Portuguese Bailout Request, ECB Rate Hike

Clearly these are important. No we’re not ignoring them. I guess none of our blog alumni have anything profound to say about these two predictable events over and above what we’ve already said. Still, here’s a thread for our commenting contingent to explain to us what it all means.

62 replies on “Portuguese Bailout Request, ECB Rate Hike”

Well, didn’t McWilliams describe portugal going for a bailout as one line of a castles defense falling?

That we’re now about to fall back to the final line with Spain. That if Spain falls, then the castle is properly breached.

As for the Rate Hike. There’s another bit of misery heaped on the people who bought during the boom.

@Karl Whelan

Not a surprise that Portugal has arrived. I posted this yesteday a few hours before Portugal went public … not intentional timing. I think this paper provides a good overview/understanding of Portugese situation … [did not get a single comment on it]. I think Portugal closer to Greece; and Ireland closer to Spain. Deauville Tango & many in ECB have a little problem with heterogeneity …. and if not addressed then the solution for Portugal proposed by the authors here – EXIT – may prove to be necessary option. Portugal has huge issue with Education/skills [have info, will find later], and an entrenched upper-echelon that regulatory captures almost all and probably closer to the Egyptian upper echelon under Mubarak; IMF could be positive, I cannot say the same for EZ/EU at the mo …. I see Portugal/Greece as certainties for default/restructuring as only sensible option.

My monthly Minsky moment goes to Portugal: German Banks are ‘Takers’

Working Paper No. 664, March 2011
Can Portugal Escape Stagnation without Opting Out from the Eurozone?
Pedro Leao and Alfonso Palacio-Vera

The sovereign debt crisis of eurozone countries such as Portugal has highlighted rising heterogeneity, macroeconomic imbalances, and high levels of private and public sector indebtedness. There is no clear pattern of economic integration among eurozone countries, say the authors. Peripheral eurozone countries have financed their large current account deficits by increasing their indebtedness vis-à-vis core countries—Germany in particular.

According to the authors, Portugal, Greece, and Spain face a decade of economic stagnation and high unemployment. In the absence of institutional reform, Portugal’s best way forward is to exit the eurozone.


On the ECB quarter pounder: no comment.

Looking at the latest HICP inflation figures produced by Eurostat, where more than half the countries in the EU have inflation over 3% (cf a target of close to but under 2%), it is just surprising that the council didn’t agree to a series of rises.


The average EBA stress test interest rate in 2011 is 1.5% which might indicate 1% for Q1, 1.25% for Q2, 1.5% for Q3 and Q4 at 2%

As the saying goes…
Yes, but is it good for the Jews. Or in other words, how will it affect Ireland.

I have heard Kevin O’Rourke and others say that the more countries that become embroiled in the crisis, the sooner a European-wide solution will be put in place and that this will entail a better deal for Ireland.

I’m not so sure however. Portugal is more like Greece, than Ireland or Spain i.e. the crises here and in Spain are primarily banking ones.

The fact that we are in a club of 3 with Portugal and Greece allows the ostriches in Frankfurt and Berlin, who claim that the Euro crisis is more fiscal than financial or banking, to keep their heads in the sand.

Maybe it’s already been discussed. But I’ll fire ahead anyway.

Obviously the rate hike is bad news for Ireland, but we all should know that the ECB is considering the eurozone on aggregate, which is fair enough.

However some commentary I’ve read in the media suggests that even still the rate hike is not appropriate. Yes headline inflation is 2.6% which is above target, core inflation is only around 1%, but Trichet argues that he wants to head off second round effects (i.e. wages sprialling out of control).

One argument against this reasoning is that unemployment in Germany is still quite high, and so this slack in the labour market means that workers aren’t in much of a position to ask for higher wages.

And here’s another argument against the rate rise:

Germany economic growth is driven by their export sector, which will also be unaffected by any rate hike.

What’s everyone’s opinion on this counter-arguments?


I have heard Kevin O’Rourke and others say that the more countries that become embroiled in the crisis, the sooner a European-wide solution will be put in place and that this will entail a better deal for Ireland…..
I’m not so sure however. Portugal is more like Greece, than Ireland or Spain i.e. the crises here and in Spain are primarily banking ones.

Why assume that an effective European-wide solution will be put in place.
The situation to date has been compared to fire fighting. But is there any evidence that the Fire Department understands the dynamics of the fire or the consequences that deliberately not putting out the fire will have.
There is no definitive fire break. Nor is there a will to create one. If anything the strategy has been to let the fire engulf the outlying areas, which it has done.
The question is what is next. And who still retains their confidence in the fire department to prevent the very worse.
Certainly, I don’t.

A rise from 1% to 1.25% is not taking a sledge hammer to the teetering countries on the periphery. Nor is it a brake on the German economy which is overheating. I expect complaints from both sides which means Trichet got it right.
Food prices have increased due to flooding in Australia, Colombia and Canada, drought in Russia, export restrictions in India, civil unrest elsewhere. Independent of natural weather disruptions, fertilizer and fuel prices increased markedly, these are inputs which reduce output if there is no guaranteed price increase for outputs. Commodities have been on a tear. Taken all together the likelihood of inflation increasing is high. The EU is a behemoth with enough momentum that it will take at least a rise to 3% to get the desired results.

We have been treated generously by the ECB so far, there is no reason to believe that the ECB will not take into account that Ireland cannot absorb increasing rates.

@ The Other Andrew

If German unemployment is low then obviously the rate rise is due to the need to keep the Philips Curve relationship intact. 🙂


Do I detect a touch of ennui from your Olympian fastness as you facilitate the ‘commenting contingent’?

