Categories EMU Fiscal Policy The Fiscal Implications of the Stress Tests Post author By Philip Lane Post date April 5, 2011 33 Comments on The Fiscal Implications of the Stress Tests I give my views in this IT article. Related Tags Irish fiscal strategy ← A Jobs and Creditworthiness Special Budget → Ken Rogoff on Indexed Debt 33 replies on “The Fiscal Implications of the Stress Tests” Is the total pumped into the banks still 70bn or has it gone up again since last week? How much will it be in total once we’ve paid many years of interest on all that debt? What’s the real figure? 100bn? 120bn? Speaking of €70bn, is it time to put Ricardo back in his grave again? Good suggestion Philip. How could our European partners possibly refuse such an arrangement, given their oft-stated belief in the invigorating effects of austerity, and the future health of the Irish economy? Re: Any solution to our debt problems should be based on the principles of justice and fairness. But the only benefit to the insurance arrangement Philip proposes is to our bondholders, who put an insurance scheme in place to make sure they don’t kill the patient. Perhaps the markets may be reassured by this also. When the patient is doing well, our paymaster anaethetists extract more blood. Likewise, when the patient is drowning in bad decisions, we should not be penalised for same. Wow, this should ensure we have absolutely no room to manoeuvre, no sovereignty left whatsoever to use the fruit of our labours in wahtever way we choose Its a bit like rewarding the bad and penalising the good:) I’ll mention my previous comment about the political and legal obstacles to an insurance arrangement. Philip Lane writes: “Coalition’s primary task is to reassure the markets.” This is extremely sensible advice. The good news is that, whatever sneerers like Joseph (above) say, there is clear evidence that it is happening, as the world reaction highlighted in this link shows: http://www.independent.ie/ The reality is that, although the stress tests predictably cut little ice with Ireland’s homegrown ‘doom’ economists, who now have a large financial investment in ‘doom’, they have clearly gone down very well abroad. In retrospect, it will be seen that the stress tests were the ‘doom’ industry’s Waterloo, the point at which the McWilliams/Kelly/Gurgdiev bubble burst and they were revealed as the fools that they are. Prior to the stress tests, the ‘doom’ economists were bandying about any figure, no matter how absurd, for the likely bank losses. They were certain that the stress tests would show default to be inevitable and that they would be hailed as heroes. Exactly the opposite has happened. Even by doing massive overkill on the stress tests, and factoring in lots of things that are unlikely to happen, the projected losses came nowhere near the figures that were being bandied about a few weeks ago. By going for overkill, the stress tests came out as highly credible in the eyes of foreign analysts, even if ‘doom’ analysts at home, both in the media and on sites like this, sneer at them. No wonder Morgan Kelly hasn’t been heard of since last November (I do hope that he didn’t perish in the December snow), while I can only assume that Gurgdiev has defected back to Russia, since he hasn’t posted on his blog since March 27. Only McWilliams roars on at full throttle, oblivious of the fact that his boat is sinking. The government needs to build on this success. It is vital, as Philip Lane says, to win the confidence of markets abroad, and this seems to be happening. However, it is equally important to win the confidence of domestic consumers and investors. The government needs to get consumers spending again and investors investing again, both of which are highly correlated to confidence levels. As the economy is now in balance-of-payments surplus and exports are growing rapidly, there is currently no external barrier to an increase in domestic demand in the Irish economy. So, the situation is totally unlike that in the mid-1980s, when there was a large balance-of-payments deficit and domestic demand had to be curbed to reduce that deficit. It should be noted that, of the fall in domestic demand since 2007, by far the greater part of it (about three-quarters) is due to a fall in investment, rather than in consumer spending. Consumer spending fell by around 10 per cent between 2007 and Q4 2010, but investment fell by 60 per cent. While I would not be too confident of an immediate rebound in consumer spending, a speedy rebound in investment is eminently achievable if confidence levels at home, and not just abroad, can be raised. I don’t like to base too much on one month’s figures, as they are often volatile, but it is encouraging that last week’s trade figures for January showed a 75 per cent rise in imports of machinery and equiment as compared with January 2010. This is normally the first sign of an increase in investment. To boost confidence further, the government needs to be far more active in highlighting