Paul De Grauwe on austerity and implications of the ESM

The Sunday Business Post carries an interesting opinion piece by Paul De Grauwe in today’s paper.   Although articles are not available on the paper’s website until the Monday after publication, Cliff Taylor has kindly given us early access to article. 

The European Stability Mechanism will not not lead to more stability

After much hesitation and a lot of pressure exerted by financial markets, European leaders finally decided at the end of March to set up a permanent financial support mechanism which was given the name of European Stability Mechanism (ESM). From 2013 on, Eurozone countries will pool financial resources to be disbursed to member-countries in times of crisis. This historic decision illustrates the painful and slow way the Eurozone moves in the direction of more political integration in Europe.

Will the establishment of the ESM shield the Eurozone from future crises? My answer is unambiguous. It will not. In fact it is worse than that. Some of the features that have been introduced in the functioning of the ESM will make it more difficult for a number of countries, in particular Ireland, to attract funds in private markets.  These features will have the effect of increasing rather than reducing volatility in the financial markets.

The first feature in the operation of the ESM is that the conditions to obtain funding will be quite harsh. The ESM will apply a relatively high interest rate (200 basis points above the funding rate). In addition, countries that apply for financing will be subjected to a tough budgetary austerity program as a condition for obtaining finance. Thus, with each recession, when countries are more likely to be forced to turn to the ESM they will be forced to reduce spending and to increase taxes. Investors who anticipate this, will with each recession, raise the interest rate on government bonds, thereby making the recession worse.

This has important implications. One major social achievement of European countries is the existence of automatic stabilizers in the government budgets. This means that when a recession occurs, and the  government budget deficit increases, the hardship for those hit by the recession (the unemployed who obtain unemployment benefits) is reduced. The new financing mechanism that is being set up in the Eurozone will rob countries of their capacity to protect those hit by the recession. This is a major setback that will reduce the social and political basis that is needed to keep the Eurozone alive.

There is a second feature of the working of the ESM that is likely to increase rather than to reduce volatility in the financial markets. From 2013 on, all members of the Eurozone will be obliged to introduce “collective actions clauses” when they issue new government bonds.  The practical implication of this is the following. When in the future, a government of the Eurozone turns to the ESM to obtain funding, private bondholders may be asked to share in the restructuring of the debt. Put differently, they may be asked to take some of the losses. This may seem to be a good decision. Bondholders will be forced to think twice when they invest in government bonds, as these bonds may not be as secure as they thought.

The intention may be good; the effect will be negative. In fact we have already seen the effects. When the German government made the first proposal to introduce collective action clauses at the European Council meeting of October 2010, the immediate effect was to intensify the crisis in the Eurozone sovereign bond markets. Interest rates on government bonds of Greece, Ireland, Portugal and Spain shot up almost immediately. Since then these interest rates have remained high.

This should not have been surprising. When private bondholders know that in the future their bonds will automatically loose value when a country turns to the ESM, they will want to be compensated for the added risk with a higher interest rate. In addition, each time they suspect that a country may turn to the ESM for funding they will “run for cover” and try to avoid the loss in the value of their bond. They will do this by immediately selling their government bonds. But this selling activity will raise the interest rate on these bonds, and will make it more likely that the government will have to ask for support from the ESM. Thus the mere fear of losses will precipitate a crisis, making these losses more likely.

Thus the collective action clauses will make the government bond markets more fragile and more sensitive to speculative fears. Instead of more stable government bond markets in the Eurozone we will have more volatile ones.

This is quite unfortunate. Especially because the existence of a financial support mechanism in the Eurozone is a great idea and a significant step forwards in the building of an integrated Europe. Unfortunately, by introducing restrictions and conditions, the ESM has been transformed into an institution that is unlikely to produce more stability in the government bond markets of the Eurozone.  

51 replies on “Paul De Grauwe on austerity and implications of the ESM”

Path-dependency from the economic_nationalism of Deauville busts asunder the idea of European Solidarity in fragmenting risks to those areas in difficulty through imposition of an economic_cultural_financial Germanic model on areas that do not have similar institutions to cope with it.

The other direction is go for Euro_bonds, beef up institutional and legal remit of ECB, and then deal with internal weaknesses internally within the overall strength of EU/EZ. Yet EU democracy is going in opposite direction – increasing populist nationalism, fair bit of it of the zenophobic-roight bent …

The reverse of Deauville’s intent will inevitably ensue; sovereign default becomes inevitable, and markets will not touch those on the path-dependent road to such defaults, including Ireland. Hope right now is that Greeks bearing Gifts for the IMF might trigger a rapid reversal in this flawed policy. Are we ready …? Real Stress-Tests on German banks is yet another trigger ….

