Behaving Like Teenagers?

A development that I have noticed lately in the comments section of this blog is the tendency to argue that the Irish people deserve little sympathy from our European partners because we are somehow unwilling to implement obvious solutions to our problems.

Every story about public sector inflexibilities (such as the silly business about the privilege days) is taken as evidence of mendacious insiders and nasty trade unionists defending their ill-deserved high salaries while the nation heads towards sovereign default. Similarly, stories about cuts in pay for politicians or academics are merely greeted with outrage that the cuts are not big enough.

Discussions of welfare rates provoke the question of how dare we ask for improved bailout while we pay higher benefit rates than elsewhere. Similar moral outrage is applied to the corporate tax rate discussion and, less often but occasionally, to the fact that (even after recent increases) Irish rates of income taxation for low and middle-earners are still low by international standards. A call for immediately cutting the deficit to zero so that we would not need a bailout was greeted very positively by many of our commenters, who clearly take the view that this can be done easily if only we had the will.

The conclusion often reached from these discussions is that the Irish people are a feckless and inflexible lot who are “behaving like teenagers” in looking for help from Europe.

I understand the moralistic instinct that underlies these comments as well as its implicit faith in simple solutions. With the country effectively in administration, this belief—that solutions are clearly sitting out there, but cannot be implemented because “other people” are feckless, inflexible and pampered—provides a lovely warm blanket of indignation in which to wrap oneself.

In my opinion, however, this kind of commentary is based on a gross misunderstanding of the challenges posed by the scale of the Irish fiscal adjustment. It is also extremely unfair to the Irish people and acts to undermine valid arguments for looking for additional help from the EU.

Let’s start with a hugely important fact that tends to receive little attention. The Irish adjustments thus far have been enormous by international standards. Prior to the December 2010 budget, the government implemented a combined €14.6 billion in adjustments from summer 2008 to December 2009. With Irish GDP estimated at €157 last year, these adjustments added up to over 9 percent of GDP, with the vast majority of the underlying impact distributed about equally between 2009 and 2010.

To get a sense of how big these adjustments are, consider the chart below. The numbers on the x-axis are the IMF’s estimates of actions taken to reduce fiscal deficits in 15 advanced economies during 1980–2009, while the y-axis shows the change in the cyclically adjusted budget deficit. The paper in the IMF’s World Economic Outlook argues strongly that its fiscal action measures are superior to simply measuring the change in the cyclically adjusted deficit when considering the stance of fiscal policy.

The IMF chart shows the Irish 2009 fiscal adjustment as the largest across the sample of advanced economies over the thirty-year period studied  (measured against GNP it would not have been a close race with Italy 1993). The paper was prepared before they could enter in the 2010 adjustment but by my calculations, it was about the same size. Then the government implemented an additional €6 billion in adjustments in the December 2010 budget.

Consider this for a second. In 2009 and 2010, the Irish public experienced the two biggest years of fiscal adjustment anywhere in the advanced economic world over the past thirty years. And this left Ireland with a budget deficit of nearly 12% of GDP. After another budget implementing adjustments similar in size to the previous two years, the public then elected a government consisting of parties who proposed a further €9 billion in cuts over the next three years in the case of Fine Gael or €7 billion in the case of Labour.

By the time the stabilisation programme is supposed to be finished, the cumulative fiscal adjustment will have been close to 20 percent of GDP. Previous academic studies of large adjustments reported cumalative adjustments of 10 percent of GDP as the outer limits of what had been achieved (see here and page 17 of this paper).

I’m my opinion, those who wish to characterise the Irish public as feckless teenagers have it exactly wrong. Fiscal adjustments are extremely difficult to implement. Every society in the world has powerful institutions and organisations designed to protect vested interests and various types of status quos. Many of these societies would respond to one year of fiscal adjustment on an Irish scale with mass public protests and strikes.

In Ireland, however, we have largely accepted three years of these adjustments without serious disruption and then voted in a government charged with implementing further large adjustments.