Ireland’s advantages compared with other countries, even if this offends some of them. The previous government, presumably exhausted after a quarter of a century in power, was particularily useless at this. It needs to start highlighting the huge demographic advantage that Ireland has over countries like Germany, Austria, and others; the total absence of political, social and industrial unrest in Ireland, compared with France, Spain, Greece, Portugal, and others; the low business taxes (not just Corporation taxes) – there was a report last week showing that Ireland had the third lowest business taxes in the EU, less than half those in France (not just Corporation taxes); and more recently, the huge inflation advantage that Ireland has over the UK. It should be highlighting the folly of people investing in UK bonds and getting a real return of MINUS 2-3 per cent, measured againt the UK’s high inflation, when they could be investing in Irish bonds and getting a real return of PLUS 4-6 per cent, measured against Ireland’s low inflation. Once the likelihood of default diminishes, investing in UK bonds, at 1-2% and 5% inflation, while scorning Irish bonds, at 5-10% and 1% inflation, becomes a nonsense. This message is starting to get through. When the government launched bonds at 5 per cent a few weeks ago, a thread was opened on this site to provide a forum for the usual suspects to sneer at them, which they duly did. To general derision, I posted that I would be very happy to purchase them. I was told that I was a fool. Now Morgan Stanley is saying what a good investment they are and advising people to buy them. A further boost the the new government is also revealed in today’s Irish Times. Although overshadowed by Philip Lane’s excellent article, Fintan O’Foole has also wriiten a column in today’s Irish Times, announcing his disillusion with the new government and accusing them of sell-out. Quelle surprise! When the likes of O’Foole were clamouring for an election last autumn, I predicted on this site that, should his wish be granted, he, and those who think like him, would experience a brief ‘Obama moment’ of euphoria with the new government, but that, within 3 months, they would be accusing that government of treachery and sell-out and being no different to Fianna Fail. How wrong I was! It has taken 3 weeks, not 3 months. When the history of this time is written, it will be seen that most of media-generated negativity was politically-motivated, primarily designed to destroy Fianna Fail. It succeeded (at least for now). But, what they didn’t reckon on was that Fine Gael/Labour would immediately become the new Fianna Fail. Can anyone point to a sigle important decsion the new government has made that is one iota different to that which Fianna Fail would have made? This has left many of those, who spent the past few years demonising Fianna Fail, feeling lost, bewildered and, in some cases by their own admission on this site, ill. Get well soon is all I can say to them. @ K O’R :)) Paul Krugman has been looking in vain for someone called the ‘Confidence Fairy’, the entity that will sprinkle magic dust over an economy such that it will exhibit strong and sustainable growth in the wake of fiscal and monetary tightening. His search is over. We can now refer him to our very own JtO. From now on can we please refer to him, if we must at all, as the Confidence Fairy. Thanks. @ JtO / Confidence Fairy I’m a little confused about the link you posted to the Independent demonstrating good news. Initially I thought you must be referring to the article titled ‘Confidence vote sparks new hopes for recovery’ but upon reading this article, it appears to be a baseless cheerleading effort highlighting the only one of numerous international investment banks that has upgraded Irish sovereign debt to a buy rating post the stress tests (in the same way that 14% employment is equivalent to 86% employment; 1 upgrade out of say 10 is equal to 90% not upgrading). I note the article also highlights that Morgan Stanley expect lower GDP growth than the baseline PCAR scenario (0.8 and 1.6 vs 0.9 and 1.9). I had a read of the report itself, to see what I’m missing, It says: “Of course, Ireland is still facing major challenges. But, if there is one economy in the euro area that could meet these challenges, it is probably the Irish economy, we think.” Confident stuff there allright. Perhaps its one of these other Indo articles you meant: ‘€7.1bn hole in finances but State hits bailout target’ ‘Bank shares are volatile as BoI begins disposal of €30bn assets’ ‘ECB hike will weaken countries like Ireland, top economist warns’ ‘Crisis-hit luxury hotel calls meeting of creditors’ ‘€16bn of small project loans won’t go to NAMA’ ‘10.8pc plunge in Irish house prices’ I’m all for highlighting good news and trying to inject confidence into the country. I’m not in favour of being blind to the truth and ignoring difficult facts on the ground by saying ‘sure it’ll be grand’. @JohnTheOptimist