Failure to Catalyse

While the change of government has brought a welcome fresh start, long-term bond yields – and the implied probability of an Irish default they signal – continue to rise.   The 10-year yield is now above levels that forced Ireland to seek the EU-IMF assistance programme in November.  It is of course early days.    But there is no getting away from the message the bond market is sending.  

The hope behind the programme is that it would catalyse private funding.    With this in mind, it is interesting to look at the literature on the catalytic effect of official funding, much of it originating from the IMF itself (see here for an example).   The basic idea is that official funding can be a complement to private funding.   

There are two main catalytic mechanisms.  First, in a situation where private investors are unwilling to provide (non-senior) funding because of a debt overhang or liquidity concerns, the existence of official funding can increase confidence that they will get their money back.   And second, a combination of IMF conditionality, an IMF “seal of approval”, and direct IMF input into the design of the adjustment programme can increase confidence that the programme will work.   Against this is the possibility of official lending will induce “debtor moral hazard” – effectively a weaker adjustment effort.    (Unfortunately, the apparent weakening of the adjustment effort in the new Programme for Government, and the rather confusing split between taxation and expenditure responsibility in the newly organised Department of Finance, may have raised these concerns in our case.)

The hoped for catalytic effect has not materialised so far.   I know many readers of this blog are confident they know the reason – given the outlooks for growth and bank losses, Ireland will not / cannot make the fiscal adjustments necessary to first stabilise the debt-GDP ratio and then bring it down to a less vulnerable level.   And indeed the empirical literature on the catalytic effect does point to it being present for countries with weak but not disastrously weak fundamentals (see here).   

But it is worthwhile to also consider another factor: private investors do not want to buy Irish debt because they fear getting caught in any new crisis resolution mechanisms that involve creditor bail-ins.   Such mechanisms are now envisioned for new issues after 2013, but investors fear that they will be brought forward if the crisis does not abate.   The direct involvement of the EU/euro zone along with the IMF makes the likely evolution of the resolution mechanisms more unpredictable than usual.  

Discussions on revamping the resolution mechanisms have focused up to now on how to make the bailout more generous.    But potentially just as important is to have more clarity on any eventual bail-ins.   Advocates of more orderly bail-ins emphasise the deadweight costs of disorderly defaults, as well as the benefits of fairer burden sharing and avoiding creditor moral hazard.   Clarity on whether such mechanisms will be pursued – and on whether they will be toward the more voluntary end of the spectrum  – could allow the catalytic effect to finally emerge.

66 replies on “Failure to Catalyse”

Yes John, March 10 and hittin 10 – no getting away from it.

The Catalyst that we, and other indebteds need, is an Ounce of Sanity from the EU Core policy makers ….. this is, apparently, not on agenda for March 24-25.

In the interim, we ‘hold’ on the main ECB liquid catalyst. The few inches off the hangman’s rope on the interest rate will ensue of its own accord. The deficit hasn’t gone away we know; our most productive human capital is contributing to growth elsewhere at a 1000 a week; and who trusts bank stress tests these days; I’m particularly looking forward to the French and German ones; The Spanish can bring the house down and force the issue … we hold the main catalyst ’til then – and might even hold onto it in the form of a nationalised bank with an irretrievable black hole, which the kore can write down to experience.

Some chemical equations are immune to catalysts; ours is one of them.

At today’s close, the fair value of the Irish 10-year at a constant risk-free 3.3% (the German ten-year rate) is just over 150% of market. The Greek percentage is higher, Portugese not far behind. Ominously, the same is true at five years.

There is no prospect of market re-entry for these countries through fiscal effort alone, which is not an argument for not trying. It is an argument for addressing the real and present danger, several Eurozone countries deemed by the sovbond markets they must re-enter to have high probability of default. Debt crises, unattended, turn into liquidity crises.

Question: Has there ever been even one sovereign default in an economically advanced country with no capital controls, and no realistic prospect of imposing any, which was also in a currency union?

@ Colm McCarthy

The short answer to your question is, I think no. As a layman, I found the report by the McKinsey Global Instiute on debt and deleveraging to be very informative in this general context.

The insistence on bail-in arrangements is, of course, coming from Merkel and it seems to be a feature of the German political system that a position once it is adopted by the Chancellor cannot be reversed. It also seems to me that the reform process for the EFSF/EFSM cannot, in logic, be divorced from the negotiations on the ESM.

Furthermore, there is a school of thought which I understand considers the very idea of an ESM to be counter-productive i.e. anticipating a system for preventing defaults simply risks precipitating them. Events seem to be bearing out this theory.

It is now too late for a tailored case-by-case approach. In short, Germany under Merkel has backed the eurozone into a corner from which it will be very difficult to emerge.

@John, the political difficulties aside, you don’t think there might be an option value to waiting to decide how losses should be split between the EU, the IMF and private creditors then?

@Colm, the closest to an example I can think of is Newfoundland, which is scary. I believe that the Newfoundland dollar was issued by Canadian banks, so there was effectively a currency union with Canada.


Sure, but the value goes to those bodies you mention, which goes some way to explain why things are left drift. Just to be clear, a policy on bail-ins that imposes large losses on creditors would most likely make it very difficult to regain market access. It is the standard ex post vs. ex ante issue with resolution regimes: it helps to be able to impose losses on creditors who made bad investments ex post; but when it is easy to impose such losses it is damn hard to raise new funding. From our point of view as a borrower, I think it would be good to reduce the uncertainty and let investors know the regime they are dealing with.