So pick on Irish public servants and trade unionists if you want but if you think that their equivalents elsewhere would have been open to larger pay cuts, you’re kidding yourself. Irish public sector workers have seen enormous reductions in take-home pay via cuts in gross pay, a pension levy and tax hikes and many are now struggling to meet their mortgage commitments. Yet there hasn’t been a single strike of notice because these workers and their union leaders understand the gravity of the fiscal situation.

And of course there are inefficiencies and waste in the public sector and people who are paid wage rates that are out of line with common sense. But show me the large organisation, public or private, that doesn’t have such inefficiencies. To be fair to our political processes, the current crisis has brutally exposed a wide range of public sector inefficiencies and the people elected two parties that have both committed to public sector reform.

And rail against welfare benefits being too high if you want. But these are the least well off in our society and they have put up with consecutive cuts in their modest incomes without serious protests.

And you can compare Irish income tax rates for low and middle-earners with other EU countries and reckon there’s room to raise more income there. However, the vast majority of these people have entered into commitments (mortgages, car loans, childcare payments) that cannot simply be reversed at the drop of a hat and many are already under enormous pressure. This is why fiscal adjustments are so small and gradual elsewhere.

No doubt many of our commenters will continue with their negative characterisations of the Irish people. However, I think the past few years have showed that we are a strong people who have displayed great courage in coping with immense adversity. Requesting a small amount of assistance from our European partners (particularly in relation to the repayment of loans made to insolvent banks by the ECB and European bondholders) to help Ireland avoid a sovereign default—this shouldn’t be too much to ask for if European solidarity is to be more than just a cheap slogan.

Reminder: George Kopits seminar: “Rules-Based Fiscal Framework: Rationale, Experience, and Good Practices”

George Kopits (former chair of the Hungarian Fiscal Council) will give a talk in TCD on March 22, 12.30-2 in IIIS seminar room on “Rules-Based Fiscal Framework: Rationale, Experience, and Good Practices”.

All welcome!

Bio:

George Kopits is former chair of the Fiscal Council, Republic of Hungary—elected unanimously by Parliament in February 2009. During 2004-09, he was a member of the Monetary Council, National Bank of Hungary.

Kopits began his professional career in 1968-74 at the Office of the Secretary, U.S. Treasury Department. In 1974, he joined the International Monetary Fund, where he served as assistant director until 2003. In the Fund’s European Department, his assignments included surveillance of major Mediterranean and Eastern European economies. In 1990, he was appointed group leader in the Task Force on the Soviet Economy. In the Fiscal Affairs Department, he coordinated several projects for the Executive Board, and contributed to the design and monitoring of Fund-supported adjustment programs.

In addition to involvement in fiscal and monetary policymaking in Hungary and the United States, Kopits headed technical assistance missions on various economic policy issues to Austria, Belgium, Brazil, Costa Rica, Ecuador, Indonesia, Madagascar, Mexico, Peru, and Ukraine. Also, he was invited to give technical advice to the authorities of Argentina, China, Colombia, India, Israel, Korea, Nigeria, Thailand, United Kingdom and Venezuela.

Kopits has held visiting academic appointments at Bocconi, Budapest, Cape Town, Johns Hopkins, Siena, and Vienna universities. Currently, he is on the adjunct faculty of the Central European University. He authored more than fifty publications. Kopits holds a Ph.D. in economics from Georgetown University. He was an NDEA fellow, and was awarded the Heller Farkas and Popovics prizes for contributions in economics and finance. He is a member of the Hungarian Academy of Sciences.

‘All’s Well’ – Trichet

At the European Parliament today, ECB President Trichet was asked whether Ireland could cope with both the sovereign and bank debt. RTE has reported as follows:

‘Following a suggestion from Fine Gael MEP Gay Mitchell at the European Parliament that it was impossible for Ireland to cope with both, Mr Trichet said Ireland had to regain credit worthiness.

‘My working assumption is that Ireland can do it, Ireland will do it,’ he said.

Speaking to the parliament’s economic and monetary affairs committee Mr Trichet said the rescue programme had been approved by the international community, not only the EU.

‘The decisions taken by Ireland over the past three years are there, and there has been a programme approved by the international community,’ he said.’

