IIEA Blog Post: No Deal Is Better than the Wrong Deal

@ Karl

“This could greatly damage future attempts to implement Treaty changes in Ireland.”

Howling error. The word “eviscerate” should have been used of merely “greatly damage”.

Seems that no deal will be done this weekend anyway (per German and EU officials this afternoon), so clearly someone wants to see the stress tests before taking the next step. Is it Ireland or the EU that wants them to come out first though??

The EU hasn’t got a hope in hell of getting another Treaty change through Ireland after the last 6 months of “leadership”.

It doesn’t seem worth doing anything on the interest rate given the bond market has left the banks to the ECB and the whole bailout structure appears to be headed for a crash and burn.

Portugal is currently voting down the new austerity package and with it the ruling party.

Live http://www.dn.pt/Inicio/

@ceteris

Appears there is no real interest in the Irish bailout terms from Merkel at the moment. See below if you haven’t already. Evidently she expects it to go and sulk in its room while she gets on with some housekeeping 😉

All that talk about who holds the senior bank bonds. Seems to me the currently pressing question is who owns all those short end gilts. They are being hung out to dry in style as our man in Paris hinted the other week, via the ESM term sheet.

The current market situation with sovereign bonds really does make the payment of the ELG seniors look really bizarre.

“On Monday, finance ministers from the 17 countries that share the euro struck a deal to set up a €700-billion ($990-billion) permanent fund from 2013, replacing an existing smaller pot for debt-laden economies.

Of this €700 billion, €80 billion would come in the form of cash payments, with the rest being loan guarantees. As Europe’s biggest economy, Germany was set to contribute €22 billion in cash to this fund.

Originally, Germany was to provide half of its portion in 2013 and the rest in three installments over three years.

But Merkel has suggested offering five chunks of €4.4 billion over five years, reducing the pressure on the budget in 2013, the year of the next federal election, said a government official who asked not to be named.

EU leaders are poised to agree the exact details at a two-day summit in Brussels starting Thursday.

Christian Lindner, general secretary of the pro-business Free Democrats (FDP), junior partners in Merkel’s coalition government, said that the “last word” had not been spoken on Germany’s contribution to the bailout fund.

“For the FDP, it seems to weigh too heavily on the German budget,” Lindner told mass circulation daily Bild.”

@grumpy

“The current market situation with sovereign bonds really does make the payment of the ELG seniors look really bizarre.”

Could you expand on this a bit? Why do draw such a distinction between an ex ante sovereign guarantee and sovereign bonds? Or maybe you are concerned that the sovereign bonds will be disproportionately targeted, which would indeed seem unfair. Do you happen to know what ELG seniors of similar maturities are trading at?

@John McH

Since I wouldn’t touch those seniors with a very long barge pole, I don’t follow the individual bonds so sorry, can’t assist with a direct comparison.

I am really thinking about the stale bulls or naive clients in those gilts. Some will foe example be charities that either chose or were restricted to very conservative near risk free assets. Lots of portfolios are not really actively managed – particularly the smaller ones.

Some will hold them because of accounting or tax reasons.

They really got shafted by the ELG. It was a gift to bank bond holders at their expense.

Term has turned out to be the only risk variable that matters for these things – and that is bizarre. That an ELG covered bond might get paid at par while a holder of a 2 yr gilt can only sell at a big loss or wait to be haircut is bizarre.

ELG has been a big market distortion. The markets are full of them all over the place at the moment.

My barge pole for same date gilts would be slightly less long than that for ELG bonds because I would assume that if the state defaults, one of the least stupid ways to do it would be hollowing out the banks and resolving them. Its a question of practical judgement rather than a legal distinction.

Despite the intense media focus on the interest rate on the EU loans, it is not a crucial issue when set against the scale of Ireland’s fiscal problems.

Absolutely. Not even a critical issue.

Looked at from a broad perspective, the following could be argued.

Europe has a problem with Irish corporate tax rates and wants to push higher European rates down Irish throats.

Ireland has a problem with European banking policy which has already force fed private bank debts down Irish throats. (Subsequent to the arsenic laced sugar pill administered by FF)

It a simple equation therefore. If you want Ireland to swallow your corporate tax rates, Ireland needs to regurgitate the private bank debts.

Conflation of issues is a two way street. If Ireland is to change its corporate tax rate, the price should be full 100% repayment from any private bank debts taken on by the State.

The interest rate issue is a mickey mouse distraction at this point.

@ John McH

you mean ELG or sovereign 2yr? Don’t see any real spike in the sovereign 2yr that day, so assume you mean ELG.