The collection action clauses in post 2013 bonds is the fundamental flaw in an otherwise useful support mechanism. European bonds will be unique in the world and dealers will demand higher interest rates for any weak member. Makes one wonder about the competence of the players.

More on Europe in Crisis … think last week’s quiet chat with troika was a mere holding_lull in the midst of a gathering hurricane …

Via NakedCapitalism
Greek 2-year government bonds soared to 18.5% on Friday in the wake of statement from German officials about the possibility of restructuring of Greek debt. In Finland, the “True Finns” an anti-Euro party is expected to win record support in an election this weekend, and in Spain, denial still runs deep about the possibility of a Spanish bailout.

@ceteris paribus
Players were, and remain, incompetent.

@ John McHale & Cliff Taylor

Many thaks for the post a quite interesting article.

@ DO’D

If I understand you correctly.

@ All

The overall thrust of the ESM model is, as I believe David has correctly pointed out, a Germanic model which may be quite easy for them politically and culturally to abide by.

It appears, from my limited knowledge of it, designed to ensure Governments in individual member states do not engage in short term political spending sprees during the upside of the economic cycle (a la Charlie Mc Creevey et. al.), but to be prudent, save and prepare for the inevitable down swing and avoid the ESM funding mechanisms.

Stability ensues (political and fiscal), interest rates above inflation, capital appreciation.

Very Germanic and no bad thing I would say.

But David is right.

Culturally to impose this on countries like Ireland, one of who’s busted banks AIB, I learnt today via Marianne Finnucane Show, didn’t even employ a ‘Risk Manager’ is bonkers – we are not ready for it.

@ Ordinary man

Ready or not, we have no choice. De Grauwe is right about the ESM but he does not confront the existential question; what if the ESM is designed not to be actually used but to achieve the result that you suggest?

@ All

The article at page 13 of the Business Section of the Sunday Times by Rory Gillen under the title “The risk of default is already priced in to government bonds” makes for an interesting read.

As far as Ireland is concerned, there is no alternative to getting the public finances in order as rapidly as possible. As Chopra pointed out at his press conference, the real source of the crisis is the banking sector but this may be amenable to separate, gradual and more normal avenues of resolution. Schemes such as that floated by the head of NAMA suggesting that it get into the mortgage business are unlikely to impress foreign investors, to say the least.

The sooner the government gets out of the banking business, the better.

@ David

Very enjoyable post as ever. You say:

‘Real Stress-Tests on German banks is yet another trigger ….’

But unfortunately for all, there seems to be much doubt that these stress tests will be real.

In the article linked by DOCM, it is given as straightforward that the German people are being lied to, and for matters of realpolitik should be lied to. One admires the chutzpah of explaining to the readers of Der Spiege online how the great unwashed should be kept in the dark.

As a rule of thumb, as far as is possible, I reckon the right course is to be as straight as possible. So the CB should be a good European within the ECB, by insisting that the stress tests be as transparent and rigorous as possible, and pointing out that this has done us the world of good this time round.

I think that it was unfortunate for Ireland that our stress tests were taken separately from all other stress tests. This reminded me of the old UK education systems, where the poor children had to do their entry exams for Uni earlier and with less suport than rich kids, but hey, all the kids were doing the same exam papers, so that’s fair isn’t it? In this case they’re not even the same exams. Maybe the German banks are in A1 tip-top condition, but the tests as envisioned seem not really designed to find this out.

If the scale of the banking crisis is not fully comprehended, then it will be no surprise if the ESM is badly designed to deal with it.,1518,756848,00.html

