Regling: Ireland and the EFSF Post author By Philip Lane Post date April 28, 2011 The slides from the talk by Klaus Regling at the IIEA yesterday are available here. Categories In Uncategorized 22 Comments on Regling: Ireland and the EFSF ← Save the Date: Bank Credit Conference, on Friday May 20th, 4 pm – 7pm → WSJ on Returning to the Market 22 replies on “Regling: Ireland and the EFSF” My Screen tells me that Irish and Portuguese 2 year yields are now the same, at 11.1%. Somebody, apart from the usual suspects on this site, seems to think that some kind of default/restructuring is a high probability event over the next couple of years, probably post EFSF but contemporaneous with the implementation of the ESM. There is an emerging lietrature that deals with the can-kickers: it reveals evidence that the longer you wait the worse the haircut, it’s more chaotic and it takes you longer to get back into the bond market. To all the can-kickers, and you know who you are, shame on you. Slide 18 “More focus on public debt to ensure long-term sustainability of public finances ” What difference would this have made to Ireland in 2007? All the dodgy debt was private. My puny brain is trying to understand this. I have to pay back €1000 in debt. My friend Klaus says that he will lend me €300 (ESFM). My friend Ajay says that he will lend me €200 (IMF). Klaus then tells me that the shortfall can be made up. He will borrow €500 for me from the markets. I will owe him this plus interest and he will owe the markets the €500 plus the interest rate they charge him (EFSF). The markets know that they will not get money from me but they reckon Klaus is good for his money. So they force me to borrow as much from Klaus as possible. But Klaus thinks that he´s not stupid and he says that after 2013 the markets can lend to me and him but that they won´t necessarily get their money back (ESM). I know the figures and all are wrong but isn´t it inevitable that the markets will push as many pèople into the ESFS as possible before 2013. So we can expect Spain to go the same way as Portugal and ireland. But the problem is that the Franco-Germans are ultimately going to be on the hook for the outstanding debt. They will pay it back but they will spend decades turnin the screw on the peripheries to get every last penny out of them. In many ways this is the worst of all solutions. It turns a bankng crisis into an international money lending crisis. Europe has too many fault lines to sustain that kind of pressure. This crisis is being managed by people who don´t seem to realise what happens when European unity fails. slide 25 Adjustment, reforms and deeper integration are the right response. By doing so… The European Monetary Union will function better Euro area Member States will move to new stability With more jobs and growth Those will be the Lisbon treaty jobs, I presume @all ‘Growth enhancing reforms, in particular on the labour market, to allow a return to robust and sustainable growth.’ Where is Capital? What about unit capital cost? One sided – one needs to address Capital-Labour Relation! How about a bit of Austerity on Capital? 2013 has no innate validity whatsoever – it is a purely political, and flawed, construction. Ergo, it can be changed … NOW. 2011 is now for European citizens sacrificed at the altar of ‘private debt’. …. as discussed previously, in discovering Minsky’s (b) on the Blog_MA… http://www.irisheconomy.ie/index.php/2011/04/08/ucd-ma-in-economics/#comment-138831 … and in agreement with simpleton above, [this time following Minsky]when bust, go bust quickly, and then begin recovery. Time, once again, Time …. previous Irish admin hadn’t a clue of its importance … this one has but a kick or two of the can left? Restructure soon … @Klaus Regling Enjoy the Wedding & Welcome. The slides draw attention, in a probably unintended manner, to the bizarre nature of the legal structure of the EFSF and of the intended legal structure for the ESM. No reference is made to the requirement for 27 member states to adopt a treaty change to agree the latter. These institutional contortions have been agreed to meet any possible constitutional challenge in Germany to an imagined threat to the no bailout clause which simply forbids the EU from assuming the liabilities of any member state. Lending them on, at an exorbitant mark-up, money raised on the markets hardly comes under this heading. But Germany (and the other creditor countries which include the UK) own the ball and decide the rules of the game. @simpleton But what about the “option value of waiting”??????? P.S. I don’t know the emoticon for tongue-in-cheek. The video of Mr Regling’s presentation, incorporating his slide set, can now be viewed here: http://bit.ly/iPuXGu. Not one overt mention of bank culpability in any of the slides. But a big emphasis on the necessity for labour market reforms. I thought Greek, Portuguese, Spanish and Irish private sector wages were lower than those of Germany/France. So maybe the whole European banking crisis will be resolved by reducing the wages of people who don’t work in banking at all. That sounds logical. And by the establishment of the European Banking Authority populated by Bini Smaghi types to lecture the masses on moral hazard. The EFSF promotes itself as a lean organization. It would certainly need to beef up the quality of its proposals for resolving the European crisis. It could start with an honest assessment of how and where the many of the problems arose i.e in the European banking sector. “And where the offence is let the great axe fall”. Not on hapless workers as evidenced by the slide objective below. Foster competitiveness by assessing wages, unit labour costs, wage setting arrangements and ensuring that public sector wage settlements support the competitiveness of the economy Promote employment through life-long learning programmes, tax and welfare reforms to make work pay and by facilitating the