The ECB is leading Europe to disaster

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Colm McCarthy makes some important political points in today’s Sunday Independent. He points out, quite correctly, that the ECB’s policy of favouring an Irish sovereign default later over a private banking default now (and it is important to be clear that this is exactly their position, whether or not they publicly admit it) is going to make it very difficult, if not impossible, to get public buy-in for the further austerity measures coming down the line; and is also virtually certain to lead to increasing anti-EU sentiment here (and in the rest of the periphery as well).

But it’s worse than that. By confusing fiscal and banking crises in the public mind, the ECB is also fuelling anti-EU sentiment in the core, since core taxpayers understandably resent the notion that they should subsidize feckless peripheral taxpayers. By contrast, greater honesty about the fact that we have a Europe-wide banking crisis would make taxpayers everywhere realise that they have common interests, and a common enemy, namely an out-of-control financial sector. In such a scenario, ‘Europe’ might be seen by ordinary voters as having something positive to contribute, since cross-border banking requires cross-border regulation. Right now, however, ‘Europe’ is seen as a big part of the problem, in the case of the ECB correctly so.

Like Colm says, it really is a slow motion train wreck.

58 Responses to “The ECB is leading Europe to disaster”

  1. The Dork of Cork Says:

    Its been pretty clear what the ECB has been up to for some time – I have been saying this for a while now.
    Given the structure of the Dollar and how it is created the FED aims to destroy the currency to bail out the shadow bank actors

    In Europe they aim to maintain confidence in the currency but destroy peoples trust in Goverment money – this will force many investors to rush to Gold recaptilising their balance sheet at the expense of goverments who have lost the confidence of their people through the superioty of bank and corporate paper over goverment paper.

    In Europe the base money is not goverment paper but Gold with profound poltical , social and economic implications.

    The weakness of republics is the tendency to become populist as the plebs slowly replace the patricians.
    The monetory powers recognize this weakness and have played their hand beautifully.
    The expression open your shit eyes comes to mind when I think of the sorry nature of the “Irish Elite”

  2. Michael Hennigan - Finfacts Says:

    A fiscal train wreck it maybe or maybe not.

    This Domesday scenario is dependent on the economic growth outcome rather than what happens in Frankfurt or Brussels and a weaker euro triggered by renewed sovereign debt jitters could help growth in the big economies.

    An Irish banking default now would become a sovereign issue as the ECB is the biggest creditor and supported by dodgy collateral. The other EMU members would have to recapitalise the central bank.

    As regards a buy-in from core country voters, we do not have to engage in what is termed ‘austerity’ but absent reform which shows a serious intent to end at least the most egregious examples of public and private sector gouging, we will continue to lack credibility.

  3. Kevin Donoghue Says:

    … it is important to be clear that this is exactly their position ….

    Not only to be clear, but to shout it from the rooftops. All credit to Colm McCarthy for doing so and shame on the many commentators who gloss over it. Sunlight is not only the best antiseptic, it’s about the only medicine we have for this particular disease.

  4. Ger Says:

    The big story of this crisis, is the way that the financial interests managed to not only convince sovereigns to absorb all their private losses, but to do so in such a way that it looks as though countries -rather than banks- are being bailed out. We’re not only paying for their mistakes, we’re taking the rap as well.

  5. pongo Says:

    I have great respect for Colm and hes articles and opinions are clear and sobering while his (ignored) recommendations are pragmatic and make alot of sense.
    Reading this is very worrying!
    Does anyone have any examples of monetary unions falling apart (USSR?) or countries defaulting when they where on gold standard. Is there anything a mere commoner like moi can learn from past and prepare for future.

  6. grumpy Says:

    @KoR

    The ECB are pissed off that as they see it they were misled by IRL about the banking insolvency and were conned into taking assets onto their balance sheet. They are also embarrassed that they were taken in and are trying to make it look like there is more to it than that. They are taking no prisoners.

    ” and a common enemy, namely an out-of-control financial sector.”

    They cannot countenance that. They are of that sector effectively and do not want that to happen.

  7. Brian O' Hanlon Says:

    Colm McCarthy writes,

    In the Irish case (but not the Greek), outstanding debt includes enormous obligations to repay bank bondholders. These were imprudently undertaken by the Government in the belief that the banking problems were much smaller than they actually are.