@colm mccarthy
“Question: Has there ever been even one sovereign default in an economically advanced country with no capital controls, and no realistic prospect of imposing any, which was also in a currency union?”
Argentina in 2001.
They had their currency pegged to the USD, so were effectively in a currency union.
They had, at that stage, no capital controls.
They, er, ran out of money trying to pay every peso that left in dollars.

You might see te US Virgin Islands default on their muni bonds:
or Detroit (from the same slide show). With a population of about a million, that’s not insignificant.

Any of the gold standard defaults (so anything pre-1930s) would effectively also have been in a currency union and would have had no ability to impose capital controls (gold being portable and all that). It has been said before that the euro operates as an effective gold standard (possibly except for Germany) since no single country is large enough to move it.

I think it is ominous that the Greek 2yr closed at 17.01% having traded at 17.1% earlier. Does this indicate inevitable default?

I think the likelihood of clarity about the regime making enough of a difference to bring lenders back is so low that it is necessary to give a lot of weight to any negatives. For me, the big risk of doing what you suggest is that the Irish government will have to make commitments about the conduct of a default, which we will regret later, to sweeten the deal. A rather large option cost.

It’s no accident that I referred to Newfoundland, which entirely lost its sovereignty as the result of a debt crisis, below my initial response to you.

Well it might seem quite obvious. But if you want bond yields to come down, you cut debt, not add to it (some 43bn earmarked for Ireland from the EFSF, EC and IMF alone in end 2010 to 2011, as laid out in the EC’s Economic Adjustment Programme for Ireland, Feb 2011). As John says, “official lending will induce debtor moral hazard”. And how does EU-IMF loan disbursement impact seniority, today and in 2013?
Actually I just have up in front of me a chart of the 5% 2013. Back in mid October of last year, it was under 4%. Time of Deauville and Ecofin. Does that ring a bell?
Wednesday, October 20th, that Karl Whelan ran a post on a “New European Treaty”. If you were actually at the meetings leading up to it – or even maybe just reading the press attentively – you’d have had a bit more notice of what was in the offing. Today, we are still on the road that was mapped out back then, as the authorities decided, with all that implies for 2013 and beyond.
Like for Portugal today, choice was available, even at that late stage. Choice though between two very difficult alternatives. Decisions maybe were taken by default, but taken they were.
Just for memory, we had John McHale writing on “Self-defeating deficit reduction?” on Saturday, October 23rd. . We then had the following Tuesday a “Government Statement: €15 billion target” (where did the 3% in 2014 go to?). Kevin O’Rourke asked “What do markets want?” on Thursday, October 28th noting that “market participants tend not to believe in tooth fairies or negative fiscal multipliers ». Philip Lane posted the same day on a “Successful Bond Auction”. The rest is now history.
Yet when I read the Irish press on developments in Europe on the 20 October 2010, they were pretty accurate, uncanningly so indeed. For some sovereign risk assets since that date that price events just beyond 2013 (in 2014), it has been a one way street since then. And it all began on that date.
In relation to this post, I wonder who had the idea that private funding would be “catalysed”. Indeed the Bruegel report two weeks later (8 November) put the dots on the i, as they say in French, for anyone that couldn’t read plain English, on that particular point.
As for “confidence that the programme will work » just because the IMF is there, just read the conclusions to the IMF’s December assessment of the Irish package – the very last page.
As for now, I don’t see the interest the authorities would have in bringing forward crisis resolution mechanisms. There is a certain logic in what the EU authorities have decided, in the expectation that primary deficits can be cut substantially. There might be better, if similar, schemes like CES-IFO or Bruegel have suggested. But for now, if the remaining governments live up to their fiscal promises, strictly, and somehow avoid shocks, they can stay on the same road, with Ireland and Greece in tow.
No outcome is still inevitable, unless given, as John says, « the apparent weakening of the adjustment effort in the new Programme for Government ».
@ Colm – is it the sovereign defaults at the time of the gold standard you might be hinting at?
@ John “it would be good to reduce the uncertainty » I think the governments were clear last October-November. But the news was maybe a bit hard to take. I’d expect them to stick to the same path at the upcoming summits. Thereafter, less uncertainty. There is time to let the news seep in. Like when you are dealing with a seriously ill person, it is maybe not helpful to spell out all the gory detail up front.

“Question: Has there ever been even one sovereign default in an economically advanced country with no capital controls, and no realistic prospect of imposing any, which was also in a currency union?”

Reinhart and Rogoff classify the Goschen conversion as a default. I think they are wrong. But what’s so special about being sovereign? The New York default in 1975 involved an entity much larger than Greece or Ireland by most criteria.

I’m not trying to be a smart-arse here, I’m just puzzled by the question. Why is sovereignty, as such, a big deal to a bond-holder? To me the only thing that makes sovereign debt special is that you have no come-back. If the King says he won’t pay, you’d better believe it.

@ Ciaran O’Hagan

‘As for now, I don’t see the interest the authorities would have in bringing forward crisis resolution mechanisms. There is a certain logic in what the EU authorities have decided, in the expectation that primary deficits can be cut substantially’

Indeed there is a logic Ciaran. To me it looks like the logic of a poltical process which has been captured by the big players in the financial markets. The ECB sat on its hands for years while a massive credit bubble was inflated.

They bought into the ‘Greenspan put’ all the way, because that is what ‘global markets’ demanded. Having encouraged governments to socialise the inevitable private sector losses, the central bankers now preach austerity for Joe Public.