The dissenters from this view unfortunately include the sovereign bond market, which Ireland is scheduled to re-enter before the end of next year. At today’s close, the Irish ten-year bond offered 9.60 on the bid.  

At this price, M. Trichet must regard these bonds as remarkably good value, and a suitable home for the ECB staff pension fund. The October 2020 issue has a coupon of 5% and has been trading recently about 72. It would be at least 100 if M. Trichet’s view was shared by the market. No distressed Eurozone member can credibly re-enter the market without selling at least some bonds at ten years or longer, and at rates below Spain’s ten-year, recently yielding about 5.15.

What precisely does M. Trichet expect to happen over the next 18 months to bring secondary market Irish yields down by the enormous amount implied by his expression of confidence? He clearly must believe that the market has got it wrong about Ireland. Does he believe things are going equally well in Greece, where the ten-year bond yields about 12.20 on the bid?

The Eurozone is in serious trouble unless his private view is more realistic.

Paschal Donohoe: Why the 31st Dáil Should Not be the Default Dáil

Drawing on the international literature on the costs of default, newly elected Fine Gael TD Paschal Donohoe has written an interesting pamphlet on the option of a unilateral default (see here).   Whether you agree with his conclusion or not, it is great to see people of Paschal’s calibre in the new Dáil.

The pamphlet is referenced in Daniel McConnell’s article today in the Sunday Independent (see here).    Daniel comes out strongly for a default-now position.    He draws heavily on the Prime Time programme on default in supporting this position.   One of those quoted is Philip Lane.   Not too surprisingly, the short snippets that could be used in the report do not do justice to Philip’s nuanced position.   If you haven’t had the opportunity to view Philip’s interview, I think it is well worthwhile to view in full.   While recognising the seriousness of the situation, I think he gets the balance just about right (full interview here).  

Employment Control Framework

I reproduce the full text of the ECF over the page (via 9th level Ireland blog). I really would encourage people commenting to read the document first as its not very long. Some of the argument has conflated the provisions with university funding, with some people complaining about the ECF because it limits academic numbers and some people supporting it basically for the same reason. The issue is not the resourcing but rather the process of hiring in universities and the stipulation in this document that all university hiring will need to be specifically approved by a small central government committee along with similar provisions about reallocating people across institutions and so on. Continue reading “Employment Control Framework”

Stress Tests

The next milestone in Ireland’s crisis resolution efforts will be the March 31st stress tests. In addition to revealing important information to financial markets, the results of the tests are likely to impact the political debate about the appropriate crisis resolution strategy, not least the contentious issue of default. At the moment, there appears to be a lot of confusion about what the stress tests are all about, which is important to clear up in advance to prevent the release being counterproductive in terms of the political debate. I offer some thoughts after the break, but I hope others will weigh in on the thread. Continue reading “Stress Tests”

Daniel Thomas: Irish Bail-Out Terms Endanger EU’s Future

Here‘s an article by my UCD colleague Daniel Thomas that makes an important argument. If the Irish authorities are to get anywhere in relation to getting a better deal on issues such as the interest rates on official loans or dealing with our banking problems, they cannot rely on arguments based on narrow self interest.

Dan points to the dangers to the EU political reform process stemming from Ireland getting a bad deal. I think one can also argue that a deeper role for the EU in solving Ireland’s banking crisis can also be justified on the grounds that it can help to maintain financial stability throughout the Eurozone.

Ireland First Blueprint Document

Via Namawinelake, here‘s the up-to-now secret “Blueprint for Ireland’s Recovery” that has been produced by a group that apparently call themselves Ireland First. As you’ve probably heard, the group includes businessmen like Dermot Desmond and Denis O’Brien as well as various grandees with links to Fine Gael (John Bruton, Frank Flannery, Peter Sutherland), Fianna Fail (Ray McSharry) and Labour (Dick Spring).

Naturally, given that it’s an economic recovery plan, there isn’t an economist in sight. And, as is often the way with non-economist plans, it’s mainly a long laundry list of stuff the group would like to see happen combined with ambitious claims and targets related to what might happen if the chosen policies were adopted. Many of the policies proposed are sensible, some less so.