    The way in which this has been covered up in Ireland is remarkable. I use the word remarkable, but to be honest, there are a variety of words that one may choose inside. The fact is, that no word adequately describes the situation, whereby one small lobby group in Irish society – namely, the property industry – a group of county councillors, land speculators and squireeens (and that is all they are), had too much influence in policy decision making at national level, at the very top. It was with a sense of horror (but not surprise, surprisingly), that I learned the chief executive of Anglo Irish bank, delivering a lecture on October 17th 2008 to the society of chartered surveyors in Ireland on our future in the global economy. That was no more than a couple of weeks after the infamous bank guarantee, and approximately a month before that chief executive was fired from his job (getting fired in Ireland from such a job, means you are given €1 million euro to walk away). But we still wished to listen at seminars to the man from Anglo, who appeared to have all the answers. At a certain point, one has to question the ability of the Irish to employ a BS meter. Who is employed to fix the Irish economy, and get credit flowing again, through the National Asset Management Agency? You have guessed it. The society of chartered surveyors. The extent to which the property lobby group in Ireland has been kept in the loop at each and every stage of the decision making process is simply breath taking. For all of the activity and borrowing, as I understand from a Daniel Gros presentation featured here at the Irish Economy blog, the property industry in Ireland added almost nothing to the Irish GDP, even at the height. Brendan Keenan wrote something in today’s Indo, which we would do well to listen to in Ireland. The German approach is to deter investment in non-productive property; especially with borrowed money. But where was that voice in Ireland during the 2000′s. That is the question, which no one seems able to answer. BOH.

  8. The Alchemist Says:

    “By confusing fiscal and banking crises in the public mind” which is exactly the legacy of the ‘cheapest bailout in history’ policies of the Cowen led government.

    The Cowen government seeded the confusion with the extravagant guarantee. Surely the ECB, assuming the hypotheses of the article, is simply being consistent with the precedent set by Cowen-Lenihan?

    While I am at it. Didn’t Lenihan offer a forecast that at this stage of the austerity program, the public deficit would be down to around €12bn – completely open to correction here – instead it is growing.

  9. Brian Woods Says:

    “…(g)reater honesty about the fact that we have a Europe-wide banking crisis would make taxpayers everywhere realise that they have common interests, and a common enemy, namely an out-of-control financial sector. ”

    Yeah, Kevin, its known as the FIRE economy. Been around since 1970ish time. Someone else has correctly ID’d the real enemy. Its not news Kevin, its the Dawning of Reality. We’ve had two (three?) previous episodes of trouble with an out-of-control-financial sector. This time they have pooped on everyone’s doorstep.

    And you know who will sort out all this mess for us? Those whom we know lie constantly and whom we trust the least – our glorious, gas-powered politicians! That should fill our breasts with hope!

    BpW

  10. Jesper Says:

    Another article condemning the original guarantee and the extension of the guarantee?

    It seems clear that the decision to give the original guarantee was solely made in Ireland.

    The extension of the guarantee might (?) be another matter.

    The anti-EU sentiment in the core or more accurately, the currently more solvent and coincidentally higher tax countries is to me better described as:

    There is displeasure about the government/governance in the periphery. This displeasure is found both in the periphery and in the core. Dressing up that displeasure as anti-EU sentiment is not accurate.

    The article is arguing for more power to Brussels and more money to Brussels, this argument is done on the behalf of the periphery. The core would prefer that the problem with bad governance in the periphery was dealt with in the periphery as this would keep national sovereignty within the sovereign states. I’d expect that to be the preferred solution but apparently the periphery has another opinion.

    Power that has been transferred to Brussels is expected to be more difficult to hold to account. For badly governed countries that does not matter as it any transfer likely to be an improvement for them. For countries where citizens believe their government is mostly doing an ok job it is an entirely different matter.