Fine Gael released their banking policy document that day, where there was a suggestion that they would seek a unilateral restructure of senior debt if there wasn’t an EU renegotiation of the Irish package, and Moodys put out a warning that they may have to downgrade Irish bank debt in the event of a change of government meaning a change in the approach taken to senior debt, so more or less a combination of those two.

@grumpy
“The current market situation with sovereign bonds really does make the payment of the ELG seniors look really bizarre.”
Absolutely, but it may tell us something about who holds what.
1. Other european banks hold significant enough amounts of each other’s paper that burning bank debt-holders before sovereign debt-holders is an unwelcome proposition. It may not/no longer be Irish bank debt, but there is ‘stressed’ bank debt out there that could precipitate damage.
2. Sovereign debt is not held in significant amounts by banks, at lest not at the shorter end of peripherals (could this be why the bank stress tests conspicuously keep looking at sovereign debt and not really at any other kind of instrument?).
3. Sovereign debt must, therefore, be mainly held by ‘retail’ investors, whether charities, pension funds, individuals, whatever.

It is clearly being considered that the least amount of damage will be done to the system by ‘savings’ (in the broad sense) taking the hit over bank working capital. The precedent of bank debt taking a hit either instead of or before sovereign debt is clearly destabilising.

I was wondering whether this was all about pfandbrief, so I went to Wiki it and was intrigued by this sentence “Pfandbrief bonds make up the third largest segment of the German bond market after public sector bonds and unsecured bank debt.” Note the last bit. ( http://en.wikipedia.org/wiki/Pfandbrief ). There are 806 billion outstanding in pfandbreif according to the Wiki page. How big is the unsecured bank debt number? What would a 10% mark to market valuation drop do to it? What assets do banks mainly have “available for sale” as part of their Basle II obligations?
(other sources seem to indicate that pfandbrief are the largest segment of the German bond market?)

@ JTO and others

The problem the UK is bound to run into is that it cannot discriminate between its companies in fixing a corporate tax rate. This would be against EU law unless there is some provision on regional policy grounds of which I am not aware. (It was not the extension of the Irish 10% rate to 12.5% that mattered but the fact that it was applied without discrimination to all qualifying Irish companies. Direct tax remains a matter of national sovereignty but actions in respect of it must not breach other wider stipulations of EU law).

But the topic is much wider. It underlines the choice between (i) returning to the fold as John Bull’s other island (boom and bust economics, regular devaluations and high inflation) or getting our house in order by (ii) staying with Europe through getting the new government to stop its fan dance and knuckle down to doing what has been agreed which, in essence, consists of ridding the country of the waste and feather-bedding that has brought it to near destruction.

@ John

yes, its just that one-day move which was caused by the switch (and i’m not sure the exact rules Bloomberg use for when they switch), the rest of the move is very very real unfortunately…

This might also be of interest – an interview with ex-ECB Otmar Issing in Spiegel:

SPIEGEL: But that’s a legitimate concern. The EU gives the Irish money, and they use it to fund low corporate tax rates. Is that a good model for a future-oriented European fiscal policy?
Issing: The Irish will point out, with some justification, that the EU forcing them to raise tax rates undermines their prospects for growth. This cannot be in the interest of the other countries.

http://www.spiegel.de/international/spiegel/0,1518,752591,00.html

I love this:
“If we take this approach in the long term, we will end up with a German population with the kinds of anti-European sentiments I would find horrifying. The German population’s identification with Europe is already declining to a disconcerting extent”
The word horrified is strong – could he be alluding to recent history..
Germany will only be supportive of Europe as long as the generation that carried the memory for WW2 is alive. As that generation dies Germany becomes more detatched from her past (the very past that lead to this blasted Euro in the first place) and places less value on peace and integration.
The attitude to inconvenient problems is disconcertingly consistent. Impoverish and isolate. The high interest rate impoverishes and the bullying about corporation tax is designed to humiliate and isolate.
I am not trying to characterise Germany in any particular way but sometimes attitudes to problems and to inconvenient populations don’t change that much.
I have been given out to before about this but I did predict (not trying to claim any cudos) that the Franco-German attitude to our problems would be less than benevolent.
We need to think about this seriously. Is Ireland becoming Europe’s newest ghetto?

I wonder whether any of our economists, officials or elected representatives have the German language skills to speak about the situation in Ireland on German TV or radio?