I particularly disliked this bit: “There needs to be a positive engagement with editorial and ownership/senior management of media organisations in order to ensure we have balanced coverage and that good news stories are covered.”  Ah yes, the meeja need to stop talking down the economy.  Some things never change.

Monetary Dialogue Briefing Papers: March 2011

The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here. One set of papers (including one by me) discuss bank and sovereign debt resolutions (this paper is the source of my comments here on senior bank bonds). The other set discuss the issue of Eurobonds.

Creditless Recoveries

A big question for Ireland is the extent to which tight credit conditions will restrict economic recovery.  This new IMF paper looks at the cross-country evidence.

Summary: Recoveries that occur in the absence of credit growth are often dubbed miracles and named after mythical creatures. Yet these are not rare animals, and are not always miracles. About one out of five recoveries is “creditless”, and average growth during these episodes is about a third lower than during “normal” recoveries. Aggregate and sectoral data suggest that impaired financial intermediation is the culprit. Creditless recoveries are more common after banking crises and credit booms. Furthermore, sectors more dependent on external finance grow relatively less and more financially dependent activities (such as investment) are curtailed more during creditless recoveries.

George Kopits seminar: “Rules-Based Fiscal Framework: Rationale, Experience, and Good Practices”

George Kopits (former chair of the Hungarian Fiscal Council) will give a talk in TCD on March 22, 12.30-2 in IIIS seminar room on “Rules-Based Fiscal Framework: Rationale, Experience, and Good Practices”.

All welcome!

Bio:

George Kopits is former chair of the Fiscal Council, Republic of Hungary—elected unanimously by Parliament in February 2009. During 2004-09, he was a member of the Monetary Council, National Bank of Hungary.

Kopits began his professional career in 1968-74 at the Office of the Secretary, U.S. Treasury Department. In 1974, he joined the International Monetary Fund, where he served as assistant director until 2003. In the Fund’s European Department, his assignments included surveillance of major Mediterranean and Eastern European economies. In 1990, he was appointed group leader in the Task Force on the Soviet Economy. In the Fiscal Affairs Department, he coordinated several projects for the Executive Board, and contributed to the design and monitoring of Fund-supported adjustment programs.

In addition to involvement in fiscal and monetary policymaking in Hungary and the United States, Kopits headed technical assistance missions on various economic policy issues to Austria, Belgium, Brazil, Costa Rica, Ecuador, Indonesia, Madagascar, Mexico, Peru, and Ukraine. Also, he was invited to give technical advice to the authorities of Argentina, China, Colombia, India, Israel, Korea, Nigeria, Thailand, United Kingdom and Venezuela.

Kopits has held visiting academic appointments at Bocconi, Budapest, Cape Town, Johns Hopkins, Siena, and Vienna universities. Currently, he is on the adjunct faculty of the Central European University. He authored more than fifty publications. Kopits holds a Ph.D. in economics from Georgetown University. He was an NDEA fellow, and was awarded the Heller Farkas and Popovics prizes for contributions in economics and finance. He is a member of the Hungarian Academy of Sciences.

QNHS for 2010:Q4

Results from the Quarterly National Household Survey for 2010:Q4 are now available (press release here, full release here.)  The seasonally-adjusted unemployment rate for the quarter rose by one percentage point to 14.7%. This is a percentage point higher than the previously available proxy for the seasonally adjusted rate based on Live Register figures.

I’m not sure what the explanation is for such a large divergence between the QNHS and Live Register series for this quarter. One possible factor is that some people are now reaching the expiry of their benefit eligibility and thus falling off the Live Register while still being unemployed. The different behaviour for 2010:Q4 doesn’t seem to reflect a big drop in the labour force, due to emigration for example, because the decline in the labour force was of a similar magnitude to previous quarters.