There are examples in history where citizens have been prepared to tighten their belts and do without in the name of some greater good. We Irish are no better or worse in that regard, and we simply require to be convinced.

The recent saga of the BoI bonuses is, however, only the latest affront to good governance. Any reasonable person will conclude that the instigators of the buble are intent on protecting the proceeds, and indeed to ensure that future looting is facilitated. There is nothing to respect in that.

Austerity can probably be imposed, but without the consent of the governed, the result will be emigration, withrawal to the black economy, crime and disaffection.

@John McHale

If this thread is broadly about what substantive effect the change of government has had or will have, Krugman’s opinion can be summed up as follows:

1.) The Irish electorate “threw the bums out” and replaced them with “another set of bums”. ( Krugman made this comment not out of any animus about the personalities or competence of the new administration but simply based on his perception that the “new” economic policy, swingeing austerity and acceptance of the EU/ECB/IMU deal, is the same policy as that of the “bums” that were just “thrown out”.

2.) Krugman feels ( quoting the 9.5% rate the markets now accord Ireland) that no catalysis has or will happen and that default is inevitable.

3.) Citing the property bubble ( and under water mortgages) as the main cause both of the US and Irish financial crises, ( and of astronomically high levels of unemployment….and emigration in the the Irish case!), Krugman says there is too much emphasis on the financial/banking side of the equation as the primary cause of the crisis.

He doesn’t talk about the “European” banking crisis ( which he seems to take for granted.)

Maybe that’s because Angela Merkel, realising that current proposals under discussion today (Summit 1 of the “Competitiveness Pact”) will not solve this problem.

Summit 2 of the “Competiveness Pact” on 24 March, apart from edging aside the clearly inadequate “European” institutions, will therefore be the “Fudge” Summit and will not solve the problem either. (But will pander to German and French electorates and may even make noises about a CCCTB).

Doesn’t look like Krugman or the markets have much confidence in “Europe’s” abilty to get us out of this mess.

Unsteady as she goes! And Ireland looks decidedly lonely under this new (albeit better!) set of “bums”!

Is it not simply the case that the EZ, as an association of socvereign nations, does not have the legally enforceable meachanisms in place to impose losses to the extent they should be borne by private sector investors? And, in so far as national governments have these mechanisms, there is an unwillingness to impose losses because doing so would reveal the fragility of the EZ banking system? Those who can manage, fudge, hide or defer attending to the underlying problems will do so for fear of being required to call on the public purse. And there is no appetite among these to raid the public purse to provide support for those whose misgovernance has left them fatally exposed.

@Paul Hunt

I believe you’re right….. about the the EZ ( I call it “Europe”) not having legally enforceable mechanisms to impose losses ( or manage gains) on private sector investors. Angela admits as much by proposing such mechanisms, but only after 2013.

Taken together with Michael Hennigan’s comments on Obama’s current policy and German (“surplus”) benefits from basically running the EZ, we finally emerge into the “final” global strategy stand-off viz. as things currently stand, the only choice Europe has if it wants to be invited ( post-resolution of current banking and currency challenges) to sit at the US-China G2 table is to accept that “Europe” IS Germany! or vice versa, of course!

In the spirit of the paradox of thrift, we can imagine the “paradox of balanced budgets”, sort of a game theoretical idea a few people have tossed around with relation to Greece and Ireland.

Goes like this:

1) Ireland’s incentive to avoid default on outstanding sovereign debt primarily arises from its requirement to continue borrowing into the future to balance its budget.

2) If Ireland attempts to close its budget deficit, it therefore loses its incentive to service outstanding debt.

3) Markets know this, and therefore punish Ireland with higher and higher interest rates, the closer Ireland gets to a closing the deficit.

4) Ireland knows this, and therefore reasons that a balanced budget is only feasible in the case where it has no outstanding debt.

5) The winning strategy is therefore: default immediately and accept severely constrained sovereign liquidity as a strategy to achieve a balanced budget.

One big worry for Ireland is the capacity of strangers to be kind to us.

Perhaps it is our collaborators view that in order to be given assistance by them we first need to follow through with extraordinary austerity which will teach us a lesson that will last 70 years. Perhaps they accept that they will have to help us then even if they do get to impose a huge price in terms of natural resources and fiscal subjugation. However, that will all be worth nothing to us if they are under severe pressure by the time it comes to help us. (The limits to what monetary policy can achieve are very important in this regard.)

There were massive long-term problems facing Ireland and Europe before this crisis hit. Climate change, peak oil, energy, global over-population, shifting global economic power, imbalances of globalisation (the western world is simply not worth what it has been paying itself, and using as collateral for debt, for the last 25 years), African migration, Middle East instability, Sub-saharan African instability, pension deficits.

We have some natural advantages which gave us hope. We now add to the global problems the massive problems in the global financial system (which we helped to preserve by preventing Anglo’s implosion, however crudely we did it).

If we sign up to the role of supplicant in the hope of future supplication but the World turns into a far more brutish place in the intervening period then we will be destroyed. For this reason, we need to consider taking some extraordinary action now. It may well be worth the pain which lawful default on debt would cause in order to avoid worse pain down the line. If we default at a later stage, when other countries are experiencing food shortages and power black-outs, it may result in enforcement action of a different type altogether.

At the moment, other countries will respect the law even if the markets pay it little heed. We have started the descent from the historical zenith of respect for the law by sovereign govenrments. I think it is time for us to take courageuous steps which the law empowers us to take. Our sovereign debt and the bank guarantee are largely governed by domestic law. We could unilaterally impose collective action clauses in al such debt. This opportunity for lawful sovereign action diminished every time we draw down more money from the IMF(UK)/EFSF/EU funds.

