4 thoughts on “Ensuring Fiscal Sustainability in the Euro Area”

  1. An expenditure rule would be a good thing if it was tried.

    Following the financial crisis, Big 4 accounting firm PricewaterhouseCoopers (PwC) in a report today, estimates that European banks are holding more than €1.3trn of loan assets that have been identified as non-core to their businesses. These loan portfolios consist of both performing and non performing loans (NPLs). Banks will spend the next 10 years either running off or selling these assets.

    http://www.finfacts.ie/irishfinancenews/article_1022089.shtml

  2. The paper notes “the EFSF expires in mid-2013, the European
    Stability Mechanism (ESM) will come into place
    as a permanent crisis resolution mechanism.” Flags warnings on the need for good prudent sustainable expenditure rules. Off balance sheet accounting exposure of German banks is dismissed with “The fiscal
    risks stemming from the committed off-balance sheet liabilities depend on the probability of the guarantees being called in and therefore being
    explicitly recorded in the government defi cit and/or debt. This probability is linked to the default risk of the financial institutions whose assets or
    liabilities were guaranteed.” So there’s no call for Basil 111 Bretton Woods type overhaul of derivative instruments that would require this debt to be marked down on public derivative exchanges. Note the debt dynamics of fiscal sustainability:

    “”i) by running budgetary surpluses (revenue,
    especially taxes, minus expenditure), ii) by
    borrowing funds from the capital market or
    iii) by selling government assets. The liquidity
    needs of a government depend on the maturity
    structure of its existing debt (e.g. the higher the
    share of debt maturing within the next year, the
    higher the short-term financing needs) and on
    the size of its cash deficit. In addition, a currency
    mismatch between government assets and
    liabilities may play a role”

    This is indeed true for Ireland and will cause our default. However, no solution for countries in this situation is given other than advice on how not to get into this situation although common rules on fiscal governance restraints are touted.

    Reading between the lines, ‘the mismatch between government assets and liabilities’ phrase reads to me as a context of a hoped large sell off of Irish assets such as utility companies, transport companies…But how even this will stave off default without debt write off is a mystery, perhaps the math equations on the sustainability of our debt performed against the reduced growth rate of .5% for Ireland, will explain this:)

  3. I am sorry but I do not understand the concept of fiscal sustainability – its just the money stock and nothing more.
    The Euro is treating previously semi- sovergin states as companies rather then nations.
    I guess the rot really set in after people started calling this bog Ireland inc

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