    The governments in the periphery have some tough choices to make:
    -further cuts -> likely to push some of their citizens into bankruptcy, might not resolve the situation
    or
    -collect more tax -> likely to push some of their citizens into bankruptcy, might not resolve the situation
    or
    -hope that growth can take care of the problem -> if that fails (seems likely) -> further cuts and/or collect more tax with the same results as above

    The choice they don’t have, is to borrow money that will not be paid back (effectively gifts) to pay for their unbalanced budgets. The closest they can get to that is reintroducing their own currency and constantly devaluing it (defaulting by stealth) -> destroying the purchasing power of their own citizens & guess what? The interest rates charged for that currency risk will be high.

    & the cynic in me might add: The only bad thing about having anti-EU sentiment in the periphery would be if the core would like the periphery to stay in the EU. If the periphery decided to leave, who’d lose the most? The core or the periphery?

  11. David O'Donnell Says:

    ‘The policy reforms designed to prevent another crisis are worthy and may work. But unless the European banking crisis is acknowledged and dealt with soon, we are witnessing a slow-motion train-wreck that will end badly for Ireland, for several other eurozone members and ultimately for the entire European project.’ CMc

    Yes – decisions made thus far are essentially political, and in terms of Democratic European Project, are increasingly likely to destroy this project. Unfortunately general elections in France (2012) and Germany (2013) suggest that populist nationalism, and flawed propaganda, in these core countries continues to accelerate this train wreck. How do we manufacture a jump from this train wreck in time …?

    Day that is in it – Europe Here MayDay MayDay MayDay!!! … I found the recent publication from the German ATTAC Scientific Council useful in terms of broad Political-economy – and how citizen/workers are being sacrificed to a flawed policy which gives precedence to short terms interests of certain sections of Financial System protected by ECB.

    Manifesto for the EuroZone

    http://www.attac-netzwerk.de/fileadmin/user_upload/Gremien/Wissenschaftlicher_Beirat/ATTAC%20Scientific%20Council%20Germany%20Mainfesto%20on%20the%20crisis%20of%20the%20Euro%20march%202011.pdf

  12. Gregory Connor Says:

    @Kevin

    You make some good points, but to be fair, isn’t the available choice a private banking default now and sovereign default now versus a bigger sovereign default later? Would a private banking default really sufficiently solve the ongoing government fiscal problems?

  13. Colm Brazel Says:

    Good article, but, correct me if I’m wrong, Colm states:

    “The EU’s political leadership has meanwhile contributed a proposal to include punitive collective-action clauses(against the lenders)in government bonds issued from 2013 onwards, with the possibility of haircuts also for pre-existing government debt of distressed eurozone members”

    Its the latter part of the above I’ve difficulty with.

    I havn’t seen the EU proposals discussed as having retrospective force. Quite the opposite. For example, there is no mention here of its possible retrospective nature, which is clearly outlined as ‘from 2013 onwards’, whose interpretation I take to mean, these CAC’s will only be imposed on new bondholders from 2013 onwards.

    http://365financenews.wordpress.com/2010/12/15/european-bond-investors/

    FT here is more explicit:

    http://ftalphaville.ft.com/blog/2011/01/05/449046/sovereign-debt-burden-sharing-and-free-riding/

    “We already know about some problems here — the lack of applicability to any pre-2013 debt means that it would take a long time for any sovereign to actually derive much benefit from restructuring the CACed bonds.”

    As one who took the announcement re 2013 CACs as an insult to Ireland in that my assumption was, it set out it to clearly enforce the view there would not be a debt restructuring offered through this medium retrospectively to Ireland – this allied to the late bailout not offered before a substantial amount of Irish bonds had firstly been paid off the bondholders – all clearly demonstrating the negative stance taken against debt restructuring in Ireland by the ECB and EU.

    If Colm has any further information on the possibility that EU proposal on CACs in 2013 could offer a means to set about a much needed retrospective debt default for Ireland, I’d like to know more about this.

    My take on this, the EU and ECB have thrown us to the wolves and are out to make sure, if we default, its no skin off their back. They will not facilitate this – in fact they will go the extra mile to protect bondholders rather than Irish citizens against this event.

    Our policy should be to counter such policy decisions not facilitate them.

  14. Kevin O’Rourke Says:

    I don’t think anyone is suggesting that not paying back the debts of private banks would solve the country’s fiscal problems!