As things stand we are like an insolvent man guaranteeing an insolvent company in the hope that the world will turn and we will be cut a deal. The reality though is that the bankruptcy laws are severe, the future is uncertain and the deeper we dig our hole the longer it will be for us to get out if it.

Arthur Beesley does a good job of identifying the elephant in the room in the IT this morning (repeated on Pat Kenny this morning).

“Declarations of intent will not alone suffice, although they are important nonetheless. Thus one of Kenny’s prime tasks today is to convince his counterparts that his Government intends to make good on its pledge to doggedly pursue the fiscal path of rectitude and reform.

In the first instance at least, this overrides debate on the interest rate and the banking debacle. Indeed, the basic case for any easing of Ireland’s rescue terms rests on Kenny’s ability to persuade other leaders that he has the mettle and gumption to keep going when the going gets rough”.

The issue is, in other words, fundamentally political both at an Irish and a European level, the risk being that in meeting, or failing to meet, political imperatives technical solutions will be attempted that cannot actually work.

To quote John McHale “It is the standard ex post vs. ex ante issue with resolution regimes: it helps to be able to impose losses on creditors who made bad investments ex post; but when it is easy to impose such losses it is damn hard to raise new funding”. If this is the generally accepted expert opinion, does this raise the prospect too awful to contemplate that Merkel is leading the eurozone down a cul de sac?

Ciarán O’Hagan sums up the situation perfectly in my opinion.

“As for now, I don’t see the interest the authorities would have in bringing forward crisis resolution mechanisms. There is a certain logic in what the EU authorities have decided, in the expectation that primary deficits can be cut substantially. There might be better, if similar, schemes like CES-IFO or Bruegel have suggested. But for now, if the remaining governments live up to their fiscal promises, strictly, and somehow avoid shocks, they can stay on the same road, with Ireland and Greece in tow”.

In other words, the paradoxical situation may be that an outcome resulting in a vacuous “competitiveness pact” and little else may be the best outcome for Europe. Meanwhile, the incoming economic tide may lift all boats and float the peripheral countries off the rocks while the political directorate of Europe is still arguing about what to do on the bridge. It would not be the first time. Better that the markets have to digest political reality than a solution which they do not believe can work. But politicians are inveterate meddlers.

John McHale is quite right. We are concentrating far too much about details rather than thinking about the over-riding policy aim which must be to restore the Government’s ability to fund itself in the market in the ordinary way. Bond yields are the main marker of the success or failure of policy, so what’s been happening recently to our yields shows that there’s still a huge problem, to put it mildly.

By the way, there’s a long and glorious history of sovereign default going back to the ancient Greeks – interesting case of history going in cycles or maybe circles? Bloomberg: “The first recorded sovereign default was in the fourth century B.C. when 10 out of 13 Greek municipalities in the Attic Maritime Association reneged on loans from the Delos Temple.”

The chart at the link below shows hilariously that Germany [or Prussia, same thing] has defaulted on 5 occasions in modern times. Real bond nuts never forget this kind of thing: not getting your capital back, whatever about the interest, is very upsetting……………….

– substitute “future succour” for “future supplication”
– substitute “historical zenith of respect for the law by western governments” for “historical zenith of respect for the law by sovereign govenrments”
[other typos not so bad]

Once again we seem to have come to the key strategic divide with Ludwig Heinrich Edler and Zhou apparently making the case for a default now, with Ciaran O’Hagan and DOCM arguing for the fiscal discipline to manage the burden. Richard Fedigan I think is in this camp with a further requirement (which I support) to recognise Germany’s economic strategic dominance and seek to adapt Ireland’s economic position in line with this. And I would go further and argue for reforms of political governance and structural economic reforms to remove deadweight costs, to lift economic performance and to enhance future debt service capability. These refroms would be first and foremost in our interests but would provide a clear signal to our better governned EU partners and might begin to restore our badly tarnished international reputation.

@Richard and Paul

You are right that the EU/EZ does not have the authority to dictate the nature of loss sharing, but the question of “private sector involvement — aka bail-ins — is in play in practically all IMF “bail-outs”. Nouriel Roubini and Brad Sester document this in great detail in their 2004 book, Bailouts or Bail-ins, which is a worthwhile read.

At the moment, we are seeing the link in that the various funders (led by the ECB) are demanding there is no immediate involvement of unguaranteed senior bank creditors. But with yields where they are, we know that sovereign debt holders (and potential holders) perceive a high risk that they will be “involved” down the line.

Given that the proposals for the ESM apply only to new issues, the yields are telling us that markets expect this involvement to operate retrospectively. The point of my last paragraph in the post is that the likely evolution of bail-in policy is probably just as — if not more — important than the evolution of the generosity of the bailout terms. I am less sure about the helpfulness of attempting to force the issue at this stage — and BCT, Ciaran and others make some goods points in that regard — but the fear of loss imposition as part of a new phase of peripheral assistance is surely a big element of the perceived default risk belief that the markets evidently hold. And the uncertainty must be contributing to the avoidance of Irish bonds. I don’t believe that aspect has received the attention it deserves.

Now now – wouldn’t default yet – the situation is dynamic – lets get another 100 billion – and another 100 runs – then we can afford to default ….

John McHale
“from our point of view as a borrower, I think it would be good to reduce the uncertainty and let investors know the regime they are dealing with.”