The benchmark rate is now 1.25% and annual inflation is 2.6%.

It doesn’t appear to be the start of a series and is more a reminder of the ECB’s mandate than a serious shift in policy.

@ David O’Donnell

Maybe Portugal would be better off outside the euro or maybe not.

Dependence on low skill exports with competition from the likes of China, is not a good position for a higher wage country.

Is devaluation the path to wealth – – have repeated devaluations ever been?; could an independent central bank operate there?

As to convergence, it usually happens at glacial speed.

Even if Germany’s weakest regions were to grow a steady 4 percentage points faster than the strongest regions, it would take them more than 45 years to catch up:


@ Michael H

You have a great toolbox there. There always were, and still are many Germanies. The regional/development economics approach might offer some ways out of our current impasse.
The Wealth and Poverty of Regions by Mario Polese (U Chicago P 2009) is a highly readable and thought provoking review.
KW is a trojan, but like Keano, he has his humours. 🙂

So if interest is the price of money over time, then money in equilibrium should depreciate at the same rate as the average rate of physical depreciation in the economy.

Anything else will eventually result in distortions – either in the level of investment, the exchange rate, the price of non-productive assets.

And the arguments against interest rate rises seem to hinge on shoring up an already distorted equilibrium.

I think Ireland and others should default – or else the terms of the ESF should remain sufficiently bad to represent a poor alternative to default. German investors in Irish junk bonds should get burned and to bed with it.

Don’t sacrifice the euro to inflation simply because some foolish peripherals rode their economies like drunken peasants on horseback.

RTE reporting the vote for the interest rate increase was unaminous.

Mr. Honahan forget to pack his green jersey?


On long-term trends, the disinflationary impact of low cost producers such as China and India is transitioning into an inflationary influence.

As a result, the global disinflationary trend of the past 30 or so years appears to be turning.

The Bank of England’s rate at 0.5% is still at the lowest level since it was founded in 1694 but it may be a long time before the close to zero rates return once ‘normal’ times return.

@ paul quigley

The surge in FDI from the US high-tech boom in the 1990s must mark a relatively unique spurt in regional growth in Europe.

25% of US greenfield investment in Europe with 1% of the population and a massive jump in labour force participation.

Those four crippled nuke plants in Japan (and by extension Chernobyl) are an apt example. What we have gentlemen, is a seriously FIRE damaged building. It cannot be demolished, it HAS to be shored up. The level of toxic debt is too great. This has to ‘decay’.

However, there the analogy goes pear-shaped. Radioactve nuclides have (mostly) short half-lives. Debt just keeps growing. There’s your predicament. You MUST retire debt faster than it grows. And the jerks have just stoked up its growth rate!

Now in the ‘goode olde days’, the base rate debt level was (mostly) carefully controlled. But those controls were trashed. You also had very modest (relatively speaking) energy costs. That day is also well and truly over. In those former conditions (modest debt levels, low energy costs) it was easier for the PC economy to ‘catch up’, so to speak. But once the FIRE economy was introduced it would no longer be possible for a linear system to keep pace with an exponential one. Sooner or later you got your instantaneous steam/hydrogen explosion in the reactor vessel. Sept 2008 looks good.

Now its remediation time. Its 2? years since Chernobyl. Those reactors in japan – ?00 yrs? Trillions of unpayable debt – ?? yrs? That’s why its a political matter.

I have it, from a most unreliable source, that much of the debt relates to virtual (fiated) money. The actual ‘cash’ element is tiny. So, if one declines to pay, very little money is actually ‘lost’, since it never really existed in the first place. Anyone got reliable info on this? Thanks.


I saw the BBC Newsnight item. I was only surprised that at this stage in this ongoing saga, that a new twist arises – low german wages. I just loved the classic kraut from the private bank, austerity is the answer. No germam would recognise austerity if it bit them. The success of their economy since forever means that the infrastructure etc., is first class, in an austerity regime! Compare their savings ratio/investment/any economic measure you can think of, with ours….

The strong(er) economies of the € area are only concerned with any effect the laggards such as ourselves, the inberians and the italians might have on them.


Oil prices peaked in 1980 when you factor in inflation. I think you need to look at the stagnation factor inherent to the modern consumer economy and how this was addressed over the last 10 years by the expansion of the model outside the core which involved the cinderella transformation of Third World into Emerging market. The growth of the global periphery has increased demand for commodities and the other big factor to consider is population growth- India added 181 million people in 10 years . When the gipper won the 1980 US presidential election and the neoconservative fightback began , the world’s population was 4.5bn, give or take a few hundred million. Last month it hit 7 bn. Most of these new people are desperately poor but if even a small proportion of them join the upper middle class (ie income per head > USD 12000) inflation is going to be with us for the forseeable future.

@Michael Hennigan
I am not sure that the inter-regional convergence (or lack of it) is a very apt analogy to convergence between countries in the EZ. In France the state has been pouring money in the poorest rural districts or declining industrial regions for fifty years, with very limited results .The differences between north and south Italy are so great that it is hard to believe it is the same country. Catalonia and Andalusia both belong to Spain, etc.
On the other hand, eastern ex Soviet bloc countries, in spite of recent setbacks, have been catching up at breakneck speed with the EZ average. The reasons between those differences are clear :the same minimum wage apply throughout France, the civil servants are paid the same, the labor costs are more or less the same everywhere, etc. At one point in time the salaries of metallurgical workers in Slovakia were less than one tenth of the German ones. There has been massive investments by “old” European countries (mainly Germany) to take advantage of that windfall and the convergence has been very fast indeed, slowing down as the wage levels rose.
In theory, if the Portuguese and the Greek could freeze their labor costs at a level compatible with their productivity they would catch up too (I am not sure this is politically feasible).
The Irish case is the most difficult of all since the labor costs are above what they are in Germany or France ,the solution is not obvious.