New IIEA Blog\Post on Bank Debt

I’d like to flag an excellent new initiative that our readers are likely to find useful. As many of you know, the Institute for International and European Affairs has played a very important role in recent years in promoting debate on European issues. The Institute has now started a blog focusing on European topics which already has a lot of interesting material. I have agreed to contribute some longer pieces there.  They’ve promised to make me some pretty graphs if I ask nicely which might make a nice change sometimes from the no-frills approach we adopt here at the IE blog!

Which brings me back to an issue related to my proposals for a debt-to-equity swap for central bank loans. Some commenters have rightly pointed out that this proposal seems to give up on burden sharing with bondholders. That it does so is just a reflection of the current EU position on this issue. However, this strengthens the case for the EU becoming involved in owning the Irish bank sector: If they want the bondholders paid back so badly, then one can argue that they should contribute some of their own funds to the effort.

But coming back to the European debate on bank debt, I think the EU officials are adopting the wrong approach to dealing with this issue. I also think that the proposals adopted by the European Commission to allow haircuts on bonds that are issued in the future, say after 2013, is unworkable. For a discussion of this and an alternative approach, see this post at the IIEA site.

Jon Ihle on the Stress Tests

It was great to see Jon Ihle, one of Ireland’s best financial journalists, writing in the Sunday Business Post yesterday.    Missing Jon’s weekly insights was one reason to mourn the Tribune’s demise.  

Jon has an informative piece on the coming bank stress tests: see here. 

We are clearly being prepared for some additional bad news on the bank losses, and maybe for once we will be surprised on the downside.   In interpreting the additional capital needs, however, it will be important to distinguish between estimates of additional losses and the new capital required to meet higher capital ratio targets.   

The EU/IMF terms require A baseline capital level of 12 per cent for all banks – far above the normal 8 per cent regulatory level at which Anglo and INBS are being allowed to operate.

But if the stress level is as high as 10.5 per cent – meaning capital could not fall below that point even under dire conditions – bankers expect the baseline level could go as high as 16 per cent, imposing huge recapitalisation costs.

Common Consolidated Corporate Tax Base: a critique

I presented this paper on CCCTB to the Kenmare economics conference back in 2008. Many in attendance felt that it was unlikely to come to pass. It is clearly on the agenda now though it is not yet certain that it will meet the requirements associated with “enhanced co-operation” (which, under Lisbon, requires nine countries rather than the eight mentioned in the paper, which was correct at the time. Nothing else, as far as I can see, needs updating).

I characterise the proposals as a “Trojan horse”. The logic is similar to that of Bettendorf et al., writing on “Corporate Tax Harmonization in the EU” in the journal Economic Policy in 2010. They say “consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.”

Final Reminder: Andres Velasco seminar: “The Fiscal Framework: Lessons from Chile”

The Policy Institute and the Institute for International Integration Studies (IIIS) at TCD are pleased to announce that Andres Velasco (ex Minister of Finance for Chile) will give a seminar at TCD on Monday March 14 on “The Fiscal Framework: Lessons from Chile”.  As has been flagged on this blog before, Chile was able to run very sizeable surpluses in the pre-crisis period, such that it could enjoy a big fiscal swing during the crisis without threatening fiscal sustainability.  This seminar provides an opportunity to learn how Chile was able to achieve this counter-cyclical fiscal policy.

Monday, March  14
Time: 8.30am-10am
Venue:  Jonathan Swift Theatre (Room 2041A), Arts Block, TCD
Admission: Free, All welcome
Queries to: policy.institute at tcd.ie
Andrés Velasco: Short Bio

Andrés Velasco was the Minister of Finance of Chile between March 2006 and March 2010. During his tenure he was recognized as Latin American Finance Minister of the Year by several international publications. His work to save Chile´s copper windfall and create a rainy-day fund was highlighted in the Financial Times, the Economist, the Wall Street Journal and Bloomberg, among many others.

Continue reading “Final Reminder: Andres Velasco seminar: “The Fiscal Framework: Lessons from Chile””

Universities should take to the ‘lifeboats’

Common wisdom suggests the state will not be ready to co-fund the IMF-EU deal by mid 2012. Another deal will accompany a slash in payments to the social sectors including Education. Is the third level sector ready for such a crisis?