On reading this comment is it fair to say that you now admit that your call for a “default nut” minister of finance was a lot more than tongue in cheek?

Is it fair to say that you believe it to be a legitimate worthwhile policy direction?

If that is the case than I disagree with you and agree with BeeCeeBee. Making very strong promises that cause legal or moral binds later (remember the cheapest bank guarantee in the world) are not in our interest.
It is deeds not words that will impress the bond markets re Ireland. We have shown our words mean nothing to many times.
In any case there is also the moral issue of having to financially cripple our own citizens even more in order to impress them and in any case I (unlike you) believe that it will not be possible to get out of this hole without restructuring/default/burden sharing.

Margaret Thatcher’s mantra was TINA but few democratic leaders operate like that including her soulmate Ronald Reagan.

There are national elections in France and Germany in 2012 and 2013.

There are going to be no long-term solutions for Ireland and Greece in the short term.

For Ireland, it’s best to proceed with the EU-IMF plan with lower rates and a programme of reform – – a competent government with an agenda of change would surely have more credibility than the ancien regime.

If default becomes inevitable, in say 2014 then it becomes a problem to be solved by the EU.

Unilateral default now would be reckless and is only something that well-off insiders and fools could consider.

@Paul Hunt

There is going to have to be major micro-economic adjustments either way. Hopefully there will also be major political reform either way.

To be honest, I don’t think that the political parties of the middle class will have the stomach for the radical step of default. They have been raised on political stability and cyclical recessions. They think that this is like other recessions.

They are unable to get a mental grip on the scale of our long term problems. Wishful thinking makes them believe that the world keeps turning and everything turns out ok with people a bit poorer or a bit richer in the end. Our neighbours know otherwise but the Irish middle class and their political parties can’t see what’s on the horizon. Apart from that, most of them will not be with us when the disaster fully befalls us.

The only option our politicians and the middle class see is negotiation and conditional co-operation. That being the case, we are dependent not only on the kindness of strangers but also on some brilliance of strangers coming to bear.

@John McHale,

I take your points. I think where we agree – and where I think others here would agree – is that it is the uncertainty about the extent to which sovereigns will be required to provide fiscal support to recap dodgy banks throughout the EU (with some bank losses hidden and others only partially revealed) is what is spooking the sovereign bond market. The message core EZ politicians seem to be attempting to convey to the market, is that they can manage and that they will make the peripherals manage. The market isn’t buying this. But, as DOCM points out, it may have to swallow it as it is likely to be the best that may be cobbled together and any conceivable alternative would be even worse.


I’m pretty confident that default will not be an option for the current government. I do share your doubts about its grasp of the strategic challenges, but it’s early days and I’m prepared to give them the benefit of the doubt – for a while.

John I am beginning to wonder whether you are another of these finance guys with physics envy given all this black hole stuff and now catalysts. A few banks got sucked into that and it turned out they didn’t understand physics and the physicists they hired didn’t understand finance. Repent!

You could make the case that Pimco buying your bonds or Berkshire buying your stock could act as a (positive), catalyst. The IMF arriving is never likely to inspire the markets to think they might have missed a trick, quite the opposite.


I’m actually not a finance guy at all. And know very little physics (probably shows). Just an economist trying to find useful perspectives on a very complex issue.


West Indies win by 44 runs.


Pass – couldn’t face another Lorenzo deconstruction at the mo …


His first sentence – couldn’t resist:

To understand how Europe will develop after the crisis, …’

Nuff said.


If I buy an Irish sov bond today i am taking the risk that either before ESM or after it, that bond may be defaulted on by an Irish government under Irish law.

Just as an example, David McW’s newspaper columns, theatre shows,. future documentaries for RTE and their possible effect on popular opinion and therefore the actions of politicians, are all going to be part of my guesstimation of how likely that is to happen – has that been over or under discounted in the price?

Similarly, consideration of the power of the Croke Park lobby has to be estimated – as that is aligned with the interests of those who want no disruptio to continued debt funding.

I could go on and on.

If I steer clear of Irish so v bonds until ESM I will be taking less of a risk on domestic political and legal forces, but a different kind of risk in that there will be collective action clauses that might get triggered.

It is complicated and a lot of overseas investors consider that the size of the market an likely % of portfolios means it just isn’t worth bothering with.

The crisis took time to evolve, it seems likely it will take some time to resolve as well.

Short-term changes in price can be part of a trend or they might not. It seems likely that there will be some restructuring & that might be reflected in the market. The time to prepare for the possibility of restructuring is now, the stronger the state finances are the stronger the negotiating position will be.

If there is a negotiation in a couple of years time, then a strong negotiating position combined with not having alienated the other negotiating party is needed for a good outcome.

Ireland has a couple of options:
1. Try to negotiate now.
2. Use the time given to improve the negotiating position.
3. Waste the time given. (Apologies but I can’t find a nicer way of putting it)

@Michael Hennigan and ALL

Get to high land. Major disaster – Japan 8.9 earthquake – Tsunami – Nuclear Reactor in trouble ….. and Tsunami sweeping across Pacific higher than many islands …….. gets me head out of other stuff and cricket for sure ……….


All true enough. But then there are those yields. We’re small enough that we only have to attract a tiny fraction of the market into taking a punt (at more reasonable yields). It’s still to play for if we do things right. We’re trying to figure out what “right” is.