Interesting response to a poll on the Spiegel website about who should “save the Euro” (over 6000 responses), giving insights into how Germans view the situation: http://www.spiegel.de/wirtschaft/soziales/0,1518,752759,00.html (you need to respond to see the results)
Reiche Länder wie Deutschland müssen den Pleitekandidaten helfen, auch wenn das viel Geld kostet. Schließlich profitieren gerade wir durch die Gemeinschaftswährung. 666 9,99%
Die Europäische Zentralbank soll massiv Staatsanleihen aufkaufen – das treibt zwar die Inflation, kostet die Steuerzahler aber erst mal nichts. 204 3,06%
Den Pleitekandidaten muss ein Teil ihrer Schulden erlassen werden. Die Hauptlast tragen dann die Finanzmärkte. 2220 33,28%
Die reichen Staaten sollten eine Kern-Euro-Zone gründen und die armen Länder aus der Währungsunion rausschmeißen. 1875 28,11%
Wieso soll man den Euro retten? Wir sollten zur D-Mark zurückkehren. 1705 25,56%

Sharing losses with bondholders is the preferred option for a third of respondents, a two track Euro Zone is preferred by 28% and return to the D-Mark the choice of 25%. Rich countries helping those in trouble and massive support from the ECB (with risk of inflation) are the least popular options.

I would make the point that the popular debate in all countries of the Euroarea is now out of hand and this is due, in no small measure, to the totally inept handling of the crisis by Merkel. This is not just my opinion but also that of the leader of the SPD, her former partner in coalition cf. FT on her address to Bundestag today.

“Peer Steinbrück, who was formerly Social Democrat finance minister in the grand coalition headed by Ms Merkel from 2005-09, led the attack, accusing her of “too many U-turns and pirouettes” in the negotiation of the eurozone crisis measures.

“This package is right and necessary,” he said, “but in many ways it is not enough, and it comes far too late.”

He singled out the lack of adequate measures to resolve the banking crisis in Europe, and the failure to involve private creditors as well as taxpayers in debt relief measures that stopped short of full restructuring.

“The banking crisis is not yet over,” he said. “We need a bank restructuring law, and we also need a European facility for recapitalising banks. Without restructuring or recapitalisation in Europe, there will not be any comprehensive solution”.

A better summary of the situation would be hard to find. But a solution can only be achieved if there is an end to national grand-standing and, in particular, to allowing extraneous issues to enter the debate.

There was one other rather amusing aspect in her address (if correctly reported).

“Merkel insisted that Germany had benefited from the euro as much as any other EU member state, with a 48 per cent increase in exports to the rest of the eurozone during the first decade of the common currency”.

As much as any other member state? She must be joking.

@all

from NYT – good overview on some big local issues facing Angela …

http://www.nytimes.com/2011/03/24/world/europe/24germany.html?_r=2&pagewanted=1&ref=global-home

I agree with German position on libya – I think it abhorrent that Europeans bomb North Africa …. this is the Mediterranean FCSake

@Edgar

Pls update us on Mon re results and consequences of Sunday – could Dr Merkel be ousted by her own?

@ Edgar Morgenroth

This type of scheming adjutsment of direction has been typical of Merkel since the start of her career. But, as Steinmeier puts it, there have been too many pirouettes and her actions have become too transparent. She has not just pulled the carpet from under Schaeuble once again, she has also infuriated her EU colleagues in a manner which leaves egg on her face rather than on theirs. She has also, as was pointed out by a German commentator on RTE this morning, pulled the carpet from under the argument that the Irish EFSF deal was signed only some months ago. The “Monday deal” struck by her finance minister was the equivalent of the Treaty of Limerick, broken before even the ink was dry.

@ Mickey Hickey

Why so gloomy? We now have a credible scenario as enunciated by Herman Van Rompuy which clearly implies that some adjustments may be necessary to the Irish package once the bank stress tests are known i.e. directly linked to the real problem. And the red herring of the corporation tax is off the table. But, as Portugal has just been told, Ireland must – as you point out – stick to its fiscal targets and offer something in return for the agreement to revisit the EFSF deal.
I am no expert, but there seem to me to be a variety of measures – short of extra cash being put up – which could make the problem “sustainable”. The essential point is that, after a lot of shapes being thrown (encouraged by the type of press coverage to be found in the Irish Independent over the past few days), a basis for discussion has evidently been found.

Apart from meeting its fiscal targets, restoring credibility to the Irish banking sector must be the absolute priority for the government. Even the ECB must now see that this is the case. Any other “initiatives” dreamed up by the government (job creation etc.) pale into insignificance by comparison.

@Edgar

Political economy includes both. Huge issues related to migration, rise of EU far right parties, oil, energy costs, mediteranian environment (the sea economy if you like) …. and the secular/fundamentalist ratios in N Africa … and economic & social development. Look at the map of africa re calorie intake, infant mortality, life expectancy and only two are blue: South Africa and Libya. No-Fly Ok – but actions are far, far in excess and are making situation worse …… other agendas……. header_balls in waziristan are observing with glee … not good news.