Daniel Gros: Ireland and the Euro Crisis – Is There Light at the End of the Tunnel?

Daniel Gros spoke at the IIEA on this topic today –  presentation is here.

35 replies on “Daniel Gros: Ireland and the Euro Crisis – Is There Light at the End of the Tunnel?”

Light at the end of the tunnel = find substitute for cheap ECB money.
Now that is really bright thinking.

Perhaps I am reading this incorrectly but the chart on page 22 indicating interest rates for consumption is plain wrong. It shows Irish consumer rates as being around 5%. Last time I checked AIB rates for short term lending were approx 12%, same for BOI. It begs the question as to whether a rational person would borrow anything at such extortionate rates?

A key impression of this little report is the core centric view of the author.

This is private credit money in the main – The periphery takes the “adjustment” relative to growing capital stock – no loss of private contracts is contemplated.
I guess buyer beware is a strange concept in Euroland.

But he does have a point about large assets which I believe to be non- productive in the main.
A mechanism to clear these assets at true market price is for all risk liabilties to be given these assets but term deposits converted into goverment money.
And let this Non credit money buy these assets at or near the cash price.
The risk deposits and now the ECB can then take the loss

Its never going to happen however as we must keep the illusion of fictitious wealth until it destroys us

‘Find foreign assets of private sector and then deleverage.’

Apart from commercial property assets and investments by the likes of CRH and Smurfit Kappa, which are only Irish by name as these are transactions are aranged outside Ireland, by nominally Iris cos, other data is a mish-mash of FDI transactions including the funding of overseas sister units from Dublin.

Who owns the over $40bn of US Treasuries listed for Ireland?

The sources for each chart and table are listed as http://www.ceps.eu. I’d be looking for more precise information and explanations for some of the charts and tables. Maybe those who were at the IIEA know more

I may be missing something but is not this presentation all about the obvious. Ireland had an almighty housing bubble and, as in any bubble, most people were left holding losses (the unfortunate generation in negative equity in particular) but a lot of people made an enormous amount of money and, unless they invested it unwisely (such as in Irish bank shares or further property investment) they still have it.

Is there any more eloquent graph than that in the article by Martin Walsh in the IT on 25 April comparing the bubble in house prices with the development in construction costs and average wages?


The question now is where to keep the money. Not, it seems, in the banks that facilitated the bubble.


I’ve been following comments by Daniel Gros for some time – imho he is both pragmatic and sane – erudite as well. Too many facts and figs here for me poor head after a long day at the mo ……. but a snippet of his thinking on ‘debt restructuring’ below …

Debt restructuring is still a dirty word in Europe
ANALYSIS: Daniel Gros
Irish Examiner Friday, April 08, 2011


‘Europe is making a fundamental mistake by allowing the two key elements of any resolution of the crisis — debt restructuring and real stress tests for banks —– to remain taboo. As long as successive EU summits persist in this mistake, the crisis will fester and spread, eventually threatening the stability of the eurozone’s entire financial system. ‘

Oops! For those who wish to view the graph referred to and who have a susbcription to the IT, go to Calendar, choose 25 April, and go to Thumbnails page 15.

Agreed , but is your solution to drain these deposits until there is little left or to seperate the money from property assets ?
Term accounts in the state have been socialised yet they still operate in a fantasy land of overvalued assets – seperate these as they already are part of the state and let them fund goverment expenditures as clearly the fiscal debts are a money illusion withen this state given the now current account surplus.

External actors (or cuckoos ?) are clearly making a killing from our stupidity – lets finish this.

“a lot of people made an enormous amount of money and, unless they invested it unwisely (such as in Irish bank shares or further property investment) they still have it.”
Eh, yeah. Consider the following:
The number of residences with a mortgage has remained pretty constant at about 40%.
The number of expensive foreign holidays skyrocketed in the bubble.
The amount (actual amount) of consumer spending on bling and tat leapt hugely.
The number of cars sold is still very high.
All the money that the state got, the state has spent.
The price of prostitution has come right down according to a vox pop on Newstalk last week.
The price of drugs is likewise down on lower demand.

Most of the money was blown. Some of it is strapped to old time farmer’s bodies, but that is because they rightly didn’t trust the banks and didn’t blow it on hookers and cocaine. It is an unpleasant truth that it was blown, but it was.

Some probably made out like bandits and saved their profits. Is it now to be expropriated? What if some of it has left the country? How do you get it back?

@ DOC and HM

With all due respect, you are both missing the point. There was, of course, a consumer binge and misplaced investment abroad and the proceeds are now in the pockets of German car workers, Bulgarian developers, Las Vegas “entrepreneurs” or whatever and the people with the resultant debts are busy paying them down (if they are capable of doing so).

But the real money was in the gap between the bubble prices paid for property and infrastructural development and the cost of actually producing it. Who did or did not hold mortgages has little to do with the matter. Lucky the punter who had property, unencumbered, especially along the route of a motorway, and who did not use the proceeds to buy AIB shares!