Morgan Kelly forecast the bill for the banks at €75 bn last October, he was out by a couple of € bn, what’s a couple of € bn when dealing with the banks? He was right on the button. But the stress tests don’t stress test the ability of the economy to return to growth. So once again those figures can’t be fully relied upon. We’re owned by the ECB/IMF, our fifth revolving door bailout for banks estimate is now € 70 bn, we’re now into negative growth if GNP figures are to be relied upon, the domestic economy, where the jobs are is broken. How I fondly remember all the optimism and confidence stories from our politicians the week before the arrival of the EU/IMF. When I hear the confidence and optimism stories, I know for sure meltdown is on the way. Whatever hope we have of avoiding it, if blinded by confidence and optimism, you can’t even see it on the horizon, what chance have we of avoiding it? Interesting story in Der Spiegel yesterday: “IMF Pressures Greece to Restructure Debt.” In English at: http://www.spiegel.de/international/europe/0,1518,754864,00.html#ref=nlint. One is reminded of the remark by Nils Bohr “Prediction is very difficult, especially about the future”. The Der Spiegel article has been denied by the IMF. But who cares! As Johnson famously remarked “let the SOB deny it” apropos what he knew to be a gross falsehood. I take the opportunity to draw attention to an excellent article by Paul Gillespie in the Irish Times recently. http://www.irishtimes.com/newspaper/opinion/2011/0402/1224293646691.html I do not agree with his conclusions on the monetary aspects but the general point that he makes is sound. We need to consider not what the opponent in Ireland is saying but what others outside Ireland are saying. As Arthur Beesley points out in another excellent article in the IT today “What is clear is that Dublin’s perspective will not be the defining one”. “Since the medium-term growth path for Ireland will not be revealed for a considerable period, the ability of the Irish government to re-enter the sovereign debt market would be facilitated by a redesign of the troika loan that allows for this core uncertainty. In particular, the repayment terms of the loan (the interest rate and/or the duration of the payback period) should vary with the performance of the economy, with greater net payments if the economy does well and lower net payments if economic growth is disappointing.” If international investors were persuaded that all sections of the Irish economy were fully cooperating then this might be saleable. Investors though are fairly cynical, and those over 27 even more so. They might view this as having embedded incentives for the “I’m holding out against an internal devaluation because I can and those guys over there can’t – they are my human shields” crowd. The more moribund the economy the smaller the debt repayments. I would suggest linking to external metrics – like EZ or G20 GDP. That would be easier to sell. @JTO I and presumably others would much rather that you desist from the ‘I told you so’ tone of your most recent posts – I believe that the football analogy is probably very apt when it comes to your contributions to this site i.e. stop playing the man and stick to playing the ball. When your usual rant extends into the one-upmanship zone I find myself becoming ‘ill’ as you so describe for all the wrong reasons – at least economically speaking so please do us all a favour and state the facts and move on. BTW I believe the most important data released over the past year is one that you have highlighted here on a couple of accasions namely GNP growing over the past 3 quarters with GDP actually falling in q4 following a small gain in q3, which was not expected. Therefore your recent comment in another post, “…They also failed spectacularly to forecast that GNP would RISE by +4.0 per cent between Q1 2010 and Q4 2010, a failure which they now neatly get round by claiming that it is GDP, rather than GNP, which matters, a complete reversal of their previous position…’ is at best disingenuous because I have read no commentary which indicates what you state here. If I’m wrong well so be it but thus far I cannot find any commentary which suggests the reversal that you state. There still remains the issue however that GNP is growing faster than GDP based on latest numbers and as far as I can see no commentary has given any plausible reason to explain this anomaly given what we know (or at least believe) what’s going on in the domestic economy. I’ve heard suggestions that similar anomolies were recorded last year in the US and the explanation given at the time was that mortgage holders who had stopped making their monthly payment and decided instead to spend the cash in the domestic economy which contributed to the surprising improvement in consumer spending in 2010 which ultimately reflected itself in better than expected aggregate data points. Is a similar situation rearing its head in little old Eire? The OECD has issued a positive