There is a saying in French that there aren’t 36 solutions: indeed for Europe, I only see two; either a move towards sharp austerity by governments with run-away budget deficits, or some form of restructuring of debt (i.e. ESM). The other alternatives – ECB-led inflation, a EUR 100bn cadeau in cash from the EU, or levies on a surprise find of Celtic Sea oil, are all as improbable as they are attractive.
For Ireland, the choice is either to bite the bullet of austerity or face the music. Ireland is forecast by the EC and the iMF to run a budget deficit ex banks of over 10% of GDP this year, some 13% of GNP, for a third year in a row. The highest deficit in the whole OECD I believe, even before a single red cent is spent on banks.
There is a view, both inside and outside Ireland, that Ireland’s problems are just banking ones. Wrong. There is a view too that Ireland has already engaged in austerity. Well I’ll believe that when the primary budget in surplus and gross debt, ex banks, is no longer growing.
Ireland however still benefits from a strong well of sympathy abroad. It would be a huge cost for Ireland now if it loses this sympathy through running super high budget deficits this and next year. Now with the banks closer to resolution, it will be increasingly harder to use the banks as an excuse for the most spendthrift budget in the whole OECD.
We are moving now into a new realm. Before there was a debate on whether bank debt would be paid off or not. Now most Irish bank debt has been replaced by taxpayer liability. So the question now is more how that will be handled in the years to come. The banks will be fixed. But the taxpayer still needs to pay for the cost of the repairs plus find the wherewithal to manage current government debt and future budget deficits (that latter is the bigger challenge).
What Paul De Grauwe mentions as the consequences of entering ESM are already bad enough. But they are probably much worse still (consider the impact on savers). Like de Grauwe, I won’t go into the possible chamber of horrors. However they are probably worth avoiding, especially for a fairly advanced economy like Ireland’s.
Paul De Grauwe’s article makes it clear that you don’t want to have to turn to the ESM for funds. He’s right. And that of course if why Ireland – along with other eurozone governments – agreed to establish the ESM last October. It is despairing, six months on, seeing articles explaining what was agreed back in Deauville.
I’ve no doubt that if Ireland were to take its primary budget from heavy deficit to surplus very shortly, if it does a Latvia, it would be in a position to borrow again on international markets and avoid the fate of the ESM and all that it implies. Even Latvia – still less well rated than Ireland – can probably make a return now to international borrowing.
Many other governments in Europe have made substantial progress on the preparation of their budgets for 2012. The new “European Semester” requires that. Brian Lenihan last year was ambushed by the lead-in to the December budget. It was not only the biggest deficit in % of national income, but it was also the last to be announced in the eurozone. Even if the news is bad, it is not a great tactic to leave the very hard choices on the 2012 budget to later in the year. The easiest course of action, like under the last administration, is to drift. But then ESM awaits.
And that is one great advantage of the mechanism. To help concentrate the minds of policymakers and the electorates on what they really want. Clearly consumption way in excess of means cannot go on for much longer without severe consequences, for some people, somewhere.
I believe it was a major mistake to have offered loans to the spendthrift when the market pulled the rug from under their feet. If it had been clear from the start that there was no fairy godmother in Brussels or Frankfurt, countries would either have taken firmer steps to ensure they didn’t shoot themselves in the foot, or the adjustment to the loss of wealth would have been far faster, but the recovery also far quicker.
Unfortunately we have to wait for another two years before the ESM kicks in. Another two years of uncertainty, as we prepare to enter the fifth year of crisis (since subprimes exploded and FF was reelected).

@ Gavin

As Jacob Funk Kirkegaard says in his article – they are liars and as DO’D says they are dealing with incompetents (unfortunately they are our incompetents and supposedly dealing for us).

If the risk is priced into the market they we should do the right thing, get the domestic fiscal situation in order and start having a serious chat with the bondholders with everything on the table regarding leaving the banks to sort it out themselves or we discuss burdensharing in the context of guaranteed future funding for the government – that will provide us with freedom of movement fiscally and most importantly time.

The ECB is intent in holding the only real value in the Euro – the German/Banks. We are only a bit player in this and they are just trying to hold a line as mentioned on previous threads – assuming Spain dosen’t go tits up as well.

We should take responsibility where we can and take no instruction from Europe until or unless we are all playing by the same rules – which it appears we are not.


I agree, Government shouldn’t be in the banking business.

As I mentioned previously and with respect – don’t send a group of tennis players onto a rugby pitch.


@ Ciarán O’Hagan

You say:

“Now most Irish bank debt has been replaced by taxpayer liability. So the question now is more how that will be handled in the years to come. The banks will be fixed. But the taxpayer still needs to pay for the cost of the repairs plus find the wherewithal to manage current government debt and future budget deficits (that latter is the bigger challenge).”

How big a number is the amount the taxpayer has taken on from the banking sector? How do the banks pay back to the taxpayer the money they have taken?

Irrespective of the 2013 agreement, the convergence of bond yields as the launch of the euro approached was not going to be repeated with the return of calmer times.

Merkel threw a bone to the bondholder burning brigade with the bail-in proposal and it does of course make the situation more iffy for struggling countries.

Is this a case of the hurlers on the ditch wanting to have their cake and eat it?

@Michael Hennigan

Merkel proposes that the ESM provide for holders of sovereign bonds to take losses while endorsing the forcing of private debts onto the sovereign in Ireland’s case. The debts are not equivalent legally, morally, politically or democratically.