The Irish State pays a core grant to our third-level institutions for each undergraduate student, and, in an equal amount, funds the majority of research and postgraduate fees (scholarships). The latter is managed by a proliferation of various third level education bodies which we label Quangos. The sector has developed an unnaturally high dependency on the public finances. This dependence is currently anywhere between 65 to 88 per cent in most Higher Education Institutes

The funding of third-level Quangos now represent an unsustainable overhead on the sector, as this form of finance flowing from the State is on the decline. The indirect costs or the administrative structures that have mushroomed during the boom (which distributed State money) are now vestigial and are turning into a major financial headache and constraint on the sector. The HEI’s must replace these funds with international research grants and postgraduate students. The Quangos are largely ill equipped to induce and manage this change.

The Universities, while undertaking many good reforms, made the mistake of allowing indirect costs inside universities to grow to over 50 per cent. Frontline lecturers’ salaries now only account for 25 per cent of the overall cost of the sector, when we include the overheads of Quangos. Academic salaries have collapsed by 25 per cent (net) since 2008. Most academic units have also lost up to 15 per cent of their staff via retirements or voluntary quits. These savings are returned and retained by the State and not by the Universities.  The oversized non-academic and undersized academic units are finding it a challenge to refocus efforts into securing funds from outside of Ireland. Academics need to be empowered to make such change happen.

What is the solution proposed by State and its agencies to cope with the current crisis?

An imposed agreement, under the false premises of Croke Park, to increase productivity levels of declining numbers of frontline lecturing staff is their answer. Not surprisingly, these productivity increases can never pay for what are now largely indirect costs in the sector.  New income streams are needed: higher levels of international students who pay fees, more EU and Global research funding successes, and private sources.

Yet, all hiring and promotions (whether funded by the State or not), that have come under the State’s employment control, are now banned. The most recent instalment of employment control wants to redeploy academics within and across institutions. There are even conditions on the nature of research that is allowed. The focus of such is on the disciplines that will drive the smart economy (see http://des-fitzgerald.com/ecf/).

This is a ludicrous attempt to turn academics into public servants. The agents of the State seem to have no idea how knowledge is created and dispersed. Academics in a global market face competition from serious creators of knowledge and find every international student and grant is a hard battle won.  Publishing in the leading journals and university presses is like winning Olympic medals in terms of a lifetime dedication to the cause. Academic credentials need to be first class, a Ph.D. from a top University and ground breaking publications. Academics need the time and space to perform at these levels.  Imposing constraints on academic freedom and tenure will only give our competitors an advantage over us, deter international students and grants from coming here and could rupture our growing reputation in scholarship internationally. The idea that an academic in UCD that gets a research grant from a major donor should first see if there is someone surplus to requirements inside UCD and then search in other universities, or even State departments, before hiring a post-doc clearly indicates to me that the state has no idea how knowledge is created. Incentives are for academics to leave Ireland rather than refocus efforts.

What do we do?

Universities have to realise the State is broke. Just like the State should have understood the Irish Banks were broke, now the Universities have to drop the State like a hot potato (Taxpayers and the IMF-EU would approve).

Trinity by the nature of its charter and academic ownership of its property can break from State faster than most.

The first move would be to establish income streams from undergraduate fees, increase the number of international students and external research income.

Most Universities like Trinity already have private enterprise on campus in terms of the library shop, rented accommodation, a Foundation office and Campus Companies. These could turn a higher profit to fertilise academic scholarship.

The University of Dublin, and the National University of Ireland, could create new colleges. Let’s call the one alongside Trinity College, “Christchurch College”. Christchurch could hire and promote and pay pensions on a private basis funded by the new income streams.  All existing contracts could be honoured by Trinity College.

The nature of self governance in a third-level institution means that academics rule. They can promote academic scholarship, and while doing so they can control all non-academic units and can easily restructure the internal indirect costs over-time and reduce them to less than 30 per cent, retaining these savings to invest in Education and Research.

The top slicing of finance by education Quangos would be removed and most importantly their ability to constrain academic freedom to create knowledge for use in a global society would come to a deserved end.