participation of second earners in the work force Contribute to the sustainability of public finances and pension schemes by aligning the pension system with demographic trends and by limiting early retirement schemes A fascinating presentation by Mr. Regling which should be required viewing by the more dedicated contributors to this blog as it sets the debate in its proper context; that of Europe. Unfortunately, it fails to identify the elephant in the room, that is to say the source of the major commercial imbalances in Europe which have contributed enormously to the crisis without actually having caused it. The elephant is, of course, Germany. Mr. Regling makes mention of the weaknesses that have to be corrected by Germany in the context of the Euro Plus Pact without actually identifying them, which is, of course, not his job. The most obvious weakness is that for administrative and tax measures that promote exports at the expense of other ares of the economy, a policy which has given rise to an actual increase in poverty levels in Germany over the past decade and low overall growth rates. The slack has been taken up by the other economies in Europe including those now in the most economic difficulty. It would also have been a help to have introduced free movement of labour at the same pace as very other country in Europe cf. http://www.ft.com/cms/s/0/9b3f374c-7022-11e0-bea7-00144feabdc0.html#axzz1Kf1ZlUmE It would also be helpful to hear from some source an explanation of why it was considered necessary to involve the IMF in the rescue of European countries in a single currency union, a step which in effect gave a decisive influence to the United States which holds a right of veto in that organisation. And, while an explanation of urgency was advanced as the reason for setting up the EFSF under Luxembourg law, why rely on international law to provide the context for the ESM and, more significantly, why insist on an EU treaty change (see my previous comment)? As matters stand, Germany has not contributed one red cent to the resolution of the crisis in the euro (nor, for that matter, have any of the other member countries). All that has been accepted is a contingent liability in the event of EFSM and EFSF loans not being repaid. The other interesting point is the issue of the proposed “reverse voting” arrangements to avoid a repeat of the breaches of the Stability and Growth Path. The matter is still in discussion with the European Parliament. One must await the outcome. But the core issue remains: will the approach so expertly and comprehensively outlined by Mr. Regling work? There must be considerable doubt in the matter. What the positions adopted by Germany to date suggest is that the country is happy to enjoy the benefits of monetary union, the single currency and the single market without being prepared to pay the associated price of Community solidarity. The markets are not blind to this obvious reality. As Mr. Regling pointed out, Europe is not just about money; politics also matter. P.S. The foregoing does not in any way absolve the Irish establishment of the errors made nationally. An appropriate P.S. to my comment above in respect of Mr. Regling’s reference to the forthcoming bank stress tests. http://www.ft.com/cms/s/0/a0c9fee0-70ef-11e0-962a-00144feabdc0.html#axzz1Kf1ZlUmE Bazza, Any odds on the first haircut in late summer, just after M. Trichet has departed to be succeeded by LBS. I know Draghi is the favourite but it there not a saying about Cardinals going to conclave as future popes but coming back as Cardinals. @ DOCM Thanks for the Lannoo article (on the other thread), which does illustrate the breadth and depth of work underway to lay the basis for an EC financial services market. Your FT paper referenced above, and your detailed comments on Regling, illustrate the size of the gap between the reality and the ideal state. The FT says: ‘The mess surrounding Irish banks including Allied Irish and Bank of Ireland has thrown the problem into sharp relief. In spite of being tiny and relatively insignificant banks in eurozone terms – nowhere near as systemically important as Lehman was – European policymakers are petrified to act’ Surely the mess surrounding Anglo was the most egregious of all. In addition to the problems caused by underdevelopment of domestic and EC regulation, there is the additional problem of how a builders’ bank came to have a systemic nature, or be regarded by key stakeholders as systemic.. Anglo was not systemic in the usual economic sense, but all the evidence (of which the greater part has been successfully concealed to date) suggests that it was politically and institutionally systemic. This state of affairs arose, inter alia, from the fact that a large chunk of the ‘Irish’ economy was (notwithstanding its various merits), an FDI enclave with little or no connections to the domestic credit system. That is always going to be risky. In circumstances where the domestic economy tended towards consumption, with little real progress on production, property came to be seen as the perfect driver of growth. Such a mindset resonated with our colonial past. Our domestic establishment scrambled over each other to get nearer to the Golden Goose, while the state sector bloated with windfall revenues. Not a pretty sight. Anglo eventually infected the rest of the banking system. The fallout from its collapse would have been fatal to some of the most well entrenched insider cabals in the state, and would have brough to light the depth to which our public sector has been captured by private interests. We have a long way to go, but the first challenge is to face the reality. Totally off-topic I know, but I suspect quite a few people are getting a bit weary of what the EU’s Grand Panjandrums might or might not do or be forced to do. For some thing that is subject more directly to Irish control – and has a major impact on citizens and the economy, the ESRI