The whole thing is a glorified off balance sheet excercise aimed at recapitalising E.U. banks that lent to Irish ones by lending to them through an SPV called Ireland whilst earning a nice profit for themselves in the meantime.

@Ciaran O Hagan
I’m almost lost for words…………….
The solution is a monetory one rather then a economic one given our huge trade surplus and now our current account surplus.
The structural flaw in the euro zone was simply too much credit relative to goverment money.
This was everywhere manifest from German / French export of debt instruments where there was for some strange reason a upsurge in consumption demand in Ireland .
This consumption explosion was the result of low or negative goverment debt service.
This private debt interest always goes exponential relative to the smaller goverment money base unless the base is expanded.
Traditional banking incorporates large amounts of goverment debt on their balance sheet to delay this inevitable outcome but the lack of such accelerated the inevitable monetization of debt on CB balance sheets.

The ECB needs to produce goverment money and get over its anti sovergin nature and pro bullion banking bias by simply expanding its balance sheet.
This unnecessary complexity such as the above is simply a magicians trick to prolong deeply distorted debt markets which will only benefit Pig men and their little piglets.

@ Ciarán O’Hagan

I could not agree with you more! And I would be equally pessimistic, or almost. Pat Rabbitte was remarakably frank on the midday radio show yesterday sending the message that the government’s hands were tied by the deal negotiated by the previous government. If no extra funds are associated with the so-called “jobs budget”, which has to emerge in the next few weeks, this will also be a hopeful sign. It is also courageous of Labour to say publicly “either the Croke Park Agreement or further cuts in wages”.

On the broader issues, I feel that at the very least that commentators – for their own reputations if nothing else – would at least get their facts right and not build cases on totally spurious grounds. The current campaign in respect of the ECB and Smaghi is a case in point.

@ David Boyd

Spot on.

Bondholders will get their ‘principal’ returned by 2013 just before ESM and the SPV will have the loans rolled over to infinity and beyond ……… ‘bonded’ labourers to the Haupt Bankers.

Great site by the way and good luck with the business. 🙂


A goverment whose hands are tied is not a goverment but a prisoner.
If they were honest little pigs they should resign en mass tomorrow given that they have no function other then deceptive optics.

However the Irish “governing class” always needs the go ahead from a helpful church as they seem incapable of sentient thought given their swinish nature.
Something similar happened in 1987 when the IMF boys needed a Irish face for their global plan to turn Goverment debt into private extraction mechanisms.
Whats really surprising is the lack of real effort in the propoganda sphere – it seems they do not need a cloak anymore , just a dagger.

@ Dork of Cork
I agree that monetary type solutions are attractive. But within the current institutional framework of the euro, they are not going to happen. Remember that inflation moderation is written into the Treaty (and the Irish public voted for this).


@ Gavin Kostick
“How big a number is the amount the taxpayer has taken on from the banking sector?”
Well just take a look at the numbers for 2011, which are in themselves mind-boggling. Like the Troika noted in in its Review Mission last Friday, “The government’s program is supported by loans from the European Union and EU member states amounting to €45bn and a €22.5bn Extended Fund Facility with the Fund. Ireland’s contribution is €17.5bn.”

So €85bn in total alone in 2011, or almost as big as the total outstanding of Irish government bonds. And we are not even counting the rise in contingent public liability that is also continuing apace.

Part of the funds above will finance the deficit this year (maybe some €18bn+, already stunning by any yardstick); part will fund the Nov 2011 redemption (€4.5bn) and the rest I suppose would be for banks?

The lack of any precise and detailed accounting for the funds etc. still continues to greatly surprise me e.g. what do taxpayers know about the cost of carry of funds (yet giving such information should help confidence)?

Compare these figures to any standard, anywhere, anytime and they are stunning. Divide by 4 million people. Correct me if I am wrong (even shave off one or two dozen billion for good measure) but I don’t think any taxpayer, anywhere in the world, ever, has seen such a rapid increase in per capita public indebtedness.

And yet, I see barely a whimper about the destination of funds, here or in the press, although maybe I’m blind. I’ve raised the issue several times before. The idea that continues to niggle me is that it is all too easy to be flaithiulach with someone else’s cash.


@ David Boyd
I don’t see at all how the numbers above can be construed as a balance sheet excercise aimed at recapitalising EU banks ex Ireland. I do hear it said in the Irish media, but it makes no sense to me. Irish bank debt is rapidly being consolidated into public sector liability. The biggest single creditors of Ireland are likely to be the ECB, IMF and other eurozone governments. Banks, Irish or otherwise, and barring a sudden change in policy, are fading from the picture over the next two years.
@ Ordinary man “Bondholders will get their ‘principal’ returned by 2013” Well if you beleive that, I don’t see how it would help David Boyd’s argument.