assessment on the G7 economies ex-Japan this morning. Also today, the Ernst & Young Eurozone forecast has a positive outlook on Ireland’s medium term outlook. The services sector slowed down somewhat in March while Spain’contracted. I make up my own mind on the outllook and there are downsides but the drumbeat of calamity howling is ridiculous. Who would want to work for a boss who is awaiting the next earthquake? It is likely that EU-IMF policy will evolve with flexibility linked with the performance of the economy. In the meantime, there are people working hard in small companies to survive until better times. Hope can be kept alive without losing sense of reality. @ Yields or Bust Seamus Coffey can assist: http://economic-incentives.blogspot.com/2011/03/gnp-on-up.html @PQ Thanks for the link – I think its fair to say that even Seamus is somewhat in the dark – his comment testifies:- “…Could it be that the surge in reinvestment earnings outflows up to the middle of 2010 over-stated the true drop in GNP and that the fall in these over recent quarters has seen a more accurate reflection of Irish GNP? That is, things may not have been as bad we thought they were for 2009 GNP figures and things now may not be as good as they appear to be for 2010 GNP figures. Just a thought…” On the face of it the Morgan Stanley piece looks positive. Is it possible to find out it’s influence on volumes and numbers? GNP figures are not helped by smaller disposable incomes, rising mortgage interest rates, rising unemployment, high levels of personal debt, rising taxes, business closures, higher vat rates, a tax base weighted against those on lower incomes, Croke Park agreements, unsustainable and rising debt repayment obligations, the Nama financial economy……But for some all this points to growth and recovery:: A little worrisome when our GNP in the minus is so in spite of being pumped on a daily basis with bailout money….Our economy is broken and broke, end of story! And the above will not be helped at all by the ridiculous Philip Lane suggestion of rewarding the bad and penalising the good by persuading our paymasters to go easy on us when times are bad:) “Since the medium-term growth path for Ireland will not be revealed for a considerable period, the ability of the Irish government to re-enter the sovereign debt market would be facilitated by a redesign of the troika loan that allows for this core uncertainty. In particular, the repayment terms of the loan (the interest rate and/or the duration of the payback period) should vary with the performance of the economy, with greater net payments if the economy does well and lower net payments if economic growth is disappointing.” This must be a template for some post capitalist socialism for the banks that sets out to deincentivise good work and success. I mean, why bother to succeed, if the fruits of your labour all go to the banks? Perhaps Professor Lane has some future upside down world view that will account for the smart economies of the future deciding to self destruct because the more they self destruct the more they get rewarded for their failure, which we all know is much better than be punished for success. Such is the upside down world the banks have led us to…..Just where the heck is this leading to? @ simpleton, Edward & Colm Brazel 🙂 @Yeild or Bust – spot on. ‘I’ve heard suggestions that similar anomolies were recorded last year in the US and the explanation given at the time was that mortgage holders who had stopped making their monthly payment and decided instead to spend the cash in the domestic economy which contributed to the surprising improvement in consumer spending in 2010 which ultimately reflected itself in better than expected aggregate data points. Is a similar situation rearing its head in little old Eire?’ You may be correct there – the obvious issue now is what is the potential impact of this on the banks and the Government debt (do you think anyone in a relevant position is looking at this and preparing for any necessary contingency in the event that it transpires as fact? Me neither). A ‘micro’ story I spoke to a manager in of a large organisation this morning by telephone in Belfast. He recounted a story by a junior manager speaking to some office staff who were at risk of losing their jobs telling them to max out the cards asap and get as much money off the banks as you can before it’s over. We also discussed a friend who IVA’d five years ago and ‘burned’ a couple of banks for £45,000+. Two of the above banks and card companies have already issued him with facilities again. @JTO (nouveau nom de guerre – ‘the confidence fairy’?) Did it not strike you that the sources of this ‘confidence’ are all banks? Could it be they are telling ‘fairy’ tales? Would that be a first? Rhetorical of course. @ Colm Brazel – most recent posts. I agree that it appears Philip has gone on the assumption (correct me if I am wrong Philip) that the bondholder will get paid for the most part- if not all. The