Some universities have endowments and assets that could buy the limited time to achieve such academic and financial security.

Even if the State does not default the case for the third-level institutions to break away from the influence of the State and its agencies is growing with every minute.

The Irish State is a sinking ship and academics need to escape on lifeboats labelled ‘University Charters for use when Academic Scholarship is put at risk from the State, Church or private interests’.  The Founders’ bequest throughout the centuries gives academics an instrument for use when academic scholarship is threatened. Academics need to use it now.

Colm McCarthy: Terms of the bailout deal are not unfair — they are impractical

I’ll take my turn linking to Colm McCarthy’s agenda-setting column in the Sunday Independent (available here).    

While I don’t find much to disagree with in Colm’s piece, I worry that some readers might come away with the sense that default provides a relatively painless solution to our problems, which I don’t at all think is Colm’s view.   

A few thoughts:  First, it would of course be wonderful if a Europe-wide solution to the banking problem is pursued, one involving other countries absorbing a large chunk of our banking losses.   It is unlikely to happen.  

Second, some hold the view that defaulting on State-guaranteed bank debt (ELG) would be less costly than defaulting on State bonds.   It would be good to see more discussion of why the reputational and balance sheet contagion costs would be less as a result of defaulting on State guarantees, especially given that available numbers indicate more than half of the bank bonds are held domestically.  

Third, we have to recognise that part of the reason that the perceived default risk is so high is the perception that an orderly default will in fact be organised as per Colm’s advice.   An orderly creditor “bail-in” – one supported by Europe and the IMF and probably involving additional funding – would indeed be less costly than the disorderly alternative.    But making defaults less costly raises the expectation that a default will actually occur and thus raises the risk premium.    We can see potentially self-fulfilling expectations of a default equilibrium emerging. 

Fourth, we have to recognise that a more organised system of creditor bail-ins that makes it easier to restructure debt will itself make market access harder in the future. 

Colm is right that the current bail-out mechanisms are deeply flawed and make exiting our creditworthiness crisis daunting to say the least.   It would be a mistake, however, to conclude that there is some painless alternative that is not being taken because of stupidity or even politics.   There are no easy solutions.   We may end up going the default route.   But given the costs of this route, the alternative of an assisted drive to shift expectations to the no-default equilibrium should not be too quickly set aside. 

Kenny Returns from Brussels

Enda Kenny has returned from Brussels without any agreement yet to reduce Ireland’s interest rate (Irish Times story here and FT story here). Not surprisingly, Mr. Kenny wasn’t too keen to give up Ireland’s 12.5% corporate tax rate in return for a mere one percent reduction in the interest rate on the EU loans.

To my mind, there is a lot of shadow boxing going on here. The EFSF is an EU institution and it cannot set the terms of its lending on a bilateral basis with individual countries. I’d be surprised if thee tradeoff between these two elements ended up being as explicit as suggested in this weekend’s news stories.

I think the business about interest rates and corporation tax rates has a feel of fiddling while Rome burns. More interesting were Kenny’s comments about the ECB:

“I made the point that for me to conclude a deal here I need to be much clearer in respect of elements related to the ECB,” he said.

“I spoke to president Jean-Claude Trichet and the Minister for Finance will be meeting with him on Monday. He has agreed that I should meet with him before the [next EU summit on March] 24th/25th to discuss a number of issues relating to the ECB and its positions.

“Before the council meets again in two weeks time we hope to be in a much clear position insofar as Ireland’s position is concerned and continue on our progress arising from the mandate that I’ve got about an improvement in the terms of the package for Ireland,” the Taoiseach said.

He continued: “In the next couple of weeks I expect to be in a much clearer position in respect of the state of what we have inherited is in respect of Ireland’s position.

“We’ll have had discussions with the ECB in respect of a number of matters. We’ll have a much clearer picture of what’s emerging from the stress tests and as the principle has now been accepted and implemented of a reduction in the interest rate I . . . would regard that actually as the beginning of a process.”

I reckon they could fill Croke Park if they sold tickets for those discussions with the ECB.