@ Barry

I just loved the classic kraut from the private bank, austerity is the answer. No germam would recognise austerity if it bit them. The success of their economy since forever..

Barry or would you prefer to be called Paddy?

Where were you when German unemployment was above 5m?

Prof. Hans-Werner Sinn of the Ifo institute, had a book published in 2003: Ist Deutschland noch zu retten? (Can Germany Be Saved?) – – Its blurb read: “Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels.

Germany is outperformed by its neighbours. Its growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe.“

Germany benefited during th recession from reforms that were put in place by the SPD-Green coalition.

Germany: 2003; ‘Sick man of Europe’; 2010; Eurozone growth powerhouse:


@ Dominique Jean-Raymond


Our manufacturing labour costs are competitive and in line with Germany’s.

We also have low social security costs as many Irish private sector workers end up with a basic pension that is about a third of the average industrial wage while an Irish civil servant can live to 90 and get every increase that is given to the person who currently sits in his chair.

Other costs are out of line.

@Dominique Jean-Raymond

The Irish case is the most difficult of all since the labor costs are above what they are in Germany or France ,the solution is not obvious.

JTO again:

Cher Dominique, you are talking merde. No change there then. Next, you’ll be posting that Thierry Henri headed the ball in, which would at least be a factually more accurate statement than your above one.

The facts (assuming you understand the concept) are in here:


In 2007, labour costs per employee in Ireland were 38,541 euros. In Germany, 51,612 euros. In France, 52,567 euros. Labour costs per employee in France were the highest in the EU. One of the reasons is that, in France, employers’ social security contributions were a whopping 45% of employees’ remuneration, compared with 11% in Ireland. Given the number of days holidays and days on strike that French employees take, their labour costs seem excessive. Belgium, Demmark, Sweden, Finland, Luxembourg and UK also had higher labour costs than Ireland in 2007. The figures are for 2007 – almost certainly labour costs in Ireland have fallen relative to those in Germany, France and most others since then.

I need not put too much effort into my contribution as I can refer others to the exchanges with Paul Quigley at the end of the thread “The Euro Crisis; the agenda for the new Irish government”. A link to the RTE interview with David Donovan about what the men now in town might expect of us can also be found there.

Since then, I was able to find the interactive charts published by the The Economist and I re-post the link.


One has to work down through the pull-down menus to get the full picture, including, for example, that Ireland has, or rather had, an economy about the same size as the Portuguese with only half the population.

What going through these charts underlines (although the data may be somewhat out of date, the relativities should be unchanged) is that it is not tenable, as the BBC does in the link quoted above, to speak of two halves in terms of the gap between the periphery and the centre. The relationship in terms of Greece, Ireland and Portugal is about 8% to 92%. This is par for the course for British commentators because, no less than their Irish counterparts, they are viewing the situation through a national prism (although one can readily suspect an agenda in certain quarters designed to distract attention from the parlous situation of the UK economy by exaggerating that of the euroarea).

As the issue of a “gesture” and the CCCTB simply will not go away, I repeat what I said about the issue in the following paragraphs.

There is an additional rather fundamental point to which I drew attention on another thread in the context of the debate on the CCCTB. Differences in fiscal and social laws and conditions are not considered as distortions of competition. Common rules on direct taxation and minimum rules on social policy can be adopted but they are not viewed as essential to the establishment of the internal market. This explains why the CCCTB proposal is based on Article 115 TFEU (unanimity and consultation of EP only) as against Article 114 TFEU (QMV and co-decision with EP). But the issue is not the technicalities but the view Ireland takes of the concept of “a highly competitive social market economy” introduced by the Lisbon Treaty (Article 3.3 TEU).

The drafters of the Treaty of Rome had more sense than to introduce such a contentious concept into the text of a treaty but it is there now, largely, need I say, on German and French insistence. The question will be; are we closer to Boston than Berlin if there is a move to agree a deal between nine countries under the enhanced cooperation procedures of the Lisbon Treaty?

I think that this broader debate is what lies behind the hard line positions being adopted (although there is almost certainly a tactical element).

What is the conclusion to be drawn? Mine would be that minds should concentrate on the real objective viz. getting Ireland out of the bind into which the country has fallen and this can only be done throughaction in respect of of the areas where we, nationally, have retained freedom of action (as Colm McCarthy has pertinently pointed out) and by that means outflanking what is quite simply an exercise in brute politics and out of place in the EU.

Cf. also on the attached very interesting paper just to hand. Others are also in a bind.


P.S. As to the utterances of the “Technicals” in the Dáil, what can one say?

hey guys,
Can you not see recent EU history repeat itself of mid 1980 with usual suspects (Ir, Gr, PT and SP)? Except this time, the EU Structural funds Objective 1 ‘lagging’ Regions (thats right formerly Ireland,Port, Spain, Greece) have not much to bargain with this time, with France and Germany. These latter core economic regions ( already got what they wanted back then, so they couldn’t care too too much about us all now.

Eh, what’s it called again? oh yes, the Principle of Self-Interest reigns supreme.
…having pints only has a short-term effect with the Continetal partners..

one solution?
Well, putting aside economics for a moment, we need a creative negociating team from Irish, Spain, Greece and Portugal to team up again and work some clever power play with the EU hegonomies. Not for SFs, but to regulate the power balance between core and periphery. We can never fix the geography and the economic disadvantages that come with.