  15. colm mccarthy Says:

    Gregory you have a point of course, time will tell. The odds on avoiding a sovereign default are improved if bank bondholders are bailed in soon. Their promotion to the top of the queue is invariably represented in Ireland as being at the expense of Irish taxpayers but is also at the expense of sovereign bondholders. The ‘real money’ people have been clearing off, at heavy loss.

  16. Ciarán O'Hagan Says:

    Colm McCarthy makes some interesting points, and is as usual, well-structured. The short introduction by Professor Kevin O’Rourke makes some statements that surprise me e.g.
    “we have a Europe-wide banking crisis”
    “taxpayers everywhere realise that they have … a common enemy, namely an out-of-control financial sector”.
    If I understand it right, investors bought sovereign debt that they previously thought was safe, and are now facing worries that it might have to be restructured. Banks, needing secure capital, also bought government bonds that were meant to be secure. But if banks along with pension funds, insurers and mutual funds, etc. are facing problems because their sovereign debt is not as secure as they thought, I’d call this a Europe-wide fiscal crisis, not a financial one.
    Now I’ve sparred many times here with Kevin O’Rourke over the need for pump priming and large fiscal multipliers or otherwise. Investors however are getting into ever deeper water however, precisely because of a belief that big spending, low taxing, governments can be a cure to all ills.
    It is not the other way round. However some would like us to believe that, not least some politicians.

    As for an “out-of-control financial sector”, that happened Ireland (and the UK and the US that Ireland emulated all too well). Be careful of generalising to the rest of the Eurozone, where financial prudence is still sometimes seen as a virtue. Finance was not a core reason for why public debt elsewhere in the eurozone is running into trouble. It may appear obvious, but it is useful to remember that it is not the banks that decide social welfare spending, the level of taxes or set pension rights. And if consumers across the West are still living way above their means (with Ireland the champion still), that is the consequence of lax policymaking, with easy availability of bank credit an expression of that.

    .

    As for Colm’s interesting article, my quibbles are more minor, and in order of appearance

    “There has not been a sovereign default in Europe for almost 60 years.”

    Well we did have one modest one last year in the Eurozone. It might not have made the front pages of the English speaking press. However if you had cash involved, that didn’t help ease the pain.

    “the ECB is not greatly concerned about the prospect of sovereign default in eurozone member states”

    The publicly stated position of the ECB is that there are plans and processes which need to be respected. That includes ESM et al in 2013. Otherwise I sense that there is a much greater degree of realism among the several hundred professional economists in Frankfurt than in many other quarters.

    The verdict of the sovereign credit markets … is … they … do not believe that fiscal tightening alone will do the trick.

    Fairer to say I think that tight fiscal policy could do the trick. Rather there doesn’t seem to be much appetite for the medicine. Thus investors are worried.

    Governments … cannot fashion a credible political message for their electorates, offering a credible probability of success in exchange for more fiscal pain.

    Right, at least in so far as it is long drawn out. If there is to be credible austerity, it works best when it is an immediate and a complete cure (Latvia is an example, if far from a perfect one).
    The worst policy reaction of all is hysterity, the pretence of austerity, where faith is put elevated fiscal multipliers and yet more pump priming, and where there is talk of budget cuts relative to some hypothetical no change scenario. I think the evidence indicates such ideas and advice have failed miserably.
    As the latest Stability Programme Update (29 April) for Ireland states “A continuation of the upward trajectory [of large budget deficits] evident since the end of 2007 is not sustainable”. Ireland 2008 to 2011 – four years – has had public deficits of some 10% or more relative to GNP, even before banking costs. Clearly the fun cannot go on for too long like this without very severe consequences.
    Austerity can work, but it has yet to be tried. The Irish government it seems has agreed to pay back holders of bank debt in return for ongoing liquidity support for both its banks and its run-away budget. If unhappy with this pact, the time to bargain is when the public primary deficit is almost eliminated.

  17. Fiscalization and Hellenization - NYTimes.com Says:

    [...] and Hellenization Kevin O’Rourke leads us to a good complaint by Colm McCarthy about the ECB’s handling of the eurozone [...]

