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

Over at the IIEA blog, I have written a new post arguing that it would be better for Ireland and for Europe to have no deal on the interest rates on the EU loans to Ireland than to have a deal that linked an interest rate change to adjusting Ireland’s corporate tax rate.

50 replies on “IIEA Blog Post: No Deal Is Better than the Wrong Deal”

This sentence reads a bit funny “The explicit pressure on Ireland to cuts its corporate tax rate will be seen…” increase?

And as my comment adds nothing, please delete

@ 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??

@Eoin Bond
I see reports this afternoon that Angela wants the ESM deal (agreed one week ago) renegotiated. She is apparently gone all wobbly on the capital Germany will have to put up.

So I suppose that if she can renegotiate after a week then we can do likewise after three months.

@ Karl – I agree. The debate about corporation tax, even if a change is almost impossible to envisage in the short to medium term, is creating a lot of uncertainty that is likely to influence investment decisions. It is important that this issue is taken off the agenda quickly.

@Bond. Eoin Bond – there are more state level elections in Germany this Sunday (there was one last Sunday too – it is super election year and unusually for Germany there might even be some unscheduled elections to add to the list!). No deal is better to Angela Merkel than one she does not want!!

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.

It looks like the devolution of power to the N. Ireland Assembly to set Corporation Tax is imminent.


This is historic. The first step towards the eventual economic and political integration of all Ireland. Nationalists and Republicans have been campaigning for this for years. It is great that the unuionists now support it and no longer fear cross-border harmonisation of taxes. Kenny should seriously consider delaying his visit to the EU summit by 24 hours. Drive up the M1 to Belfast tomorrow instead, seal a quick agreement with Peter Robinson and Martin McGuinness to have a harmonised CT rate of 12.5% across the whole island asap, then, armed with this agreement, fly to the EU summit on Friday.


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.”


Yes – good newz.

Martin McGuinness and co have also been the most consistently ‘sound on the banking question’ & Arlene would have the ol corporate governance well sorted, and whipped into shape, by now had she been in charge.

Why stop at tax – let’s sort the lot of it out, decommission de banks and their debts, and put Ian in The Park for good measure? Declare UDI, bring Patricia the Irish Sovereign_in_Exile home in time to greet HRH with Ian, and bob’s your uncle. ‘Nother Irish Miracle (-;


“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?

@ JtO

I’m afraid I take a more jaundiced view of NI motivations. The Unionists know they haven’t a snowball’s chance of a 12.5% rate but by raising the issue it puts more pressure on the fact that the South is out of line.

@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.


Another question: Do you happen to know what the news was on Feb. 4 that led to such a jump in the 2-year? I have been looking back at news reports, but nothing jumps out, except some disappointment with how the European negotiations were going. PIMCO also announced that they were staying away from peripheral debt for the moment.

Has it something to do with what “our man in Paris” has tantalised us with?

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.

Could the markets simply be letting Europe know what will happen if the EFSF is not pushed through? This is like a classic game of chicken…Enda can’t lose face, Angela can’t lose votes and Goldman et al can’t lose the gift that is the EFSF. Who’ll blink first?

@ 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.

“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?)

@ John

Ah! The vagaries of a generic yield curve and a country which doesn’t have a full yield curve (ie Ireland)!

Basically on the 3rd of Feb the reference bond for the generic 2yr curve was the 03/2012 bond, but on the 4th Feb that got kicked into the 1yr, and the new 2yr became the 04/2013. This had previously been the 3yr bond. So the generic curve got, effectively, 13 months added to it overnight, and also took it perilously close to ESM territory. In reality, “real” rates on the sovereign were actually more or less unchanged that day.

@ 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.

Thanks Eoin. A useful reminder to be careful. I take it that all the rises after that are the real thing.

@ 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.


@William Phelan

Ta for that. Herr Issing continues …

‘SPIEGEL: But their purpose is to save the euro. Isn’t helping member states in trouble part of European solidarity?

Issing: No. In fact, the notion of the strong helping the weak is not the issue here. This is about those who abide by the rules paying for those who break the rules. This isn’t solidarity, but a perversion of it.

SPIEGEL: How so?