OR else we create Periphery Block 🙂

@ seafóid: Thanks for that.

I was taught (a la Milton) that inflation was (only) about money supply. Price changes were separate, but related. There is a complex process involved. If you conflate the two, you confuse the issue. My opinion, is that the money supply (cash, credit, and most especially debt) has run amok – and been allowed to deliberately so. Paul Hunt mentioned something about elephants. Precient.

Sometimes there is a direct connection between money supply and ‘prices’, (wages, salaries, goods, assets, services). Other times the connection is somewhat removed (price changes lag). This time there is a real bad predicament. The money cost of primary energy sources will increase sharply, dip temporarily, then increase again. This process is unstoppable. That’s the good news.

The bad news is that the unit energy cost of supplying our primary energy needs. In order to obtain our primary energy needs we have to spend an increasing proportion of those same primary energy resources, and we are gettin less and less primary energy out (and the quality of what we are getting out is also going in the wrong direction).

Do not be fooled by stories of ‘dramatic developments’ (eg. shales and tar sands, deep waters, renewables, etc. etc.). Heavy Spinola. You need a sh*tload of energy to deliver the outputs of these alternatives to the customer. Its known as ERoEI. There is a critical ERoEI threshold for developed economies. Some folk say we are closing in on that threshold. Maybe, maybe not. Who knows? But if we pass through this threshold, its all over. Bar the elephants trampling everything in their path, that is.

Finally, as if things were not bad enough. Those pesky primary energy producers are going to give us less-and-less of their production output! They intend to keep more for themselves! Selfish blighters!

Anyhow, some day soon I expect the ‘powers-that-hope-to-be’ will announce that the laws of thermodymanics have been shown to be fraudulent – they have discovered some ‘leaked’ e-mails to prove it! :-).



Returning to Portugal … and the rest of us Europeans …….. and the power of German Kapital over German Labour ………. I posted this last month … simply to emphasise that a focus solely on labour is one-sided …. as too many of the Irish leuder_amadaans, & Deauville Roight, do …

Unit Labour Costs in the EuroZone & Unit Capital Costs


Study the graphs ………… tells a story …. Germany, as always the benchmark …….

Current discussions about the need to reduce unit labor costs (especially through a significant reduction in nominal wages) in some countries of the eurozone (in particular, Greece, Ireland, Italy, Portugal, and Spain) to exit the crisis may not be a panacea. First, historically, there is no relationship between the growth of unit labor costs and the growth of output. This is a well-established empirical result, known in the literature as Kaldor’s paradox. Second, construction of unit labor costs using aggregate data (standard practice) is potentially misleading. Unit labor costs calculated with aggregate data are not just a weighted average of the firms’ unit labor costs. Third, aggregate unit labor costs reflect the distribution of income between wages and profits. This has implications for aggregate demand that have been neglected.

Of the 12 countries studied, the labor share increased in one (Greece), declined in nine, and remained constant in two. We speculate that this is the result of the nontradable sectors gaining share in the overall economy. Also, we construct a measure of competitiveness called unit capital costs as the ratio of the nominal profit rate to capital productivity. This has increased in all 12 countries. We conclude that a large reduction in nominal wages will not solve the problem that some countries of the eurozone face. If this is done, firms should also acknowledge that unit capital costs have increased significantly and thus also share the adjustment cost. Barring solutions such as an exit from the euro, the solution is to allow fiscal policy to play a larger role in the eurozone, and to make efforts to upgrade the export basket to improve competitiveness with more advanced countries. This is a long-term solution that will not be painless, but one that does not require a reduction in nominal wages.

Deauville Tango created Periphery Block last October – a few quiet pints in Munchen would have been more appropriate in terms of EU solidarity ,,, PD/FF ignorant arrogance in previous decade has not helped either …

There is the curious unexplained lazarus rise of Spain from the ashes, its bond spreads suddenly appearing fairly good. This compared to the prescient awful expectation markets were suddenly going to take Spain down after Portugal. Allegedly the doomsayers have been proved wrong:

Nothing in the above article to recognise the exposure shown in the case of fallen Caja Sur bank to the property Spanish binge of the past decade. Has the Banca de Espana pulled off the biggest coup of the GFC and absorbed and cloaked all the €180 bn of distressed property in the smaller local property banks?

What of stress testing the Spanish banks?

Remarkable turnaround for Spain all the same? Wonder how they managed it:)

Looks like Portuguese officials might be able to negotiate a better deal than our Lot, we should benefit from it !

Perhaps we should cede our negotiations to the Portuguese in case we mess up their case as well ?

@ all

I think that the point needs to be made that Germany’s labour situation is as skewed as that of any other and, as is normal, for domestic political reasons. What differentiates it from other economies is that it has been insulated, with that of Austria, from European labour developments following enlargement because it has availed of the full seven year derogation with regard to applying full free movement of labour. This will come into force, appropriately enough, on 1 May this year.

However, the various parties in adapting the so-called Hartz IV reforms, introduced by Schroeder, to comply with (still) another judgement of the constitutional court, have decided to introduce minimum wages in certain “sensitive” sectors but not on a national basis. The intention is, of course, to protect the level of domestic wages against outside competition.

The issue of labour competitiveness is a hot potato in relations between France and Germany and it is not touched in the Euro Plus Pact except very indirectly, not unrelated to the fact that the French minimum wage is 11.20 euros an hour.