  18. Desmond Brennan Says:

    The ECB whipped up, or aided, an Irish bank run…then they very suddenly intervened, with a bailout that achieved nothing different. A massive spend of domestic policial capital. An agency of last resort is not meant to act in such a rash, precipitous and worse still imprudent manner. The underlying cause is no one is willing to have a good debate on what EMU means, and what lessons we’ve learnt. The Irish public was pretty much accepting the fiscal corrections…now that goodwill is dissipating.

  19. pongo Says:

    Gregory the banking debt and public debts are different problems, you are making the mistake of confusing the two issues

  20. hoganmahew Says:

    @Kevin O’Rourke
    “I don’t think anyone is suggesting that not paying back the debts of private banks would solve the country’s fiscal problems!”
    Ah Kevin, you haven’t been reading all the papers or watching the less salubrious telly channels or listening to the phone-ins or Dail speeches. Lots of people are suggesting just this, unfortunately. It is the current pixie dust being sold as solutions – not the plural.

    Personally, I think that, while correct, the time is largely past for the moment. The train track to the cliff has been chosen, there are signals on the way, but the driver is looking at a different map. The next choice point will be the one where the decision has to be made which sovereign debt to default on. Promissory notes? Liabilities to ICB? (When the banks inevitably go bust with the sovereign). Depositors?

    Not only has the sovereign been tied to the banks, the banks are chained to the sovereign. Currently they are both hanging over a cliff with the rope linking them wrapped round a twig. If one goes, so does the other.

  21. hoganmahew Says:

    Oops, sorry, that should be “note” the plural…

  22. Bond. Eoin Bond... Says:

    @ Ciaran O’Hagan

    ” “There has not been a sovereign default in Europe for almost 60 years.”

    Well we did have one modest one last year in the Eurozone. It might not have made the front pages of the English speaking press. However if you had cash involved, that didn’t help ease the pain.”

    Huh?

  23. Georg Baumann Says:

    favouring an Irish sovereign default later over a private banking default now (and it is important to be clear that this is exactly their position, whether or not they publicly admit it)

    Seriously, Is this anything new?…NOT!

  24. The Dork of Cork Says:

    The concept of public debt seems to get peoples knickers in a twist – it is just money with a time component – it is not really debt
    Traditionally banks fractionally multiplied this base creating credit – now however banks chiefly use deposits which are a artifact of credit creation itself as reserves.
    The deposit bases in banks therefore have no real link to the tax raising powers of the state.
    Under a fixed Gold standard the only mechanism to increase base money such as treasuries was to create new money to buy Gold off miners and therefore increase the real money supply but now congress in America just decides to increase the money at will.
    But this is not the central problem – the problem lies in private credit creation – previously under a gold standard central banks would have difficulty raising new money other then to urge the treasuries to raise taxes which just transfers money rather then creates it – their room for manoeuvre was limited so therefore they kept a tighter rein on their credit siblings.

    But now the Euro children live under a monetory system where the amount of goverment money is not important as the ECB can create new money independent of goverment using a free floating gold mechanism.(Gold being private money)
    This money could just as well be corporate or bank debt rather then goverment debt.

    The differences between both systems are huge as the new system makes goverment action and power completly obsolete.

  25. DOCM Says:

    @ All

    Alone among the institutions of the EU, the ECB has shown some competence in helping to avoid a major financial crash in Europe. Many of its actions can be faulted but its bona fides in terms of fulfilling its legal mandate cannot, in my view, be called into question. Many of the contributors to this blog seem to ignore, or to be completely unaware of, the fact that the ECB has been locked for some time now in a battle with a collection of leaders in Europe who are political pygmies compared to the any other than their immediate predecessors. Trichet has been battling on two fronts in particular (i) ensuring some degree of automaticity with regard to the SGP (so blatantly breached by Schroeder and Chirac in a manner which allowed McCreevy off the hook after 2002) and (ii) getting Berlin in particular to accept the responsibility incumbent on governments to sort out the issues affecting the functioning of the euro cf. analyses by De Grauwe and Winkler to which I have posted links.

    Trichet voiced clearly in March his view that the proposals for the ESM were inadequate, especially in relation to it not being allowed to intervene in the secondary bond market (a responsibility which the ECB took upon itself against the wishes of the German representatives on the governing council). The ECB cannot usurp the responsibilities of governments and it is unreasonable and not very sensible to expect it to do so.