published a review of Irish energy policy on Wed. 27th: http://www.esri.ie/publications/latest_publications/view/index.xml?id=3252 In the context of the report of the Review Group on State Assets majoring on the energy semi-states, given their heft, it provides a useful overview of current research, issues and the upcoming challenges. Worth a post? Anyone interested? @ Paul Hunt Yes, I noticed that, along with an Irish Times article, with a rather nice pictire of John FitzGerald, who has posted informatively on this site. Perhaps he could be offered a guest thread? http://www.irishtimes.com/newspaper/finance/2011/0427/1224295543688.html Apart from the dip in retail sales in March, Destatis reported this morning some other data on the folks expected to support some lavish lifestyles! Destatis reported that agreed monthly earnings of employees in Germany showed an average increase by 0.9% between January 2010 and January 2011, which was below the 2.0% rise of consumer prices. The ’cause of the comparably weak development of agreed earnings is the economic crisis, which still had an impact on the collective agreements of 2010.’ In September 2010, the gross monthly earnings of full-time employees in agriculture amounted to an average €1,851. Earnings in the former territory of the Federal Republic (€2,049) exceeded those of the new Länder – – East Germany (€1,772) by about 16%. Destatis said the drinking water and waste water invoice of a model household consuming 80 cubic metres of water per year was €440.99 on a federal average in 2010. @ Paul Quigley et al I introduced the issue of the German policy position because the solution now proposed to the crisis in the euroarea – as outlined by Mr. Regling who simply happens to be German – is a German one and tailored to meet a domestic CDU/CSU electoral position, down to the EFSF ceasing operations some months before the next federal election. Little attention has been paid in Ireland to the broader European context when it is, in fact, it seems to me vital that there be an understanding of it. Derek Scally of the IT has been doing his best in respect of Germany but he has little support. The attached article by Schaeuble from late last year constitutes a detailed exposé of the CDU/CSU policy stance in respect of which little has changed (other than the abandonment of the unrealistic demand that “sinners” be deprived of voting rights, a step which would be contrary to the treaties). http://www.europesworld.org/NewEnglish/Home_old/Article/tabid/191/ArticleType/ArticleView/ArticleID/21726/AplantotackleEuropesdebtmountain.aspx There is not a peep out of Schaeuble in his article about the enormous commercial imbalance in Germany’s trading relationship with the other countries of Europe when this phenomenon is in large measure the source of the footloose capital movements that have caused so much damage. You will note also that he refers to the “sudden stop” phenomenon that can affect countries but clearly does not see the reason as being that given by De Grauwe. As I see it, the real world will continue to intervene in the debate over the next two years with little chance of the sense of crisis abating unless there is a general upturn in the European economy which is certainly not going to be aided by the domestic policy positions adopted by the present German government. There are some very heartening signs that is actually happening, especially in France, the key partner with Germany of the whole edifice (nearly 50% of the euroarea). The other development to gladden the heart is the result of the manoeuvring in respect of the new head of the ECB, the other major economies – France, Italy and Spain – appearing to have won the day with regard to the appointment of Draghi, making the very useful point that there is more to the euroarea than Germany. Germany has a real problem of public debt, in large measure attributable to an admirable sense of social responsibility. But economic policy generally in Germany – especially in relation to its labour market – is in as much need of reform as any other country and certainly not the model which it is being held up to be for imitation by the other countries of Europe. They cannot all run export surpluses with one another. Off topic I know……. but I’m just back from a few days off and catching up on the news….. why is a busted flush like Anglo having Quinn folded into it? Surely they want to find a decent management team to run it or it’s just going to peter out in to nothing/eventually be flogged off to a foreign insurance company for peanuts? @ Joseph It’s a case of any port in a storm. US company Liberty Mutual will run the operation and Anglo may get some upside in time. @DOCM You’re post is even more interesting when taken in the context of Michael Hennigans stats. It seems that Germany is far from stable. In the short term this will mean the ECB increasing interest rates. In the medium term it will mean much less domestic appetite for bailouts. It is interesting to note the wage disparity between east and west. I know it has been some achievement to bring wages this close after unification but the East is more prone to right wing extremism. How will they take it when an Italian is in charge of their “Bundesbank”? It’s a heddy mixture all told. You get the feeling that somethings got to give @Gavin Kostick, Indeed. But there seems to be a fixation on what the rest of the EU should do for us, rather than on what we can do for ourselves that might actually encourage the desired reponse. Ho hum. Apologies for the grammar errors – writing on an iPhone. Just thinking about the further ramifications of Michael Hennigans stats and the 16% differential. Is it reasonable to think that a country which has failed to deliver prosperity and parity within its own borders can devise a model to deliver the same to Europe. I think leading the EU is beyond Germany! 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