Issing: It’s simple: A country like Germany, which behaves in accordance with the rules, has to support the Irish. Meanwhile, per capita income in Dublin is higher than it is in Berlin. Is that fair? 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.’

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?

@Eureka – “the Franco-German attitude to our problems would be less than benevolent”. Why would they ever have been benevolent in the first place? The big issue is that what happens here has the potential to really hurt in Germany (politically and economically), but the nature of the problem and its potential solutions are not properly autlined in Germany because that would expose failngs and mismanagement in Germany too. There is a lot of misinformation being spread in Germany – the media are happily obliging (I have some personal experience of this).

We should also bear in mind that recent decisions by the German government show that irrational decisions are a possibility.

“Germany will only be supportive of Europe as long as the generation that carried the memory for WW2 is alive.” – I am not so sure about that but it is clear that unless they are properly informed they will be sceptical.

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.

@Newsjunkie – regarding interviews, I have tried that but unless you do a live show whatever you say gets edited down to fit.

I’d say that there is a majority in Germany that would like to inflict some pain on banks and/or bankers, but that horse has largely bolted for us. Our (literally) banks now owe a significant amount to the ECB and to the Irish Central bank. The latter was referred to on a programme on a main national broadcaster (ARD – the programme was Plusminus on the 22nd of March) as some kind of secret that is deliberately being hidden, and that they had sensationally uncovered (they obviously don’t read irisheconomy.ie).

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.

@DOCM – “As much as any other member state? – whoever translated it needs to go back to school. The actual text reads “Deutschland profitiert wie kein anderes europäisches Land vom Euro.” that translates “Germany benefits like no other European country from the Euro”. This was not buried somewhere in the statement but was right at the top.

@ Edgar Morgenroth

Thanks for your post. I suspected as much. The FT strikes again! However, the point remains that it is too late for Merkel to now persuade her public opinion of the fact.

@DOCM & David O’Donnell – I have to make a slight correction. I watched the Merkel speech last night. In the speech she said Germany gained more than most other countries. The quote above was taken from the speech posted on the German government web site. In other words she went slightly off script in the parliament.

For anyone watching German politics these have been a number of very interesting weeks. Merkel got rattled by her former finance minister (from SPD) yesterday who performed very well. She looked very uneasy. If I were a betting man I would put a few quid on a Green prime minister in Baden-Wurtemberg. Recent issues alone have led to some criticism within her party including from senior figures. This would suggest that she is under pressure – not necessarily good for Ireland!

What has our new Gov’t done to balance the budget. The Portuguese prime Minister resigned because their austerity package was rejected by the European Commission. Brussels is no pushover. The first step and the one avoided since 2007 is to take whatever measures are necessary to balance the budget. If after balancing the budget the Irish economy continues to deteriorate ( it will) then the Irish Government can open negotiations on the cost of money with some hope of success. European politicians cannot be expected to bail out Ireland until Ireland has demonstrated it is capable of taking control of its own economy. It is abundantly clear that increasing taxes, cutting benefits, rewriting regulations, closing down quangos and all the other appendages of excess resulting from the “boom” is something our government is not capable of doing.

We are Irish we understand that European politicians are not going to commit political suicide for Ireland. Did any of our cute whores fall on their swords? Enda’s efforts so far have been naive in the extreme. We are back to the two trick pony, give us more low interest rate loans and our LCTR is untouchable. Good luck with that tack.

@ 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 Morgenroth

… a Green prime minister in Baden-Wurtemberg’ ….

& she could be ousted from within! Any odds on a Grand Coalition without a general election?

@David O’Donnell “she could be ousted from within” – this is a possibility but we are not that far down the road yet. Interesting though that Kohl, who has been biding his time to get back at her, now has come out and had a go regarding her electoral flip flop on nuclear policy. Others are having a pop regarding the bizarre stance on Libya, including a range of senior officials. Merkel is definitely on the defensive, but the FDP foreign minister is fighting for survival! This coalition has not gone well and there is potential for the wheels to come off – they are certainly loose already.