    The markets are showing who is right in this debate and Trichet, more than most people, is well placed to know.

    cf. the recent paper by Garry Evans and Peter Allen

    http://macromon.files.wordpress.com/2011/04/a-credible-solution-to-europe_s-debt-crisis_a-trichet-plan-for-the-eurozone5.pdf

    The only problem with this eminently sensible proposal is that the euroarea is not Latin America and Brussels is not Washington. But, at the very least, it draws attention to the game of pass the parcel that is presently being indulged in by Germany.

    There is some hope! According to the German press, Merkel is trying to camouflage the fact that she, for once, is the victim of a political manoeuvre – the anointing of Draghi as the next head of the ECB – rather than its instigator by insisting on the appointment of various other German worthies to key positions. This should keep the leaders suitably occupied while others who have some idea of what is required come up with solutions that can convince the markets, both in relation to the delayed “reform” of the EFSF and the final definitive format of the ESM.

    In the meantime, Ireland should stick to its last and show some awareness of the need to take action on the lines long advocated, as far as I can judge, by Ciarán O’Hagan. As Martin Walsh ex. EBS – the author of two of the most sensible articles to appear in the Irish media since the start of the crisis – pointed out on the Marian Finucane Show this morning, some maturity is required in the debate. This includes recognising that it it is not solely confined to Ireland and her woes.

  26. Chris Dornan Says:

    More people should be saying this load and clear. (For those outside the Eurozone it has been obvious for quite a while now.)

    The terrible failure of the ECB has been only exceeded by the leadership failure of the political classes.

  27. Gavin Kostick Says:

    @ Michael Hennigan, The Alchemist, David O’Donnell, Ciarán O’Hagan and others

    Michael, you say:

    ‘This Domesday scenario is dependent on the economic growth outcome rather than what happens in Frankfurt or Brussels and a weaker euro triggered by renewed sovereign debt jitters could help growth in the big economies.’

    And the Alchemist, you say:

    “While I am at it. Didn’t Lenihan offer a forecast that at this stage of the austerity program, the public deficit would be down to around €12bn – completely open to correction here – instead it is growing.”

    Ciaran, you argue:

    “Austerity can work, but it has yet to be tried.”

    On the front of today’s Independent we read:

    “The budgetary deficit for 2011 was pencilled in to be €12bn at the start of the year and the Government had been aiming for spending cuts of €3.6bn this year.

    However, given the latest downgrade in growth, that figure is likely to be closer to the €5bn mark, government sources admitted last night.”

    http://www.independent.ie/national-news/enda-vows-no-public-pay-cuts-at-all-costs-2634515.html

    Okay, so at the start of this in 2008 there was initially a small mini-correction budget, followed by a proposal (by Lenihan) of, annually, 4bn, 3bn, 3bn, which should have done the trick, but after, 4 (frontloading) and the first 3bn, suddenly the EU/IMF came in and then the situation became, 6bn (2010), 3bn, 3bn, 3bn. But after the 6bn, growth forcasts were slashed, so we’re looking at 5bn this year.

    I agree with Mr Hennigan, if I have him right, that within conventional thinking, growth is the answer, but the agony surely is that every time the government goes to close its defecit, it damages growth, and thus increases the amount of hacking it has to do next time, and on we go.

    It would be nice to think that by ripping out gouging practices this could be achieved, but this seems hopeful.

    On the forecast front, what I now found frustrating is that each forecast seems to find each new attempt to cut the deficit causing a reduction in growth a complete and utter surprise. So when the 5bn is put in place, I chirpily expect that this will cause a further lowering in growth expectation and round we go again. Any chance that the cutting can be more pragmatically factored in? So I think that to the Alchemist I would say, Lenihan was out because the ‘adjustment’ simply wasn’t practically factored in in terms of its effect on growth.

    To Ciarán, as you know austerity is being tried (yes, Latvia), and Karl Whelan’s post a while back expressed this. I suppose crudely, without just pointing at Latvia (I say Iceland), I would be interested to know how you think a slashing of government spend, of say, 9bn this year would result in growth.

    To David, yes, a class dimension rather than a nationalist one has power and interest. As ever, how to convert this interest into real action.