@all lorenzophiles

‘It is difficult to strike a balance, especially when the economic and political difficulties are inspiring a search for scapegoats, even abroad. It’s easy to nourish nationalist sentiments in the countries in difficulty, shifting responsibility to the European institutions for having caused the crisis or for not having done enough to prevent it. The ECB, for example, was reprimanded for having exacerbated the Irish crisis in November 2010, after demanding for a long time that the government swiftly adopt the necessary measures for fiscal consolidation. Recently, a former Irish Prime Minister has even had the honour of front page headlines when he reproached the ECB for not having sufficiently monitored the Irish banking system when it is well known that in Europe the powers of prudential supervision are the responsibility of the national authorities, a competence that you do not want to give up.’

[must be Little John who is turning him on…. ]

‘The piecemeal approach followed in recent months risks losing sight of the long-term goal. The measures may not be completely coherent. We came close to it last autumn, with the Franco-German proposal, endorsed by other countries, to make it easier for countries to go bankrupt. Fortunately, the idea has not gained acceptance, not only because of the ECB’s dislike but also because of the devastating effect it has had on financial markets. It will take time to recover from the loss of credibility suffered by Europe with that proposal.’

[No fan of the Angie/Nicky FanTango either apparently ……]

The proposal was based on the assumption that the best way to discipline governments and to ensure sounder public finances is to make it easier for a country to declare bankruptcy. As soon as a country has problems with its public finances, it should seek a restructuring of its debts or automatically extend its bond maturities as a necessary condition for receiving help from European and international institutions.

This idea is mistaken for several reasons……’

Will peruse at me leisure later – whenever me blood pressure or me chuckling genes need a boost …. and respond personally to Dear Lorenzo ..


Different type of punters if you make them have to do a lot of weighing up of this and that and the other – and they want paying for the effort and rewarding for the risk.

Many stale bulls of Irish sovs are really irritated and a bit bemused at the way the guys who bought corporate bonds off the duff banks have taken full coupon and redemption, meanwhile the cautious guys who didn’t like the look of the banks are having to explain big capital losses on their holdings of Irish sovereign bonds. They are unlikely to be back in a hurry.

@ zhou

‘Our neighbours know otherwise but the Irish middle class and their political parties can’t see what’s on the horizon’

+1. Conceptual block.

@Paul Hunt

Richard Fedigan I think is in this camp with a further requirement (which I support) to recognise Germany’s economic strategic dominance and seek to adapt Ireland’s economic position in line with this.

Germany has the largest GNP and population of any of the 27 countries of the EU, which is not entirely unexpected.

The EU’s GNP (?) in 2010 was 16.1 trillion, Germany’s part of it was 3.3 trillion or about a fifth (Germany’s population is about one sixth of Europe). It is an impressive performance but not wildly so.

It is also the performance of a country as different from Ireland as could be imagined in its principle industries, economic structure and scale. This is a nation at the geographical centre of Europe with a population density four times that of Ireland.

How did the idea gain ground that because Germany has the single largest economy in the EU we need to try and align our interests to match theirs?

However this belief in German manifest destiny came about it shows a lack of imagination (rebranded as realism) about what role Ireland has to play in Europe and a commitment to Merkelism and the continued political primacy of the CDU in Germany that borders on the religious.

The way to make EU policy for Ireland is to decide on what priorities best suit the Irish citizen and then see which set of alliances best match it, which agendas we should push and which we should oppose.

However instead the recommendation is effectively to try and impress middle Europe through political homage and self abasement and then hope that this new found “respect” translates into undoing the damage of the bank guarantee and the ECB’s strong Euro obsession.

If we get the best most German, governance in Europe it will be cold comfort when a combination of servicing the banking part of the national debt and the next global economic leaves us a bankrupt state with a population shattered by austerity.

That is why we have to relentlessly push the banking crisis to the political forefront in Europe until the political costs of not dealing with it outweigh the political benefits of pretending it is not there.

@ David 0’Donnell


I’m attracted to unconventional people; an Irish communist who is a cricket fan seems unusual or is it me?

Groucho Marx said after attending a cricket game in the UK, “If you suffer from insomnia after this, you really need to see your analyst.”

As regards the debt issue, I do believe we are in this Civil War situation with the realists/compromisers V the dreamers/fantasists.

On the military analogy, it seems too early to fire all the guns now and in evidence of the emotion in arguments, people seem to be motivated by what is ‘fair’ rather realistic.

The ‘Dalai terrorist’ as the Chinese affectionally call him, is giving up his political role; that’s a clever move, rather than dying according to the Beijing plan. We too need to use some imaginative tacticts.

BTW, ‘communist’ can be a positive term if you are among the downtrodden like Vincent Browne!!

The text in the Smaghi speech quoted by David O’Donnell needs some interpretation, including the following paragraph that follows his extract.

“This idea is mistaken for several reasons. Firstly, it attributes the main task of disciplining governments to the financial markets. The markets – according to its proponents – work better if the conditions under which a state may fail are more explicit. This hypothesis – dear to many academics – does not however reflect reality. In the private sector bankruptcies are possible and are subject to regulation, but markets often incorrectly assess the risk of securities issued by the private sector. The markets were wrong both before and after the crisis, and continue to make mistakes, even with regard to sovereign risk. Moreover, they often behave inefficiently and facilitate collusion, especially when it is possible to buy derivatives that allow you to ‘bet’ on a country’s bankruptcy, even without having invested in it. Giving the market the exclusive power to decide the fate of millions of people seems to me quite irresponsible. The recent European decision to limit the possibility of buying derivatives to hedge sovereign risk without the underlying security is therefore justified”.

