.

    @Ciarán O’Hagan

    Thanks for the response. Right now I’m inclined to take a Keynesian view of the long run (i.e., in that timeframe we’re all dead). Of course the US will have to confront its deficit eventually but, given the interest rates Uncle Sam borrows at, it doesn’t strike me as an urgent problem.

  38. @Michael Hennigan

    “The media largely reflects the conservative well-heeled of the Left and Right who are resistant to change – -unless it arrives like manna from heaven.”

    Indeed. Mercs to the Right and SUVs to the Left.

    @Ciaran O’Hagan

    Re deficit. Hard to see how that can be brought under control with public sector pay and welfare reaching the moon. Moreover if PS pay is cut too much (whatever that is) mortgage defaults will accelerate. Very tricky. Only long term solution is more private sector jobs and that must entail serious adjustments to welfare.

  39. @ Shay Begorrah

    Everyone here realizes that there needs to be adjustments at a wide range of levels in Irish society (especially those undeserving poor and feckless public servants it seems)…

    You are good with the victimhood and I guess the Irish sector where there is no guaranteed job security, where people doing comparable jobs earn less and the public pension scheme could only be affordable for a minority in the economy, is an alien place for you.

    200,000 people have lost their jobs.

    To me, selfish vested interests should be taken on whether they are on the Left or Right.

    @ all

    Former Bertie Ahern booster, Aengus Fanning, the Sunday Independent editor, has bailed out before the new government has a chance of a honeymoon and the ex-Cowen admirer Jody Corcoran is tripping over himself with outrage.

    Shane Ross TD is another revolutionary who is double-jobbing and most bizarre of all, Fanning enlists novelist and British Tory eurosceptic, Frederick Forsyth, who advocates leaving the euro, in the newspaper.

    Forsyth says:: “A massive vote against the bailout terms would leave no doubt about the preparedness to fight once again for the emerald isle. And maybe, just maybe, somewhere in the darkness, the spirit of Michael Collins still dimly flickers.”

    Maybe or maybe not.

    Michael Collins had to take consequential decisions that these novelists and journalists could only dream of and also put his life on the line.

    All these bravehearts are well protected from the consequences of what they advocate.

    Isn’t it strange indeed how these firebrands of default have so little to say on development of a credible national jobs strategy.

    Where was the outrage when it may have mattered?


    Ireland, an Béal Bocht and a freshly varnished Victims’ Cross

  40. We could start from scratch with a radical design based on some foundational truths???
    government has become too expensive both locally and nationally. The retiring and or defeated td’s confirm this.
    Downsize all the ps pay scales, cut ps pensions and other costs.
    This would also mean an intervention into the existing mortgages.
    If it was done right, wouldn’t it work.
    We won’t get out of the shit with half measures!

  41. @ Triple-A Austerity & Illusionist Pay-em-all back brigade

    John Finn of Treasury Solutions said the impact of a rise in rates would be minimal if fixed-rate mortgages at market rates were available. Then borrowers could effectively hedge against increase in interest rates. He believes the increase in rates will have several knock-on effects in the Irish economy.

    “Borrowers who can afford to save to protect against rate hikes will do so, decreasing consumer spending. This will result in lower retail sales, lower vat revenues and higher redundancies in this sector, which in turn leads to lower PAYE, higher welfare, etc. All of this will increase the government deficit … and will reduce our ability to repay sovereign debts.”

    He said there would be further mortgage arrears.

    “If there are significant mortgage arrears when the base rate is at 1%, what will the level be like at a base rate of 3% to 4%?

    Mr Finn said higher arrears lead to higher bad debt provisions at banks, higher losses/lower profits and higher capital requirements for banks, which can only borrow from the government, which can only borrow from ECB/IMF.

    “The government will struggle to pay existing debts so you have a vicious circle. The economy is cannibalising itself,” he said.

    http://www.irishexaminer.ie/business/interest-hike-will-lead-to-vicious-circle-147259.html

    What is that Joycean phrase again … ? And it ain’t Mia …

  42. @Michael Hennigan

    You are good with the victimhood and I guess the Irish sector where there is no guaranteed job security, where people doing comparable jobs earn less and the public pension scheme could only be affordable for a minority in the economy, is an alien place for you

    I have worked in the private sector my entire life and have spent much of my working life in contract positions (by choice) with no long term job security. I have been fortunate never to have never been the victim. I do have a sense of others people’s victimhood though, and perhaps I apportion that victimhood wrongly.