Look around you! The winners are to be seen behind very large gates all over the country. (Some gates may, of course, be giving a false impression. It may be all the owners have left).

You may have noticed I have agreed with your first point for once but to try to force these farmers / business men etc to give up their financial resourses will result in a economic war you could barely imagine.

The breakdown has been a result of the loss of trust of state executive and banking institutions who poured all they could get into the shadow bank sector.
Therefore domestic capital is on strike ( my own personnel financial trajectory was from 20,000 in each bank , to post office bonds , to Gold )
First you need to restore trust but unfortunately the euro is a destroyer of sovereignty and therefore of domestic power.
People do not understand the nature of the beast but they do know its a dog.
We maybe primitive animals on this island but many of us ain’t as stupid as you may think.


Forget about the State for a second – it is a little midget when compared to the overall figures in this juristiction.
The price of things have gone down because the velocity of money has almost stopped – the money is still there.

If the state could rip some real flesh off the shadow bank sector and offered 5% on a 3 Year post office bond it would not have any problems raising domestic money.

Gros’s viewpoint explains why the ecb is busy shifting it’s support onto the Irish central bank. Then the govt her can seize all domestic financial assets and then pay off any external debt left. Err… hasn’t this been tried in Germany of all places in the 30s? And after the financial assets weren’t enough it decided to seize fixed assets? Is this guy for real? As they say


Gross is essentially correct – but the executive here needs to project a REAL independence from the financial class before people can trust them again.
Anyhow there is a long history of this in Ireland – with commercial banks holding much more Sterling Bonds then Irish bonds during the post 1920s poverty / independence experiment.

It may be quite ironic that our austerity may fuel a investment bubble in Germany before this decade is out.
The financial system has been in a almighty mess since Americas default as there is no fixed value that people can use as a reliable metric anymore – therefore unsophisticated investors can be played again and again by the sharks of the financial world.

The CDS extraction games now being played in London is merely the end of a long line of duplicity.
The lesson we seem to be learning is that civilisations have the potential to end in farce rather then invasion – the dreaded Hun just comes after the show is over.

Gross seems to focus his analysis on the net external financial position of Ireland – both public and private.

Do we have any examples of a country that defaulted on its public foreign obligations while running a current account surplus?

The net foreign assets of the country is basically in balance. This would appear to imply that the country does not have an external debt problem taken as a whole.

It would be interesting to hear whether Philip Lane agrees with the importance that Gross implicitly gives to these facts in determining the likelihood of default.

What does Gross mean when he says tax theses foreign assets – does he mean the income of the assets or the capital value of the assets? Would the owners of these assets leave the jurisdiction if we imposed penal rates of tax on their foreign assets? This is all quite confusing


Wow – how could I have been so foolish – I completly misread Gros take on things earlier.
It looks like he is just another ordinary German nationalist who wants to contain the Gypsies in their little caravan.

While people get taxed with 4 and 5 figure sums in post offices and pensions get low yields as they have no choice without inside information.

The insiders in Zurich , Frankfurt and London can continue to play with the little people, sustaining grossly distorted trade balances throughout the Euro / Sterling area.

You cannot engage in effecient free trade when only 3 bankers on a Island of 100 have the wealth.
That system can only work if you have a plantation.
William K. Black recently said, they have ‘left the felons in charge of the system for the sake of stability.’

Well for a second I believed in a degree of altruism in our public servants but that seems childish now.
I leave you with a powerful Maxim from Jesses Cafe American

“The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery “

@ All

First, the good news! Ireland is not broke.

Now, the bad news! The government, nationally supervised banks and the victims of the bubble are.

With full freedom of movement of capital, it is not possible to restore the status quo ante – a balanced economy – other than in a very gradual manner. The rate of DIRT, for example, could be raised to 50% overnight but one can imagine what the outcome would be.

There is no point in appealing to a sense of patriotism. Ask the Argentinians!

Commercial undertakings and sovereign states cannot be compared. It is possible to close down the first overnight and to put a padlock on the gates. Not so a sovereign state! The Irish economy is still functioning and it needs a banking system. At some point, outside investors will make their move.

The same coterie of messers are still delaying this desirable eventuality.

I have no problem with 50% dirt if it forces commercial term accounts into goverment money.
Certainly AIB is not giving credit so therefore the deposits are funding a misallocation of resourses.
However taxing goverment money is the most peverse tax I have ever heard.
Such a tax is beyond counter intuitive , its effectively a double tax at these negative real interest rates.

Only in Ireland could they get away with such malice ( I notice they tax post office deposit accounts already so I guess taxing goverment paper directly is not too far away)
Time to shut up shop me thinks.

Does the following back up Gros’ analysis:

“At 30th September 2010, Ireland’s quarterly international investment position (IIP) results show overall stocks of foreign financial assets of €2,500bn – almost unchanged from the end-June level. The corresponding overall stocks of foreign financial liabilities of €2,649.5bn were up almost €7bn on the end-June level (€2,642.8bn). Irish residents therefore had an overall net foreign liability of €149.4bn at 30 th September 2010, an increase of €7bn on the previous quarter’s figure of €142.5bn – see Table 1.