But the essential point is that general labour statistics cannot, in my view, sum up the labour situatiuon in any country. The problem in the Continental countries countries generally lies in the difficulties of hiring and firing and the imbalance between the rights of those in permanent employment and those not, or unemployed. Germany, and the nearest high performing, can afford it, the other countries cannot.

The statistics for Germany (Le Monde 14/2/2011): 60 million work force, 5 million part-time, 5 million with Hartz IV “mini-jobs” (400 euros for 20 hours a week) and 1 million agency workers. The reasons for this situation are many and complex – reunification and an un-integrated immigrant community, notably – but the result is not good e.g. there is a shortage of 200,000 trained engineering workers.

Next stop Spain.

For a number of years Spain and Ireland were going head to head on who could create a bigger property bubble – in both construction activity and price. I remember seeing Spain had built more property than France, Italy and Germany combined in 2007. Perhaps they’ll magic a solution, but magic is really just illusion and sleight of hand. It’s hard to believe huge losses aren’t being hidden.

A little off topic, but I remember in the mid-00’s looking to get a price for coupons offered on low rated RMBS notes in Europe. Most of the transactions at the time didn’t offer notes below BBB. But there were some BB in Spain. Oddly enough these notes were priced lower than single-A (IIRC). I asked about this and it was suggested that Spanish banks were holding each others expensive bits. Now this alone wouldn’t amount to huge losses, but it shows slightly dodgy practice (if what I heard was true). Similarly many people believe official Spanish price indexes don’t reflect reality.

If Spain is playing a ‘hide and deny’, you can’t blame them. Coming clean early hasn’t been a great idea to date. Is it possible Spain is in good shape? At the beginning of the crisis, Spanish banks were said to be well capitalized. I guess their regulators were a little more tuned in due to some of their banks being hit badly in South America in the early 00’s.

In short, I don’t think Spain is in good shape, but it’s possible that they may be in good enough shape to successfully hide their problems and try to work them though. Though if I were Mr EU, I’d plan for a Spanish rescue.


We can never fix the (periphery’s?) geographic disadvantages.

JTO again:

The ‘periphery’ doesn’t have geographic disadvantages.

The term ‘periphery’ is largely based on racism and not on geography. It is largely based on which countries, according to Hitler’s theories, qualify as Aryans and which do not.

In what way are Ireland, Spain, Portugal and Greece in the perihery, while Sweden, Denmark and Finland are apparently not? In what way are Ireland, Spain, Portugal and Greece at a geographic disadvantage?

Ireland is much closer to the US, the global centre of business, enterprise, innovation and commerce, than are any of the ‘core’ countries. It is also much closer to the UK, the country that, given Germany’s demographic collapse, is forecast to have the largest population in Europe within a couple of decades, and whose capital, London, is the global centre of finance.

Ditto for Spain and Portugal, which are also much close to Latin America, than are any of the ‘core’ countries, and which have strong cultural and economic links with them.

While Greece is right at the intersection of Europe and the oil-producing Middle-East.

In contrast, Sweden, Denmark and Finland are adjacent to the North Pole.

On the subject of the “ECB Rate Hike”, can anyone explain why it is given as axiomatic that this rate will be passed on, via the banks, to the mortgage holders?

Or slightly differently, how does this rate hike actually feed through to the Irish banks? Is this the ECB liquidity money going up, and/or is this something else?

I see the expected interest rate rises was factored into the stress tests: “BlackRock estimated losses using a statistical modelling approach incorporating macroeconomic factors such as the (assumed) forward path of house prices and interest rates,”. CB

Does this complicate the issue?

So far the assumption seems to be that countries in the bailout bunker will ‘come good’ in time. Several extreme condition questions occur to me. What time periods are reasonable? What might happen if countries can’t get out of debt jail within a reasonable period, assuming they are still in the euro? Could Europe see a retreat by bondholders to other regions? There has been (continuing) a big shift in investment to BRICs but could that lead to bond starvation in the EU?

Thanks!. Yes, that is true in relation to Northern periphery of Scandanavia and Finland. But I disagree i believe periphery has economic disadvantages when country possesses limited resources. By this I refer to periphery in context of economic integration and Single market programme, not race or social dimenson as you indicated. Yes we all operate to a large extent in psychically similiar regional blocks (geog proximity or not) but in the context of globalisation and increased interconnectedness of all economies, location shouldn’t really matter, but it does in the case of economic trajectories of ireland et al.

Just to address your point:

‘Ireland is much closer to the US, the global centre of business, enterprise, innovation and commerce, than are any of the ‘core’ countries. It is also much closer to the UK, the country that, given Germany’s demographic collapse, is forecast to have the largest population in Europe within a couple of decades, and whose capital, London, is the global centre of finance’.

1. Ireland signed up to the EU Treaties not the US, hence we are more economically and politically interwined with EU regime- we bought into it at a price. Yes we are strategically positioned between US and UK however, but our trade is also with European markets and UK and thus shouldnt be ignored.

you say “In what way are Ireland, Spain, Portugal and Greece in the perihery, while Sweden, Denmark and Finland are apparently not? In what way are Ireland, Spain, Portugal and Greece at a geographic disadvantage?”

2. Peripheral Nordic states were not in Objective 1 regions under structural funds.
Keeping the economic trajectories of the ‘EU Atlantic-South Peripheral Group (ASPG) ‘ (formerly Objective 1), its worth noting that living in bitterly cold conditions of Nordic states make them very resilient for survival and necessity to cooperate between Nordic states, hence trust is high.

3. Also coupled with polar conditions these states are predominately of protestant religious orientation (historically) they have a strong economically productive work ethnic, no denying that.