The mathematics of this situation will make treaties entirely acedemic exercises – unless they wish to instigate a higher surplus via famine or at least hunger.
I guess we have form in this regard.
Defaulting on the ECB is another option if the ECB and Europe truely believe their own bullshit with regard inflation.
They cannot have it both ways.

@Ciaran O’Hagan
As regards the mind boggling numbers, you did not mention the 180 billion we have in liquidity support.
Paying this back within two years is impossible.
We will be in the ESM in 2013 and all that entails.
The MOU seems carefully designed to sleepwalk us into this trap otherwise why is the troika accepting the snails pace reduction in the defect.

@ Ciaran

As far as I know (open to correction of course) we get the loans to honour the bonds maturing before 2013.

But we can’t pay the loans back before 2013 as Ceteris Paribus correctly points out.


I believe someone actually mentioned on the RTE news that our loans chould be treated like the reparations enforced on Germany after WW1 !

Great idea?

Germany paid the reparations with cheap loans from the US (at low interest rates), which precipitated the Weimar Republic of cheap money and their credit boom of the twenties.

Remind me what happened next?


On the broader issues, I feel that at the very least that commentators – for their own reputations if nothing else – would at least get their facts right and not build cases on totally spurious grounds. The current campaign in respect of the ECB and Smaghi is a case in point.

The current campaign against the ECB and Bin Smaghi? Which campaign? Which totally spurious grounds?

Some detail might be helpful here.

Also, speaking as another anonymous commentator, your worries about other commentators damaging their reputation by disagreeing with you are quite touching.

@Ceteris Paribus
“As regards the mind boggling numbers, you did not mention the 180 billion we have in liquidity support.
Paying this back within two years is impossible.”
Absolutely and there should be no attempt to pay it back except by four mechanisms – repayment of capital (in progress), asset sales at a measured pace, new deposits to the banking system (looking a bit unllikely if you ask me, despite the rich rates – it is not clear that the banking system could afford to fund itself through deposits at the price it would have to pay for them – even at 3%, that would be 5.4bn in deposit interest), or new bond sales (see deposits and add at least 2% to the cost, if you could even sell them).

The Irish banking system is the classic asset rich, cash poor landed gentry. And look how well that turned out for them…

@Ordinary man
You are confusing the bailout loans with the liquidity support from the ECB.

You are also confusing the timing of the Weimar hyperinflation and the loans received to pay under the Dawes and the Young plans.

Finally, it is quite disingenuous of RTE to say that Germany has been paying WWI reparations for many years – the loans were suspended, initially unilaterally by Mr. Hitler and then following the second world war totally (there were many reorganisations and deferrals of the plans).

Weimar bonds became due following the second world war and West Germany paid its portion. The rest was deferred until Germany was reunited and was on a twenty year payment schedule so it restarted in 1990 and finished in 2010.

@ Shay Begorrah

Not having chosen to enter the public debate, I have no reputation to defend. I am just another lost internet soul lost among many others. But that does not prevent me from identifying errors of fact and pointing out their impact for those that have chosen another route. If not, why bother to blog?

As to the campaign, do you not read the papers?

The spurious grounds are manifold (i) attributing to the ECB powers that it does not have (ii) attributing base motives to Smaghi and implying that he is attacking Ireland exclusively when what he has been doing is pointing out the consequences for member countries of the EU, Ireland being among the foremost, that failed to give the powers to the ECB that it evidently needed (iii) failing to recognise that the ECB is of necessity a totally independent institution of the EU the major, indeed almost the sole, task of which is to protect the value of the euro (where it has been doing an excellent job) (iv) failing to recognise the major role it has played in compensating for the errors and/or inaction of vacillating politicians across Europe by taking various “unconventional” steps to defend the euro and, in the process, aid countries in difficulties, most notably Ireland.

I, for one, am grateful, preferring to have my meagre savings in euros than in some version of the Punt sought so vehemently by the proponents of default.

The euros high value is finished – it is pointless to fight the coming inflation – the high value of debt was based on continued wage deflation through globalisation and local capital rundown programs.

The Euro masters know it is finished long term but are perhaps pleasantly surprised that people wish to continue their bondage through debt peonage.
They will continue the peonage policey until it breaks – their get out of jail card and continued use of debt money is the freegold mechanism – this will enable the recapitalisation of the system.
Do not fight the system by trying to maintain the value of your paper holdings – ultimately these policies will do even more damage to a already severely compromised economic ecosystem as the inertia from the expanding credit bubble of the 80s and beyond is now unstoppable

‘The sooner the government gets out of the banking business, the better’

The only reason Irish governments have got involved with banking is because of the looting which has gone on. With the compliance of a thoroughly compromised cabinet and (for different reasons) a compromised ECB, the perpetrators dragged down the sovereign in September 2008. Not much to admire there, I am afraid.