brutal truth is Colm, that if you are looking for fairness or some kind of morality or justice in this game you are looking in the wrong place – there is not going to be any. Now that’s not nice and the second biggest con of the lot is politicians failing to accept that reality and get into these guys and do some hardball of their own. What I should say is that Philip has presented a best case potential solution for a given set of assumptions and parameters. What we should concentrate the minds of the politicians and policy makers is a solution based on a different set of deliverable parameters and assumption. As I have mentioned on a previous post. This situation regarding the sovereign/bank debt is a bad deal because in my opinion, it is undeliverable. @ Ordinary MAn, Nope, don’t misunderstand me, although i do have a set of moral imperatives I can apply to our fiscal situation, I’m setting them aside here. I’m merely drawing attention to the fiscal unsustainability of both sovereign and banking debt weighted against the fiscal unsustainability of Croke Park, the Nama financial circle, high levels of personal debt, rising mortgage rates, high VAT, rising mortgage debt and GNP reversal because of emigration and unemployment and business closures. The above is meltdown/default and the figures confirm this:: How long we can jellyfish on as some debt hybrid economically kept on life support by the paymasters is anybody’s guess? But I’m guessing its smart to prepare as best you can for the worst because the patient is not looking good! Just spoke to a German colleague at work today. I know its only one opinion but she said: “I’m on Ireland’s side….German banks should never have gotten involved lending all that money in the first place….” And that was it. Who said the European citizen is not receptive to the truth! @JTO Why do you insist on making every personal. Man, I think you are a very unhappy bunny. sorry, every thing personal @ Colm “the ridiculous Philip Lane suggestion” don’t mean to be critical, but thats twice now in the past couple of days you’ve used some relatively impolite (and im being polite) language about some of the authors on here (John McH and now Philip). Perhaps you need to learn how to play nicer or people will start to think you’re a bit ridiculous yourself. It might not be possible to reconcile justified exuberance about the resilience of the real economy with the extent of the drain that Irish banks are placing on it. We do need to be more positive about our country. We also need to figure out how to stop piling on debt. It’s not sustainable and it’s a ridiculous burden to leave to our children and grandchildren. Fed Help Kept Banks Afloat, Until It Didn’t Interesting article in NYT http://www.nytimes.com/2011/04/05/business/economy/05fed.html?ref=business @Micheal Hennigan Ernst & Young have a bit of ‘form’, as the ‘onest cockney puts it, in making positive forecasts …. methinks they gave Shawn_ee a ‘sound as a trout’ once upon a time … @Colm Brazel Philip Lane’s suggestion is essentially the same as progressive taxation. The better you do and the harder you work the more you pay. Progressive taxation is regarded as a fundamental element of Western Europe’s social fabric. We do need to get real about taxation … and to get real on how, where, and who it is spent on …. and to get really real on real value creation …. and these are largely decisions within petit_sovereign political control ….. so we simply need will, intellect, and most importantly (no gender differential implied), the balls to do so. Good few lifeboats to be built and stocked – the ship we are on is destined to go down in 2013 or earlier due to the idiocy of previous captains and the pirates who are now in charge of its navigation – be rather foolish to go down with it! Pitcairn before we die and we are still rapidly running out of time …. @ Colm Brazel Says: April 5th, 2011 at 3:16 pm Colm I believe we are in agreemment regarding unsustainability – but have to agree with Eoin and Hugh whereas JTO is good for a party (you can’t have a party without a balloon! :). On the micro side of things; I heard tonight on the BBC that t/o and profits in a series of major british multiples are significantly below expectations. I think a significant portion of UK credit card holders and small loan (cashflow) customers are now maxed out and the slow decline into illiquidity is beginning – the real misery may be just around the corner in UK. Think we are about to see defaults rise with anger or apathy in Ireland? @ ceteris paribus No suprise there. It never fails to amaze me how stupid and self delusional these people are – they realy do believe their own BS. Jimmy Goldsmith was dyslexic and could ‘brutally’ analyse a balance sheet for value in 30 seconds (so the story goes) and spend the next 30 seconds figuring out how to brutally analyse (sic) the company out of it before he bought it! @ David O’Donnell ‘get really real on real value creation’ Exactly. Comments are closed.