Germans may yet thank Guido, whether he survives or not, and Angela on Libya …. this will come back to seriously haunt Europe ………… and prime mover is unitlateralist_sarkozee for his own doomed electoral purposes – but it has gone way beyond what is required ……….. and the consequences for Europe/North Africa relations have not been thought through …. the parallel with bahrain is now patently obvious ……….. and the young well educated across the region are not fools ………

@David O’Donnell – we are straying a bit from the purpose of this site. The situation in the Arab countries is very troubling for the west. There are no easy options, but it is never good to marginalise yourself while gaining nothing at all. Germany could have voted for the resolution but not participated in any military action. The partners would have understood that. As a NATO operation Germany will actually pay for a significant proportion (I think it is 21%) of the costs regardless.

@ Edgar Morgenroth

I think that the political future of Angela Merkel, and the actions that she takes to preserve it, are intimately linked to the subject under discussion on this thread, whatever about the general purpose of the site.

It seems to me that the actions of Merkel have to be set in the context of the arrival of Schroeder, as the representative of the first generation of German politicians not to have had direct experiennce of the war, and his desire to place Germany on an equal footing with other European countries and for Germany to cease to be the milch cow, as he put it, of the EU.

Merkel has pursued the same line of policy because it coincides, it seems to me, with the normal political desire of any people not to be forced to carry the burden of history indefinitely. But it has given rise to very curious results, notably the deepened relationship between Germany and Russia. Nothing could have underline this more than the position taken by Schroeder in relation to the Iraq war and his subsequent involvement with Gazprom.

Merkel’s most recent pirouettes must be seen against this background.

Just a thought!


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.

@David O’Donnell – yes, although the reporting on RTE this morning is a bit off the mark. The CDU lost Baden-Wurtemberg but they made gains in Rheinland-Pfalz – they lost but not in any decisive way. The SPD lost a significant share of votes in Rheinland-Pfalz but will stay in government with the help of the Greens – i.e the SPD won but also not in any decicve way.
The real story is about the two smaller parties. The FDP did not make it in Rheinland-Pfalz at all and their vote halved in their stronghold Baden-Wurtemberg, and they only just made it – as I noted in a previous comment this meltdown puts their leader Guido Westerwelle, foreign minister and deputy chancellor, under huge pressure, which will feed back into the coalition at the national level. If they had not made it across the 5% hurdle in BW I would have expected Westerwelle to be ousted immediately, sparking a significant crisis in the coalition. He will probably survive but has to react. Given his erratic nature in government I would not want to bet on how this will change the coalition. One thing I would expect though is lots of internal rangles within the FDP, possibly with some resignations or heaves. The Greens are the big winners, and they will be taken very seriously even as a potential coalition partner for the CDU.

To come back to the important point for Ireland, I do not think this helps us at all. Merkel is increasingly backing herself into a corner on the bailouts because she needs to look strong. She can’t afford another flip-flop.

Regarding Libya, that is a side show for the guys in Waziristan (more likely they hang out in Yemen these days). They have their eyes on Saudi i.e. they are more interested in developments in Yemen and Bahrain.

@Edgar Morgenroth

Yes – and my hopes of a grand-coalition have grown slimmer …


CDU remain strong – and SPD weaker than I thought …. Greens have arrived big-time …. if FDP fall Greens will be tempted …. but I can’t see a BIG MOVE on EZ BanksCrisis with present groupings …. CDU/SPD could have sold it ……… this result is no assistance to Ireland at the mo …. agree Dr M cannot flip-flop again ….. unless the Stress on Landesbanken and smaller local banks are REAL ….

Bahrain is somewhat different – Shia are getting a very very raw deal there …. and democracy could work there – which is too scary to contemplate for too many ….. Yemen is going sim to Somalia … and I still find the idea of Europeans bombing N Africa abhorrent – present no-fly far far exceeds what is necessary ……. tribal nature of Lib society is not well understood ……….

On the more positive side Nicolas is now as popular as Fianna Fail – not all fools in France either … cheers me up no end …. (-;

@David O’Donnell – remember that Saudi has a shia minority who are also getting a raw deal, that is why they marched into Bahrain.
Landebanken are known to be very ‘problematic’, but there might be more problems elsewhere among German financial institutions.

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