    I know that I have prospered at least partially because of luck and birth where others have chosen the wrong parents and suffered. I have a strong sense of increasing injustice and inequality in society which I find personally upsetting as well as morally repugnant.

    I do not disagree with you that some (much?) of the public sector has become institutionalized or that the current approach to pensions has left private sector workers far behind. We have lived far beyond our means and have become comfortable with the idea of the long term unemployed and indeed of not having to work.

    However my hope would be to gradually change the way we organize the economy to make the insecurity and deteriorating working conditions of those working in the private sector abate and then reverse while simultaneously reorganizing the public service to make it more flexible, efficient and effective.

    As far as I know you think that this is a pipe dream and our best hope is to shrink the state, reduce business regulation and make the competitiveness of our economy the primary goal of government. I see only a race to the bottom with this approach and I have other hopes for Ireland than trying to win a race to debase ourselves for capitalism.

    We can find a way of out of this other than despair, submission and self destruction.

  43. @Michael

    The SINDO line seems motivated by outrage that Labour is in power and that this will mean a soft line on the public sector.

    I’m in one of my hope moods. I think if FG tried to drive public sector reform via that new position then positions would polarise and the unions would simply do an IRA/Rainbow job (just refuse to deal with FG). If Pat Rabbitte has the job then maybe he can use the relationship with Jack O’Connor and introduce a sense of…realism to ICTU. So rather than see Labour has the ICTU proxy, see them as a bridge to the power brokers in ICTU. If you know what I mean.

    I also thought it positive that Ruairi Quinn is being mentioned again in dispatches as a possible minister.

    I’ll give them an extended honeymoon….though if Eoghan Harris’s predictions in the SINDO are right, they won’t be getting one from RTE either. Still FG strategy to date (and successful) has been to ignore the media and press on. Fingers’ crossed…

  44. It is all thoroughly depressing. The apparent compromises (split finance) are a receipe for disaster. Turkeys controlling Christmas. With the the UK prospects looking dodgy and the prospect of another oil shock on the way, the Irish growth forecasts look increasingly optimistic. Add Trichet’s forthcoming rate rises and the picture becomes bleak. With all the headwinds the four year plan is highly likely to go off the rails. So what then? Another dose of austerity to further depress the economy. The only bright spots is the likely defeat of Angela and Sarkey in their elections and the departure of Trichet this year and Weber out of the running.

  45. @ Michael Hennigan

    dunno if u saw aengus fanning on the late late a few months ago, but that man is quite clearly bereft of sense. it was a performance to make your skin crawl. and jody corcoran is little better. the tone of the indo today was very disappointing

  46. @Sarah Carey

    if Eoghan Harris’s predictions in the SINDO are right…

    ha, ha, ha, good one 😀

    I wonder which poor fecker is going to get the support of Eoghan Harris.

    I’m hoping Gaddafy, or maybe the Saudi royal family.

  47. I can’t believe there are so many Sindo/Indo readers on this blog. I’m off to wash my eyes with tiger balm…

  48. A vulgar search:

    Statement of Common Purporse (sic)

    no mention of the word ‘DEFAULT’

    ~ 50 on ‘bank’

    2 mentions of restructure – for small business and semi-states – None related to BANKS

    3 mentions of ‘corporate governance’ – Note that Ireland is the only country in the EU that does not have its own ‘national code of corporate governance’. Does it show? [Richard Bruton – I’m observing your ‘promise’ to request ALL directors of State Boards to resign within 6 months ………….

    6 mentions of the word ‘hope’

    14 mentions on ‘jobs’

    ONE mention of the word REVOLUTION ! I must have missed it ….. darn!

    I wish the incoming administration well. … Honeymoon over …. (-;

    ….and lets not forget that there are still 80 hours where the other crowd can still do untold damage ……….. Blind Biddy remains vigilant ….

    Now to peruse the vichy_bank programme … sure we will have a new thread ……….

  49. @ Shay Begorrah

    As far as I know you think that this is a pipe dream and our best hope is to shrink the state, reduce business regulation and make the competitiveness of our economy the primary goal of government.

    This isn’t correct; my view is that a just, well-run accountable governance system, is not incompatible with business regulation.

    I advocate fairness which isn’t very evident in the vested-interest dominated Irish system.

    I wrote this in 2004: ” The landmark Irish employment legislation of recent decades has been the Unfair Dismissals Act of 1977. In common with all rights legislation, the early years of the Act provided tabloid journalists with much fodder as there were the inevitable share of frivolous cases along with the worthy ones. Today it’s the Equal Status Act which provides tabloid journalism with material.

