WSJ on Returning to the Market

Good summary but Forell does not distinguish bank from sovereign bondholders. There is to be bail-in for holders of Irish sovereign bonds but yet more bail-out for those clear-eyed folk who bought Irish bank bonds. The unfairness to Irish taxpayers is matched by unfairness to long-term holders of Irish sovereign debt. Many have cleared off nursing large losses, leaving a bond market for hedgies. It is to this that Ireland must return in H2 next year. 10-year at 10.50 this morning.

There is to be bail-in for holders of Irish sovereign bonds but yet more bail-out for those clear-eyed folk who bought Irish bank bonds.

Speaking as one of the myopic suckers, I’m now resigned to that. At this stage a plausible-looking restructuring plan is all I ask for. But on a more cheerful note, I’d like to express my gratitude to John Bruton, who gave me a bloody good laugh with this line from his (otherwise fairly sensible) article in the Irish Times: “The United States is having difficulty maintaining its credit rating.”

Would that we had similar difficulties.

Well when you don’t want bank bondholders to get burnt this is the problem you get…….tough shit EU suck it up like you are telling us to!

I see Boi listing another 25 billion of short term paper today. That makes 70 billion of issuance this week by the two pillars. Does this indicate that the ECB are swapping paper with no collateral (other than guarantee) for newly minted cash?

The columnist writes

“The international bailouts of Greece and Ireland don’t contain enough money to cover all the countries’ needs”.

No. It is the total opposite. The loans are far in excess of what is reasonable, of what would have ensured strict budget discipline, of what would have facilitated a quick return to markets.
The “Financing needs” of Ireland, as identified by the EC in Feb 2011, are €55.4bn in 2011, €22.2bn in 2012 and €7.5bn in 2012. (source “The Economic Adjustment Programme for Ireland”, http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp76_en.pdf )

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Pray, why so much? I continue to ask the question and have yet to see good detailed answers. Let’s try and keep some sense of what these numbers mean: €55.4bn in 2011 is some 3 times the budget deficit; maybe 160%+ of total government revenues for the current year.

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And now Portugal is also getting a good dallop of loans. I’m surprised at the numbers I see in the press.

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“The country’s needs”, as I‘d see them, would be a short term loan to tide it over one imminent redemption. The funding of the deficit or the protection of the domestic banks are optional extras. The funding of the largest public deficit in the OECD area as a percentage of national income, four years on from the subprimes crisis, I would definitely describe as an optional extra. A very luxurious one. There are certain obvious consequences if the same policy continues to be pursued.

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Fears of a negative ratings action etc will hopefully lead to more responsible fiscal policies, in Japan and the USA (they have anyway far more balance sheet flexibility that SOEs locked into a fixed exchange rate). That expectation of responsibility has supported financial stability and lower yields of late.

In contrast, the press is reporting this week that the Portugal government is asking for easier budget targets in the years to come, given the prospect of loans from Brussels etc on offer. Countries that get large subsidised loans, far in excess of immediate needs, can therefore ease up on whatever moves towards austerity they were making. Doubtless people will still be writing that Portugal and Ireland are following programmes of austerity. Hysterity I think is the better term, the pretence of austerity.

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Portugal could have hobbled on with short-term funding etc., obliging it to sharply cut its deficit. That is what countries have to do when they can’t count on solidarity from Brussels or Frankfurt. But “solidarity” is trumping discipline, helped along by the willingness of the IMF to facilitate ongoing large public budget deficits across Europe, even in SOEs with fixed rates of exchange.
More when the EU-IMF loans package for Portugal is presented, with the press talking about next Thursday.

@Ciaran O’Hagan
The 55.4b for 2011 seems astonishing. Could it include the 24 b for the banks? Even then it does not balance unless of course we have massive redemptions.

@Colm McC

” Many have cleared off nursing large losses, leaving a bond market for hedgies”

Sov investors (buy and hold) – the ones Ireland needs to suck up to – have watched losses mount as Ireland has made choices which they regard as bizarre.

One is to effectively subordinate term sov holders to bank corporate bonds near redemption.

The other is what they think has an element of “lifestyle choice” about it, in terms of sticking limpet-like with a high salary / high cost economy.

That kind of “form” might be hard to shift.

@Zhou_enLai

‘The IMF is not legally permitted to persist in a charade where it does not think the plan is credible. I suggest that the IMF executive should live up to their obligations and threaten to with-hold further funds until the programme is restructured to be credible.’

IMF pragmatists have well known, and quietly signalled, since Day-One that present ‘loan arrangement’ is a very very poorly structured one. Unfortunately, IMF is the minor political partner – and unlike Axel Weber, rarely if ever makes public dissenting opinions – quite murmers is more the style. A loud ‘AIN’T CREDIBLE’ from IMF pragmatists would be most welcome – if PUBLIC. IMF ain’t happy with European response to banking mess in general – so little Ireland might prove useful in this regard.

Grumpy says,

One is to effectively subordinate term sov holders to bank corporate bonds near redemption.

The other is what they think has an element of “lifestyle choice” about it, in terms of sticking limpet-like with a high salary / high cost economy.

That kind of “form” might be hard to shift.

The problem with Ireland one could argue is that we are too like the British in our mentality. That is not to say that Ireland is not capable of having an international outlook to the wider globe. Ireland has a long, long history of working in many parts of the world, and were often the first to go to many corners. But what we don’t have in Ireland (and something we share in common with our nearest neighbour), is a tradition of going to the continent nearest to us. We do not have any binding relationship to our European neighbours. Except for the one, that we clearly resent and feel that it is affecting our sovereignty too much. I don’t believe this is a strictly Irish trait, but it is something we inherited from the British.

This is a problem for Ireland at the moment. How we face it, and deal with it though, is the crucial part. I know a lot of folk in business who came here to Ireland from China, and could not believe how little relationship that the Irish have with Europe. The fact is though, that our European neighbours haven’t been particularly accommodating of us either. It is a two way street. There is a very simple reason why the Europeans indescriminately lent so wrecklessly and so stupidly to Ireland during the 2000’s. They didn’t really wish to do any business with Ireland, but when they saw Ireland and UK standing out on their own, and doing their own thing, they wanted a piece of it. It appears like there is a lot of backward-ness on both sides (the Irish, the British and Europeans), which needs to be dealt with somehow. The world is a much bigger (or smaller), place in the 2010s, and that trend will only continue in the decades to come.

Let us bear in mind, that the traditional European/north American dominance that characterised most of the 20th century, will not be present, in the same way, in the 21st century. All of the largest, fastest growing urban centres and economies are now in places we call the developing world. Places such as London, Paris, Berlin and Rome will feature much, much less in the coming decades. I fear, trying to bring the ex. colonial powers around to that realisation will be difficult. BOH.

PS
should also have mentioned that the governing board of the IMF is almost entirely composed of Europeans.

@Michael,
I concede. Well corrected.