So yes they are geographically peripherially located but are very economically interdependant amongst each other.

So in context of reaping benefits of EU economic integration, they are not ‘peripherially economically disadvantaged states’ but ASPG are and even moreso now.

“Cher Dominique, you are talking merde. No change there then. ”

actually pretty funny

Michael Hennigan – Finfacts Says:

April 8th, 2011 at 9:44 am

Spot on all.

David O’Donnell Says:

April 8th, 2011 at 11:38 am

The report links were excellent along with the analysis.

Combining the benefit rate equalisation convergence of worker and capital was maybe borne, not by any reduction in returns to capital, but the lack of return to the state as displayed in


(JTO’s mis-informed post earlier)

Capital not as generous as Bertie ? 🙂


Back on the ‘gear’ again I see? 🙂

I can see where a casual study of the link above taken from you earlier post would lead you to your conclusion.

But a more curious look at the detail of the report would show that net disposable income of the Germans is almost a third less than Ireland.

More money for the masses, more credit to be sold by the banks, less resources or regulation by the state, result? busted state.

As to your geography lesson – do you suffer from spatial disorganisational awareness syndrome?



Very good post.


‘there is a shortage of 200,000 trained engineering workers.’

That is our porblem they are looking for real ‘value adding’ workers – we sadly are chasing FDI call centres.

Via Bloomberg, BlueBay (fairli big) has gone slightly overweight Irish sov bonds:

“We like the fact that the interests of European Central Bank and European Union policy makers are very much being observed by the new government. A near-term restructuring of Irish government debt is extremely unlikely.”

“We were concerned in the election process that the new government may look to turn its back on Europe and try to go it alone with an independent policy,” said Dowding. “It’s a relief that it’s not the case. In this environment, Ireland will continue to receive external assistance and support. We believe the risk that’s priced into Irish bond yields has reached an unrealistic proportion.”

That second paragraph gives away the fact that they (and many others) did not have a sufficiently good understanding of Irish politics to be able to work out that pre-electoral commitments to things like Croke Park and no discussion of the possibility of a post default zero primary deficit, meant this was always very unlikely.

There is a very simplistic analysis that says you should buy these bonds because default is always optional.

@ Ahura Mazda

The jury, as you say, is still out with regard to Spain. But it is not in the interests of any of the major banks in Europe that the stress tests be pushed too far and this is enough reason for them not to be.

To return the main issue raised in the title to this thread, I have sketched in previous contributions the background as I see it. The only element that needs to be added is that, apart from the taxation issue, the social aspects have also to be addressed as far as Ireland is concerned. To put it, by way of simple examples; can the Irish economy afford any longer Registered Employment Agreements; or the distinction between “permanent, pensionable employment” for the chosen few and precarious employment or the emigrant boat for the rest?

As to what will now transpire, it seems unlikely that the Portuguese and the Irish cases can be kept apart. The ECB rate rise will move the overall cost of borrowing up the scale and also the level of the rate which the margin gives rise to. This is an added argument for applying the agreed ESM margins now. But the Portuguese are being asked for additional measures including, if a heard one comment correctly, “an ambitious privatisation scheme”.

We also know that a “quid pro quo” is being sought from Ireland.

I suggest that attention might now be addressed to this aspect. What might this be?

There is the subsidiary complication of supposed UK difficulties with funds being drawn from the EFSM which borrows on the back of the EU budget raising a contingent liability for the UK as a net contributor. The presentation of the issue in the UK, however, fits into the brass neck department given the existences of the UK rebate (which is funded in the main by France, Italy and Spain and, of course, all the other countries, peripheral included, with the exception of Germany, Austria, the Netherlands and Sweden that negotiated a reduction to one quarter of their assessed share).

@ Colm Brazel

As early as 2000, the Banco de España insisted that the main Spanish banks which it regulated, provided extra ‘rainy day’ fund provisions during boom times.

Spain’s biggest bank, Banco Santander, has been run by the same family since 1857. Emilio Botín, the current chairman is married to Paloma O’Shea, the Marquesa de O’Shea, providing an example of the Irish connection with northern Spain.


Portugal’s public debt was 92.6% of GDP last year compared to Spain’s 60%.

Spain has problems with the regional politically controlled ‘caja’ banks but the key difference with Ireland is that its main banks survived the bust.

Not quite sure what to make of the claim that the Nordics are trusting 😉

The Swedish FOI is in place because Swedish citizens want to be able to verify what the Swedish government is doing on their behalf. Some would say that since Swedes want to be able to verify what the government is doing, it means that Swedes actually do not trust their government. The secrecy that the Irish accepts is on the other hand a big show of trust and it indicates that Irish people trust their politicians and civil servants a lot.

Trust in business in Sweden? Like anywhere else a debt can become overdue. Like anywhere else it can be because the debtor can’t pay or because the debtor won’t pay. The smallest amount I’ve seen being passed on to the Sheriff for collection was for approx 50 eur -> Debtors who can pay, they try to pay on time as otherwise they’ll be made to pay even more. Getting payment in Ireland….. Write-offs can be made in the 1,000s of EURs as it would be too costly to try to get the legal system involved for enforcement. The system in Ireland seem to be unprepared for the debtors who won’t pay -> Very much a trust-based system.

It is difficult to get qualified to practice some professions in Sweden, and it does seem that Swedes trust that anyone who managed to get qualified is good enough to manage without special government granted privileges. In that sense, maybe the Nordics are more trusting in the abilities of qualified professionals than a country like Ireland.

@ fin,

In Spain the grubby property troubled asset lending was ported through the cajas, a strange conglomerate of political, regional, religious administration hybrid peculiar to Spain masked in secret patronage from all the above.