    In recent months, the Irish Times columnist Kevin Myers has referred on a number of occasions to the Equality Authority as the ‘Equality Police.’ It is easy for a white middle class male to make an issue of what is termed political correctness. It took time for the administration of the Unfair Dismissals Act to settle down and the same also applies to the Equal Status Act. There will always be a number of bad judgments in the adjudication process provided by rights legislation but that is not an argument for no such legislation.”   

    @ Sarah Carey/ Jarlath

    The newspaper appears to be run like a tabloid where journalists and columnists are given the editorial position to cheer lead.

  50. @Michael Hennigan

    This isn’t correct; my view is that a just, well-run accountable governance system, is not incompatible with business regulation.

    I stand corrected.

    I advocate fairness which isn’t very evident in the vested-interest dominated Irish system.

    Now if we could agree on the order to deal with the vested interests in…

  51. @all

    Rehn: Bailout terms should be extended to seven years

    http://www.irishexaminer.ie/breakingnews/ireland/rehn-bailout-terms-should-be-extended-to-seven-years-496297.html

    Later [Olli’s ] spokesman insisted: “This programme is the best guarantee for the Irish economy to recover, to have a new fresh start for the benefit of its citizens in the medium and long term, with a more solid basis, whether it comes from the restructuring of the banking sector or the fiscal consolidation of Irish state.”

    Ah Yes- a bit of ‘restructuring of the banking system’; methinks this one is driven more by Greece situation than by Ireland … i.e Greece can’t pay …DDDDDDDD

    AIB transfers €1.1bn in loans to Nama – ‘nother bit of re-structuring wha!

    @Michael Hennigan

    ‘… my view is that a just, well-run accountable governance system, is not incompatible with business regulation.’

    Agree.

  52. I mentioned upthread that Ciarán O’Hagan was mistaken in claiming that Paul Krugman was “encouraging EU peripherals, in his public press articles, to engage in pump priming.” But I didn’t provide a cite since it’s a bit off-topic and I couldn’t find a handy link to make the point. Krugman actually believes that Ireland has no real alternative to austerity. He spells it out in his Erin Go Broke column published in April 2009:

    Is Ireland’s government doing the right thing? As I read the debate among Irish experts, there’s widespread criticism of the bank plan, with many of the country’s leading economists calling for temporary nationalization instead. (Ireland has already nationalized one major bank.) The arguments of these Irish economists are very similar to those of a number of American economists, myself included, about how to deal with our own banking mess.

    But there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.

  53. @Kevin
    Despite the above, which I believe to be correct, Mr. Krugman has consistently undermined the case for austerity by criticising the outcomes: http://krugman.blogs.nytimes.com/2010/06/13/does-fiscal-austerity-reassure-markets/ for example, and, as in the same piece, by praising the results of those who didn’t immediately austerify 😳

    I’d prefer a bit of consistency – which is it? We have no options? Or we should be doing what the Spanish have now abandoned?

  54. I can’t see any inconsistency at all in saying: (a) the notion that fiscal austerity reassures markets is refuted by the data; and (b) Ireland is in such a bind that TINA to fiscal austerity. So we have to do it, but we shouldn’t be straining our eyes to see the silver lining that isn’t there. Maybe Krugman is wrong — for all our sakes I’d love him to be wrong about (a) — but he’s not being inconsistent here.

    A point he has made in another context is that if the situation gets really dire in some eurozone country, with the banks closing their doors, the euro is likely to be abandoned and a local currency introduced. But he doesn’t see the Irish predicament as being quite that bad.

  55. (TINA = There Is No Alternative.) Maybe some readers are too young to remember Mrs Thatcher.

  56. @Kevin O’Donoghue
    Maybe you’re right. The carping about austerity, though, considering TINA is a bit grating. Perhaps some guidance on ‘better’ and ‘worse’ austerity would be helpful.

    I doubt there are many left (if there were many in the first place) who think that austerity will be grand. It is clear, I think, that there are choices to be made and that those choices have consequences. More focus on the effects of the choices and less of the hand wringing would be useful. Austerity is bad, but all the choices facing us are bad. There’s not much help to us in using us as a strawman to score points against US political opponents.

    If we are unable to stimulate parts of the economy by putting more money into them, it seems that our choice will be to less destimulate them by cutting them less. Given promises to introduce property and water taxes, universal health, cut quangos and so on, it makes sense to think about the effects beforehand rather than being surprised by them after (again!).

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