Notwithstanding, the total net outstanding liability is still approximately one year’s GNP. So are we not back where we started even if all assets were liquidated?


Essentially, In Argentina, the private sector assets could not be found or alternatively the government did not try very hard to find them since much of government and private assets had become one in the same thing. They tried the usual, lets get the money from the poor but found that the poor were not prepared to bleed up any more money. Umm interesting! In Ireland, the government are trying to bleed money from highly indebted people, who as he says, effectively becoming wards of the state if they are pushed enough.

Gros says, we must mobilise the assets of the private sector to deleverage the country. As well as being currently illegal as Colm McCarthy pointed out the battle is already under way big time. Why are Irish people fleeing from their own banking system? There are many, many people in Ireland who have already decided to hell with the state. They will gladly let the state go into structured default and social decay rather than have their private wealth taxed. One advantage of trying to “find” this money is that it is very concentrated in the hands of the top 5% as well as the pension funds themselves.

He hopes the Irish government can find the private assets here, he further hopes that these private sector assets are conveniently traceable pension funds, that can be “forced”, to load up on generous interest bearing Irish government debt which may be restructured again down the road. I disagree that everybody will be happy. On the surface yes. All is predicated on the EU changing its laws to facilitate an Irish government pension bond stuffing exercise. That is a surprising amount of hope and an astounding solution amount coming from a German.

Slightly off topic, but looking at the sex differences in unemployment between Ireland and the rest of the EU is startling.

Look at this chart, then pick any other country to look at.


I’m new to all of this, so correct me if I’m wrong;

When Gros suggests “the government could just pass a law which forces every holder of a government bond to pay a tax equivalent to 50% of the face value of the bond…” does he mean that every bondholder is taking a 50% haircut? And given that the tax is paid to the Govt; doesn’t that render the paying of all bonds ‘resource neutral’ for the state?

If so, then this is burning the bondholders by any other name, but it does smell more sweet, because the govt can only do this via the tax code, and hence, only domestic bondholders are burnt.

And furthermore; if the govt does this, then who is ever going to buy their bonds again? It means that the one large potential group of investors remaining after a bank-default or even a sovereign default are unlikely to patriotically half their funds.

Our banks lost 16.7 billion over 6 months; there’s no point in trying to re-capitalise them, its like running on ice. Ireland needs a bank default and to open the economy to outside banks, who will invest wisely, get things moving and hopefully prevent sovereign debt.

But, honestly, correct me if I’m wrong – genuine newby here.

@Patrick Lee

Yes , if this happens it is a act of outright lawlessness as favoured classes are bailed out at the expense of peasantry.

I continue to think that one of the ECBs strategic goals is to divorce citizenry from the state via monetory means.

The loss of faith in goverment money will force people to buy private money increasing the power of the Euro balance sheet.

As for allowing foregin banks access to sovergin states , well under tradional banking this was normally only accomplished after defeat in a war.
Remember sovergin republics are traditionally a synthesis of both a private bank cartel and the executive class of that country.

The euro is a different beast entirely as the banks aim is to divorce themselves entirely from executive sanction.
Only if you do not believe in the nation state could you logically want powerful unregulated credit engines into your country.

I would recommend Frederick Hayek’s “The denationalisation of money” which was the intellectual bedrock of the banks attempt to divorce themselves from the sovergin via the Euro.
This was first attempted in modern times when Nigel Lawson tried to give interest control back to the BOE but was shot down by certain groups withen the Tory party.
Only when Gordon Brown got into number 11 was this accomplished withen a week of office and without cabinet approval.
He subsequently sold half of the UKs Gold at rock bottom prices to facilitate the entry of the Euro and their freegold mechanism.

Patrick Lee,

I’m not aware of any legal obstacle to confiscatory taxes on bondholders. I don’t see how the ECB could object; it’s not burning the bondholders in the usual sense, meaning default. AFAIK they really don’t much care what taxes we increase, or what expenditures we cut, as long as we do enough to shrink the deficit. In that sense they are quite broad-minded, bless their stony hearts.

Of course if half a bondholder’s interest goes in tax, that pushes up the pre-tax interest rate on new borrowings. But if the fear of outright default is removed you could still be looking at a 10-year rate well below the current 10.6%

@ All

for all this talk about illegal and confiscatory taxes, how many people are aware (AFAIK – and please correct me if i’m wrong) that domestic Irish investors are not subject to CGT on Irish Government Bonds?

“… domestic Irish investors are not subject to CGT on Irish Government Bonds ….”

That’s my understanding. What’s your point? You know somebody sitting on capital gains on Irish Government Bonds?

Presumably Noonan will start taxing the gains once he has figured out a way to do so without making the losses allowable for CGT purposes.

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