The Ansbacher ‘business’, the overcharging and other smart alec stuff were just the hors d’oeuvres for the property dish. As many of our most reputable professional firms were up their necks in it, we must all pretend it was just an unfortunate misunderstanding. Now if only we could find a couple of hundred billion somewhere……..

@ Ciaran O’Hagan

‘I agree that monetary type solutions are attractive. But within the current institutional framework of the euro, they are not going to happen’

I think you’ll find that JCT has QE in his ‘unconventional’ toolbox. He already found the ‘instrument for replacing deposits in peripheral banks at base rate’. QE is the big bazooka of course, but his successsor may well need it if Dinero B sinks the ESM.

@ Hoganmahew

On the detail like a man with a ‘big shoe’ – I stand corrected. Thanks. 🙂

But tell me this, why are being locked into a policy, not a principle, that will be a bandoned in 2013 ?

Why are the people of this country being indebted for the next two, three generations to a debt overhang not entirely of their own making?

I’ll will be happy to forward a hypothesis, the ordinary Irish taxpayer is a 1% experiment in social cohesion – we are idiots of the first order if you take this for the sake of conformity.

I think as a people the Irish, in the majority, as Brian Lucey mentioned last week on Vincent Browne, are just ‘conservative’.

Conformists, that lack the imagination, courage and determination required to reject the notion of ‘this is how things are’.

‘Conformity is the jailer of Freedom and the enemy of growth’


@Ordinary man
Why are we being indebted for generations?


A member of the Central Bank of Ireland has suggested tonight that we restructure the bank debt over 90 years.

Wow. The Germans did not ask for the reparations to be paid over such a period.

Perpetual Indebtedness?

@ Hogan
on rates being offered it seems they are scrambling over each other with offers of double your money in year two , up front interest and today a new extraordinary offer from one of the players.
Desperation ?

Is Greek (Default) Restructuring Inevitable?

The German finance ministry have now come around to the view that a restructuring is unavoidable, even if the Greek government, European Central Bank, European Commission and IMF continue to rule it out in their public statements.

“Most intelligent people know there has to be a significant restructuring to ease the burden on Greece, and we’re not talking about a painless extension of maturities, but wiping away a large portion of the debt,” said Charles Grant, director of the Center for European Reform in London.

“My worry is that the longer they leave it, the stronger the euroscepticism becomes. When they finally do decide to restructure the debt it will be too late.”

@ Ceteris paribus Says:

April 18th, 2011 at 12:39 am

Exactly, I mentioned that earlier on, but I did not realise it was a member of the Central Bank – we are in great hands then.

Glad to hear there are people of courage and vision, et al. dedicated to the economic freedom of Ireland at the heart of banking policy.


@ Ordinary man

I agree Irish people are inately conservative, but I think the reason we have been so accepting of things up until now is because by and large the situation has been tolerable for the vast majority of people. Irish people are still getting by, obviously the largesse of prior years is gone in most quarters, but the vast majority of us are not living in conditions that would make a populace rise up and take to the streets permanently.

And the truth is we have just about managed to maintain this facade of normality thanks to the massive amounts of debt, both public and private, that we are still running up. It’s our addiction to debt that has us where we are.

@Ordinary Man
“Why are the people of this country being indebted for the next two, three generations to a debt overhang not entirely of their own making?”
While many of the people of this country did not indebt themselves (me, for example), others did. It is entirely of our own making that the debt was taken out. That all of us, rather than the specific debtors, should pay the bill is the question that should be asked. Why should we bail out people who considered themselves high-rollers and sneered at us for our foolishness in not betting on the property market?

@ceteris paribus
Desperation? Yeah, pretty close I think. I don’t think it is the cost of trackers, per se, that is at issue, though. If interest rates return to ‘normal’ levels, trackers will be less of a problem. Negative equity, however, will make those mortgages unsaleable (in a securitisation). This is an attempt (a welcome one, I believe) to address the underlying problem – capital repayments need to be incentivised, not interest payments. My ‘solution’ in part to the mortgage and debt mess are to take losses on the interest side while incentivising capital payments (transfers from pensions at zero cost, tax relief on capital payments, not on interest payments etc). The overall level of debt needs to be reduced, not the repayments on it deferred.