According to this the €180 bn troubled asset figure I gave earlier should be revised upward to €210 bn


Note from above there is a cleanup of the cajas, see example given:

“As said, the largest stock belongs to Banco Financiero y de Ahorros, which is a new entity as the result of a merge of Caja Madrid, Caja Segovia, Caja de Avila, Bancaja, Caja Insular de Ahorros de Canarias, Caixa Laietana and Caja Rioja.”

There is a big cleanup in operation switching the cajas into more transparent savings banks. Its possible markets believe liquidation of troubled assets into these new savings banks can provide opportunity pickings for foreigners, the article mentions Barclay’s bank (bark, bark:)) in the UK may be interested in a €50 bn investment fund for some of these new savings banks.

Doesn’t surprise me the Brits are nosing around as so many of them lost life savings in Spanish property over the past few years.

It wouldn’t surprise me given the sensitivities, the ECB and Goldman are involved in some wheeling and dealing behind the scenes to support Spain..but who can tell

Spain like here could do with a good firesale to clear up market doubts:)

@finfacts @Colin Brazel

Yes, the cajas may not count as “pillar banks”, but they’re clearly pillarised banks. Mind you, our two tyrant banks were pillars in this sense too, at least as regards who got to run them – one for the Protestants, one for Our Own.

Speaking of the cajas, one of the most perverse policy responses to our crisis has to be Labour’s determination to replace (or at least augment) our failed banking model with … err … the Landesbank/caja banking model. It’s not as if ICC and ACC used to consistently cover themselves in glory either, right?

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irishtimes.com – Last Updated: Friday, April 8, 2011, 17:40
Noonan stresses ‘importance’ of rate cut

Minister for Finance Michael Noonan speaks to the media after the informal meeting of the EU economic and financial affairs council in Godollo, Hungary. Photogrpah: Laszlo Balogh/Reuters
Portugal told to implement reforms ahead of bailout | 08/04/2011
US Midterm Elections
Minister for Finance Michael Noonan said that he discussed the “importance” of an interest rate cut on the EU part of the Irish bailout during talks in Budapest today.

Speaking after meeting German finance minister Wolfgang Schauble on the fringes of the meeting of EU finance minister in Budapest that his German counterpart understood the matter.

Mr Noonan said he plans to meet with his French counterpart Christine Lagarde later today. He also said that there was “no question of any concession” on Ireland’s corporate tax rate.

Mr Noonan said the European Central Bank’s commitment on March 31st to ongoing liquidity provision for Ireland’s banks was “in effect an ECB commitment to medium-term funding”.

He said there is “no big rush to recapitalise” Bank of Ireland, which has to raise €5.2 billion. Mr Noonan said Irish banks are “adequately capitalised”.

From breaking news IT

Magic… A commitment to ongoing liquidity turns into medium term funding.

Over on Bloomberg El-Arian
has an interesting take on the next stage of the crisis saying that the ECB will shift focus from liquidity for Ireland, Greece and Portugal to solvency well before 2013.

I wonder how we will fare?

Returning again to Portugal … and views from The Centre … & German citizens waking up to real banking realities … and the Finns still flogging the whip ….. [thought I spotted Christine winking at Michael on the 6 o’clock newz – worrying …. rem the fool she made of Brian, and us poor eegits]


The financial daily Handelsblatt writes:
“It is impossible for the political leadership of Europe’s common currency union to end the debt crisis with a single move. Such expectations are unrealistic. But they could certainly do more to withdraw some of the uncertainty from the financial markets. For that, one thing is necessary above all: the courage to tell the truth. First and foremost, euro-zone countries must bring themselves to reveal the true losses their banks have experienced as a result of the euro crisis and the losses that could still be pending. Indeed, the new round of stress tests would be a perfect way to shed light on such questions. But euro-zone decision makers lack the courage. Once again, the stress tests are not testing which banks would be hit hardest in the case of a state bankruptcy in the euro zone.”
“One has to assume that political interests are the reason rather than economic logic. A stress test which includes the sovereign bonds held by a bank would almost certainly reveal even larger capital shortages than are already to be expected. In Germany, it would likely be primarily the state-owned institutions, particularly the Landesbanken (eds. note: banks owned primarily by German states), which would be affected. And that is bad news for taxpayers. After they have already paid billions to prop up the banks, they would have to cough up even more. That, though, is something that Chancellor Merkel would rather not tell German citizens.”

Die Welt
“Despite the EU aid, Portugal’s problems are far from solved… Greece and Portugal need to restructure their debt — as soon as possible, and not only in 2013 as Chancellor Angela Merkel keeps promising to the financial markets. It is time that private investors bear the risk for their investments — rather than making taxpayers exclusively responsible for euro-zone problems.”

@ David O’Donnell

What is interesting in all of this is not that there is anything new in it but that Der Spiegel should choose to translate and present it in this fashion. The only explanation that I can suggest is that there is a desire to stiffen political nerves with regard to the stress tests and to try to bring the game of hide and seek to an end in the belief that this would be best for the German economy. The approach will not succeed because, as far as the political decision-makers in the “centre” (which is 90% of the euroarea) are concerned, the real economy is picking up and it is full steam ahead and the devil take the hindmost. The key question is whether Spain can keep up.

It occurs to me to ask for a bit of feedback on what peoples’ perception of the Landesbanken is. In London they are regarded as something akin to the antithesis of the Squid, in that they are cumbersome, very un-savvy and due to management structures, usually very late to parties but arriving in enthusiastic fashion – as if to make up for it.