Does this spell finis for Merkel’s cavalcade?

grumpy is surely right about this, given the actual political situation:

Many stale bulls of Irish sovs are really irritated and a bit bemused at the way the guys who bought corporate bonds off the duff banks have taken full coupon and redemption, meanwhile the cautious guys who didn’t like the look of the banks are having to explain big capital losses on their holdings of Irish sovereign bonds. They are unlikely to be back in a hurry.

I don’t think anything is going to be done to placate gov’t bondholders. But in principle there’s no especial difficulty about rectifying their situation. The Dail screwed them and the Dail can repeal the legislation which screwed them. It won’t happen of course. To do that we would have to abandon the grovelling posture which Shay very properly derides.

I think we should thank the election results for providing a new economic benchmark. When the ten-year gets above FF’s % of votes won then we know we have really arrived.

@Michael Hennigan
You seem to think that the national elections in France and Germany have a big impact on the negotiating position of those two countries and/or a victory of the present opposition would act in a different way if they were elected .I doubt this is true about Germany .I know it is not true about France ,nothing in the socialist party program or what is known of Strauss-Kahn or Aubry thinking on the subject is very different from Sarkozy’s position (Marine Le Pen would be a different proposition but she cannot be elected _Thank God!).Foreign policy has never been very important electorally speaking and Europe’s financial problems even less.
I agree it is best for Ireland to wait three or four years to negotiate .By that time the economic and fiscal position of continental Europe will hopefully be better and the fact that the terms of the bail-out agreement are unenforceable will finally sink in.

@Michael Hennigan

Now, now Michael – ‘.. an Irish communist who is a cricket fan …’ pls do not refer to The Governor in such terms – simply giving Lorenzo further food for what he considers ‘thought’, after your pal – Little John – appears to have really egged him on …

– that said, must admit that The Governor is doing a better job of reverse-socialization for the citizen-serfs than any Irish or European Communist that I know of …. bout €185 billion not out is a reasonable estimate at the mo …. which gives the realists/pragmatists around here a slight breather …

Yes – need to keep a few guns in reserve – which we now do have – unlike poor Nicky who is nuke_ing himself and his admin at the mo with his little unilateral joust with Muammar (that little affair with Angie is now history, but staying in touch for the sake of the errant childer)…. as another well know communist put it – “Only a fool goes into a battle he knows he cannot win” – I speak of course, of the original Genghis Khan (-;

@Dominique Jean-Raymond

Did you hear the one about the French Foreign Minister who wanted to send in the French riot police to Tunis to protect her properties? She was sacked by the President. Then the President decided that he would bomb North Africa – without bothering to inform the new Foreign Minister – or any other minister, or any other European leader for that matter …. or any other world leader … or even Angie!!!! – little wonder Ms Le Pen is front runner in the polls …. What is really happening in Gaul at the moment? We are concerned … very concerned …

Good job things are going so well. Wow…ELA of 70b….

“The latest Irish Central Bank data has just been released.

It was expected that the ELA (accounted for in ‘other assets’) would drop by €17.5bn to reflect the FRNs that were issued by the Irish banks in January.

So, the expected figure would be in the region of €34bn.

The numbers show the complete opposite.

Other assets at the end of February stood at €70bn.
So, it seems that Irish banks are running out of deposits, running out of collateral, and running to the Irish Central Bank to keep their doors open.

@Shay Begorrah

“We have to relentlessly push the banking crisis to the political forefront in Europe until the political costs of not dealing with it outweigh the political benefits of pretending it is not there.”

Very wise, Shay. But you’re presuming that it’s politicians that are somehow “in charge”. If they are, it’s certainly not Irish politicians, the “we” you suggest should do the relentless pushing.

Bini-Smaghi made the not unreasonable point that EMU was part of flawed/incomplete progress towards the original POLITICAL aim of “Europe” and that these and other institutional flaws inhibit “European” politicians making exactly the kind of decisions you contend are needed.

Marx ( not Groucho) contended that “politics” was but the superstructure of the underlying economic/financial substructure that is the force we are are singularly failing to “control both in Ireland and in “Europe”.

The “we” doing the relentless pushing is the bond markets. They’re sending a very clear message about what they perceive as the future of the peripherals. And the “cores” if they allow themselves to be contaminated.

That’s what Germany’s politicians are trying to grapple with. That’s why their proposals suit Germany and not the peripherals. That’s why the proposals don’t solve the problem. That’s why the 2nd (March) Summit will be another fudge.

It may sound very harsh/”realistic”, but our “catalyst” election merely demonstrates that the ( Irish) “bums” who brought Ireland to the brink of default have been replaced by an overwhelmingly enfranchised new set of pols. that will play ball with “European” pols. struggling mightily to deal with forces beyond their control.

This has only started.


Because I’ve implicated Richard Fedigan he has given you his response (with much of which I agree). I’ll just add that recognising something powerful and influential doesn’t imply kow-towing before it. We also need to recognise that our largely US FDI financed export sector (which even the IMF decribed as an ‘enclave’) is straight out of the US Neocons’ playbook. Michael Hennigan, to his credit, continuously points out that it has served us and them very well, but that its potential to continue to do so (and, more importantly, to contribute much more to Irish GDP employment) is limited.

We need to think about playing some different tunes. And one tune, just one, is seeing how we might add value (and benefit ourselves) to the German economic machine.