Funnily enough, this is one of the ideas being touted for Greek debt – interest payments will be reduced, terms extended, but the capital amount remaining.

‘The sooner the government gets out of the banking business, the better’
Ah, it is all so predictable. The siren call of “the state has no business being in the business of banking”… sell those things at a loss and all will be well.

@Yoga: my instinct is that allowing people to go bankrupt and hand back the keys would be acceptable to people in your situation, in a way that writing off a portion of their debts would not. Would it be?

What is the alternative to having the market evaluate the risk of lending to a government?

-Rating agencies? I have my doubts of their ability.
-An EU body? I have my doubts about handing that power to unelected officials.

Maybe not having any support mechanism as ESM would be an option? No need for any maximum deficit rule in a constitution as when the deficit grows large the government in question will lose access to funding and will default – > Zero deficit for that particular country for the time it takes to regain market-confidence.

@ hoganmayhew

Would you prefer politically motivated control of the banks’ decisions? Some of the statements emanating from government and NAMA last week smacked of a centrally planned economy without those making them even being aware of it.

Another Who believes banks should have control of credit.

The production of new credit should not be in control of a private enitiy.

The production of Money is goverments function.

A goverment not in control of this function is not a goverment.


@ hoganmayhew

Would you prefer politically motivated control of the banks’ decisions? Some of the statements emanating from government and NAMA last week smacked of a centrally planned economy without those making them even being aware of it.

Only now is it becoming clear that any attempt to mitigate the damage that blindly following market liberalism has done to us is part of a devious communist plot.

The reverse is slightly more plausible, that we are in midst of a financial capitalist putsch.

“First they did not come for the bond holders and I did nothing…”

@ Jarlath

Couldn’t disagree with a word you said.

The fact is though the majority are using credit for cashflow which may eventually cease (in the personal micro-sense). My concern would be the timeframe of the minority becoming the majority, or a sizable enough minority, to precipitate a further contraction in domestic spending and the conditions in round two for all people.

@ Hoganmahew
‘It is entirely of our own making that the debt was taken out. That all of us, rather than the specific debtors, should pay the bill is the question that should be asked. Why should we bail out people who considered themselves high-rollers and sneered at us for our foolishness in not betting on the property market?’

I take it you meant to say ‘It is entirely of THEIR own making that the debt was taken out.

I agree to the extent they bought something that was sold to them by allegedly ‘professional’ bankers who should have been prudent enough to assess the repayability of the loans in the context of a proper risk assessment and market conditions.

‘ That all of us, rather than the specific debtors, should pay the bill is the question that should be asked. Why should we bail out people who considered themselves high-rollers and sneered at us for our foolishness in not betting on the property market? ‘

That’s exactlly what I am saying, I would go further and make those who made and authorised the loans and developed the business strategy to stump up for their mistakes as well.

I mean how can you run a bank without a Risk Manager (AIB and who else?) – numpties the lot of them.

As far as I am concerned you should have a license to engage in this activity and be criminally liable for any wreckless behaviour endangering the ‘common good’.

As for sneering ‘high rollers’ – he who laughs last though it’s no laughing matter.

“Would you prefer politically motivated control of the banks’ decisions? Some of the statements emanating from government and NAMA last week smacked of a centrally planned economy without those making them even being aware of it.”
Yes, if the alternative is selling the banks off for a song to those who got their money out of them, the ‘advisors’ on the night of the guarantee.

Liquidation is my preferred alternative – break the banks up totally, get rid of the senior management for statutory redundancy. Break them into retail franchises, deposit taking, mortgage banks, business banks etc. The retail banks can be kept in state ownership along with the payments system. This is the key money transmission mechanism in an economy. With this in place as government companies, they can be merged with An Post banking and the government can set up an account for each citizen into which state payments are made. That way and only that way. Taxes should be paid through those accounts also and pension payments (in/out).

Is that state control enough for you? I’ve had it up to my oxters with the sleight of hand that lets some sectors benefit to the detriment of the rest of us. Visibility harms those with the most to hide.

@ Hoganmahew

No ambiguity there! You may, indeed, get your wish but I doubt it. One way or another, we need a retail banking network and some element of competition within it. The choice should have been BOI and PermanentTSB/EBS and the closure of AIB. An example of politics interfering with commercial good sense. But, of course, AIB has a wider network and fancier buildings or, should I say, facades.

“we need a retail banking network and some element of competition within it”
I’m not sure that we need competition for retail banking. I think low standard charges applied to everything and a retail network run on a not-for-profit basis would serve the economy well.

As for all the excess staff and branches (by closing some of the many multiples), they could probably be accommodated by longer opening hours, full opening on weekends etc – multiple bank shifts.