It s a very particular reputation and goes some way to explain the apparent embarrassment over the content of their books. Is it a view widely shared among Irish observers?

Also, they have now got a hybrid capital eligibility problem for the “stress” tests.

The big bond traders working in conjunction with credit rating agencies can precipitate a crisis in any country

Germany lives and dies with its high quality manufactured exports. The whole economy revolves around manufactured exports. The German gov’t subsidises companies in downturns to keep workers in employment and the manufacturing juggernaut humming. The exporting companies are obsessed with retaining market share in downturns. Another stabilizer is the 13th month pay, paid if the company makes a profit and a cost of labour minimizer worth 8% if there is a loss.
The first commandment is maintain competitiveness, all inputs are carefully monitored and anomalies are dealt with promptly. Germany did not make its usual lightning start out of the traps in this recovery. There is concern that competitiveness is eroding. Domestic consumption will be curbed to keep the export machine in fine trim to take on the threat from China which is moving upmarket at a rapid clip.
When I look at Germany which I know very well and compare it to Ireland which I know too well I would weep if I was not a grown man. There is no doubt but that at some point Germany will crumble under pressure from Asia, it could take a decade or two.

@Mickey Hickey

Germany’s domestic choices in relation to direct taxation and social policy are her own as long as they do not conflict with EU law. The problem with tailoring decisions to promote the export-driven approach, for the other euroarea countries in particular, is that it is a logical impossibility for all the countries concerned to run export surpluses with one another. The curiosity of the present situation is that the single currency may actually be making this impossibility self-evident because of the strains it places upon it. Hence the “revelations” by Der Spiegel.

The article by John Whittaker to which I re-link her underlines the price that will have to be paid while a better balance is being achieved.


The political reality of the situation must also be beginning to dawn on the German electorate. Who exactly is benefiting from the policy? Certainly not the generality of the population as a recent survey by the Bertelsmann Foundation on child poverty has revealed. It also makes very little sense given Germany’s overall demographic situation.

At this point the Finns are worryingly close to becoming a destructive influence in Europe.
The Finnish finance ministers comments on Portugal were punitive and slightly bizarre. There is definitely alot to be learned from each other in all of this but imposing severe destabilizing austerity on parts of Europe is not in its interest either.
Finland has a population density of 16 people per km2 compared with 109 in Portugal. The economic and social models required to sustain 16 per km2 are much different to those required to sustain almost 10 times that density. They should remember that!

@Mickey Hickey

Good link: but One-sided to just look at unit labour – need also to look at unit kapital …

as in paper linked above …


ULC does give good indication who crashes – and Unit Kapital gives an indication of who is shouting loudest to crack whip on Labour – German, Dutch, Finnish, Austrian, French ideological_big_capital backed ‘roights’ ….

From the paper linked [see graphs], and locally, one may also discern the TOXIC influence of the PD/FF de-soft-feather-zero regulation, and criminal fiscal from the 4 horsies of the present Apocalypse McDowell, Harney, McGreevey & Bowel Dig-Out Bertie Ahearn ……. a cop out to blame EMU – these are political choices ………. and what has changed?

Irish Upper_Echelon Continuity: Stat Sig*************************

… and they sent the bill to the p1ss_poor bleed1n citizen serfs.

The Capital-Labour relation has two sides to it – just in case anyone had forgotten (-;

@ Eureka

This is the guilt argument which cuts absolutely no ice with Germans nor should it. Indeed, it should be ruled out from any sensible debate. Germany is behaving in a fashion no different to that of any of the other European democracies. All have lost sight of the European ideal. It is up to all to rediscover it. However, a particular responsibility falls on both France and Germany. Neither has leaders up to the task at present. But it must be registering with both that there must be something wrong. Both are falling rapidly in the estimation of their peoples.

Not guilt tripping. Just pointing out why the stakes are high.
Can we afford impoverishing all the people of Europe just to protect bondholders. Even in Germany there are concerns that the fruits of their economic boom are not bringing prosperity to all the citizens.
We all must put the needs of European citizens ahead of bankers. If people lose faith in the European ideal and see Europe as a bankers empire then God knows what will happen.

@ Eureka

I agree with you completely but fear that Ireland was the first front in the battle (others may consider Greece to have been) and it has fallen – somehow we are now only looking from the sidelines.

As the Stiglitz thread has rather gotten out of hand, herewith a link to a comment by Mohamed El-Erian which seems to me to be on the button.


Colm McCarthy is, of course, generally right in his commentary in today’s Sindo and Richard Bruton, possibly disastrously, wrong in his comments on radio at midday. Just two points.

First, the fact that we may think it was an error to join the euro is nothing compared to what the centre must think about allowing us in. The motivation of trying to outflank the UK in the matter has been shown to be completely erroneous. Either way, it is too late to cry over spilt milk. We cannot leave and they cannot afford to push us out.

Second, as the link shows, the strategy of quarantining the trio in difficulties seems to be working. What is at issue for Ireland now is how the country can engineer a return to the markets by 2013 and avoid involvement with the ESM. This requires some give on both sides which should be forthcoming because it is in the interest of both sides.

The German taxpayer is just as mad as the Irish at the behaviour of German banks. But the issue is not why the money was lent or why it was borrowed but what was done with it. In Ireland’s case, while there is something to show for it in terms of good investment, most ended up in the pockets of various players – many of them Irish – and there is no reason why the German taxpayer should feel any responsibility to compensate borrowers for this, no more than the Icelandic taxpayer feels it for UK and Dutch governments who chose to make whole speculative depositors in an Icelandic bank who should have known better.

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