And I’ve also made it clear that I’m nor comfortable with the centre-right dominance in the EU, but it’s what’s there – for the moment. We also need to recognise that Chancellor Merkel is seeking to repair the damage Neocon inspired, global financial capitalism did to the banking system underpinning Rhineland Capitalism – and to prevent further damage in future. Though I might prefer a modern-day version of Helmut Schmidt, if I were given a choice of EU driving force of a Neocon fan (e.g., Blair or Brown) and a leader of Chancellor Merkel’s calibre, I’d stay with the latter.

@ Shay Begorrah

That is why we have to relentlessly push the banking crisis to the political forefront in Europe until the political costs of not dealing with it outweigh the political benefits of pretending it is not there.

What does this mean?

You seem to forget that there is an IMF team operating in Merrion St and over €200bn is being provided by the ECB and the EU/IMF program.

Other countries are going to take the advice of the IMF until the program gets to a stage where further decisions have to be taken.

@ Brian Lucey

So, it seems that Irish banks are running out of deposits, running out of collateral, and running to the Irish Central Bank to keep their doors open.

As overseas deposits exceed domestic ones, some of us here did raise the risk of an acceleration of the deposit outflow if unilateral action was taken on bank debt.

@Richard Fedigan and Paul Hunt

Obviously when I read your postings I see the work of people who are polite, reasonable, articulate, intelligent, well intentioned and without being modest more accomplished than I am. I certainly get more from you then you get from me and I am impressed with your persistence.

However I also see a touch of cognitive error (not mine of course as I avoid cognition).

A black sky of chickens has come home to roost with the banking crisis, revealing weaknesses in our governance, economy and society that we have long failed to address and problems that both of you have been thinking on for some time.

Our difficulty is that the problems we can address internally and self reliantly, our long standing problems, our national embarrassments, are not the ones that threaten to cause us the most damage or the ones with the highest chance of becoming more and not less serious.

Our biggest problem remains the banking crisis and the non approach to it favoured by Germany and France, this is a problem with a pan European character and one where the current path favoured by the governing parties of the largest economies is right over us.

So though Chancellor Merkel’s ambitions for Europe may well represent a well thought through, realistic and farseeing plan we still have no choice but to oppose and interfere with it, even if ineffectually, because it is a plan that has huge risks for us.

@ Shay

Yes, but as @ Zhou has pointed out above, it’s doubtful if our newly elected government can even comprehend the nature of the task. Not that I would remotely claim to be able to do so, but I can recognise floundering when I see it.


I appreciate and value your well-articulated cri de coeur.

As for opposing and interfering with Angela’s plans and ambitions for Europe, even if you consider it “ineffectual”, I can offer you the following (cold) comfort

It would be a serious error ( cognitive or otherwise) to assume any more effectuality (sic) on the part of European or “European” politicians or electorates than there is extant in Ireland, even faced as we are with a crisis caused by banks fuelling a now busted property and construction boom.

Ireland’s woes appear on the attention screens of European taxpayers and voters only as sound bites and very much in the context of the difficulties they are experiencing in their own lives. Lives they have very little faith in the ability of their own politicians to impact positively.

They ( both the taxpayer-voters and their political representatives) don’t actually think about us very much.

So, Ireland must fight its corner tenaciously and unemotionally by simply stating what most Europeans know ( really), that we are in deep doo doo, Europe and “Europe” are in deep doo doo, we’re all in this together, and we’ll only get out of it together.


I’ll be away from base, consorting with mostly northern Europeans ( and a few North Americans) for the next week and may glean some new insights. Bon courage and Happy Paddy’s day.


I second Richard’s comments and greatly appreciate your willingness to engage so constructively. No one has perfect insight, but reasoned disputation has the ability to bring a number of valid insights to bear in a constructive manner. I sense that some here seem to think I seek to channel and foreclose debate on some threads in which I participate. But that is not my intention.

There is always a risk that valid, but opposing, positions – leading to two very different courses of action – are stripped down to their ‘sound-bite’ essentials to highlight differences when, in reality, there is considerable common ground. I have long held the view that, once we had a government with a strong popular mandate (which we now have), it should speak quietly and calmly, but firmly – in both public and private – to our EU partners. I have no illusions about the impact of disputation on this board, but reasoned disputation, however far removed it may be from the corridors of power, is far better than discordant populism or debilitating resignation.

Nor have I any illusions about politicians in other EU member states. Politicians are the same the world over. But one thing of which I am reasonably convinced is that in the traditional economic heartland of Europe – NE France, the BENELUX countries, west Germany and northern Italy – the ‘Rhineland Capitalism’ model (which compelled financial capitalism to be the hand-maiden – rather than the imperious mistress – of productive economic activity) has been damaged by the Neocon-inspired frenzies of global financial capitalism.

We should not underestimate the political and official will that exists to shackle the forces of financial capitalism, once again, to be the hand-maiden of Rhineland Capitalism. Dr. Bini-Smaghi’s views on the financial and capital markets is a forceful reflection of this desire.

And the peripherals’ problems stand between them and the achievement of this desire. We, unfortunately, have to work hard to convince them we wish to be part of the solution – and not of the problem – and that we need them to cut us some slack to make our contribution.

@Paul Hunt

As always well explained.

When the topic arises again I might ask how the core EZ can simultaneously tame the current rabid strain of global financial capitalism while vigorously defending the banking sector (surely the most significant agent of the now excessively large FIRE sector) to the extent that states are compelled to bail that part of the economy out at the expense of more productive economic activity.

Rhineland capitalism’s approach to the economic imbalance seems to me a little wishful a lot morally confused.

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