This would be a great step forward in banking, IMO.

Loan businesses would be free to continue to compete on a profit basis for the different types of loans…

How does competion to produce credit work ?
Its a mad concept.
If 3 inhabitants on a island of 100 could produce all of the debt soon they would have all of the assets.
If such a absurd debt system is to work – all debt will have to be written off every couple of generations as otherwise all trade would cease to function except between the 3 island bankers.
The central bank is refusing to produce money to write off this debt killing the physical economy.
Its as simple as that.


we need a retail banking network and some element of competition within it

Indeed, the intense competition in retail banking has served us so well up to now.

Imagine someone had the guts to try something as radical and moral as hoganmayhew’s suggestion, we could have saved enough to give the unnecessary half of the banks staff a handsome redundancy payments.

Of course the idea would not have gotten much traction, (there is no alternative to completing our financial ritual suicide to honour the banking system, our dignity is at stake!) but imagine if the idiotic platitudes about moral hazard, reputational damage, competition in the domestically owned banking sector and “getting the banks to lend again” (through the power of prayer) had been ignored?

How much money would have been saved, how much wasted human effort?

I breeze through here to take the temperature of people whose business it is to understand this stuff. To most people the staggering figures being tossed around are like thunder rumbling in the distance. We need to galvanize and face into the storm. Now. We need the layman’s roadmap to tell people honestly what is the way forward. And of course there is a way forward. I was in Cologne recently and was struck with the pictures of shear desolation and destruction at the end of WWII. If they could get out of that, we can get out of this.

Ciaran Dubh

@Hogan & Shay,

You’re on to something here that is much bigger than basic banking. The whole idea of retail competition in the provision of utility services imposes excessive and unnecessary burdens on consumers and citizens – even if it works well. Hogan, I think your idea for retail banking (seconded by Shay) would work extremely well. This is a basic utility service for most citizens. But it would need a savage, statutory consumer protection body to keep it in line – not the kind of lame, toothless, underempowered NCC outfit we have at the moment.

And as for retail competition in electricity and gas…don’t get me started. What we have now is the ESB and BGE using the excessive cashflow from over-priced network services to subsidise loss-making supply businesses providing offers to entice consumers to switch. It’s simply bribing people with their own money. It would make far more sense to fold the ESB’s and BGE’s supply businesses into one, allow them to hold on to the distribution networks (but be required to offer network access to any other supplier who might fancy their chances) and get prices down for all consumers. Again a savage, statutory consumer protection body would be required. Any benefits that competition might generate are only available at the wholesale level – mainly EU level – and the main requirement is to ensure that these are passed through – to the greatest extent – to final consumers.

This has the potential to be applied in some form across all utility sectors. So what are we waiting for?

@Paul Hunt.
You will have to wait for collapse before anything is done I’m afraid.

Go long wood gas stoves.

@Paul Hunt

I wish I knew. The bizarre half way house we have now (semi-state competition?) leaves me confused but then the idea that we have the scale to meaningfully decouple generation and distribution also seems doubtful (how long would it be before EDF owned generation?)

As noted we have the same absurd position in retail banking with our “pillar” banks, neither possible without state funding, both nominally competing.

It’s the duplicated effort of competing enterprises with none of the benefits of competition as we bankroll both the winner and the loser, the customer either pays in charges or in taxes for staging the mock battle.

Then again our record on regulation has not been good, the unions in BG and the ESB are probably resistant to change and I can not see the EC allowing the threat to competition or the single energy/financial market or whatever they have instead of a plan to take root.

I better be quiet, I could rouse Mr Tol.


The EU (ably assisted by national governments in hock to various vested interests) has ruled out many sensible solutions, but political pressure throughout the Union (often unfortunately accompanied by the expression of ugly sentiments) will force the pace.

In the meantime, the report of the Colm McCarthy-chaired State Asset Review Group is due to be published today. We may get some idea how thinking in these areas is developing.

@paul hunt

Headline on rte news this morning:

Gas, electricity networks merger recommended

The options are:

* You are telepathic or have powers of prescience.
* Paul Hunt and Colm McCarthy are one in the same person.
* The Irish Economy blog sets government policy – be careful what you write, those joking references to the salt mines could have serious consequences.


I’m afraid you’re wrong on all counts 🙂

Rather than merging the gas and electricity supply businesses – to avoid this nonsensical and costly competition between semi-states – I suspect the gist of this headline is a proposed merging of the networks within FG’s NEWEra construct so as to protect them from privatisation.

In any event, all will be revealed this afternoon.

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