    To lefties in general, I must admit I’m genuinely curious as to why job losses are considered preferable to a general lowering of wages to the same effect, as envisioned by Croke Park.

  28. Brian Woods Says:

    @DOCM: “… some maturity is required in the debate.”

    I did not hear this comment, but it is daft. Maturity in any discussion is indeed desirable, but so too is a reasonable understanding of the processes that need to be deployed to clear out the predicament we are in. These are now, strictly political. The predicament has deteriorated too far for anything else. The other bits of the solutions will have to be attached onto the political decisions.

    Politicans will never act unless a plausible external treat or force majeur is applied. This may have to be a soverign default event. This might not actually happen, but the real probability of such, may trigger them to act. Otherwise they will “Jaw Jaw”.

    This crisis event is someway off, but it has to occur. So be prepared.

    There is another probability, and a nasty one: an energy shock. This is certain; p = 1.01. Time – uncertain. The financial event may be finessed for a couple of years, but if the energy shock strikes first it will immediately trigger a severe financial aftershock. Then its batten-down-the-hatches time.

    BpW

  29. The Dork of Cork Says:

    @DOCM
    I noted with interest the FT piece on Draghi and his possible flawed pedigree.
    Patrician bankers such as Simon Johnson will not be listened too – I think they fear a almighty war between the usury class and the rest of humanity.

    Maybe Goldman boys have got it right – its best to get the dirty busineess over and done with quickly as pleasantries and such are obsolete in todays world of derivatives.

  30. Kevin O’Rourke Says:

    @Yoga: OK, point taken, so let me rephrase: “I don’t think that any of the contributors to this blog…”

  31. The Dork of Cork Says:

    @Brian Woods

    If the Euro can take out the dollar the energy crisis will take a back burner for a while as what is driving oil prices higher is dollars desperatly looking for a yield ( the dollar being hyper inflated 30 years ago needs a return to exist as it has little money value)
    Unfortunetly the dollar is like a dragon eating its tail as the US domestic consumption needs lower oil prices – its not going to end well I fear.

  32. DOCM Says:

    @ All

    On the “maturity” issue, or the “teenager syndrome” if you will, I have no hesitation whatsoever in saying that the debate in Ireland is insular, inept, parochial and ill-informed. The Dáil, courtesy Lucinda Creighton, Minister for European Affairs, is to begin to do something about this sad state of affairs on 9 May in a debate devoted to Europe.

    It cannot come a moment too soon!

    In the meantime, a link to a country that actually has a parliament that works (even with a hereditary chamber).

    http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeucom/110/11003.htm

  33. Jake Watts Says:

    The government agreed to bailout the bond holders because if they did not the following would happen:

    Banks would fail and have to be closed.
    There would be a run on deposits.
    The markets would lose confidence in Ireland and sovereign bond yield’s would rocket up.
    Property prices would continue to fall.
    The government would have to create a huge bureaucratic body called NAMA to sell off all the banks’ real estate at 60% discount.
    Government growth and revenue would be revised downward.
    Emigration would increase.
    Big name developers would refuse to divulge their holdings.
    The Queen of England would make a triumph return to the colony.

    Thank God for Brian Lenihan.

  34. Brian Lucey Says:

    “Would a private banking default really sufficiently solve the ongoing government fiscal problems?”
    Nope. But … if properly put in place and communicated clearly combined with a multiyear plan (not an aspiration) based on realistic growth rates etc it MIGHT give people some clarity if not comfort that their tax increases etc were going to solve the state fiscal problems not the political problems of wilful blindness elsewhere. Might…

  35. Eureka Says:

    The ECB is a bank. Banks are motivated by money and greed. Being so purely motivated they will be effective in whatever they want to achieve.
    The EU is a ….what exactly. A club at best….
    Pitch the two of them against each other and the outcome is going to be clear.

    Economists must know this better than me – but there seems to be an entropy in resource distribution where 5% of the population sem to always end up owning about 80% of the wealth of an economy. If the remaining 20% of the wealth is enough to satisfy the basic needs of the 95% of people living on it – the system seems to work quite well (all that’s needed is the addition of some small semblance of social mobility and a sense of hope in the future).

    At the moment we are witnessing a global redistribution of wealth back to these “natural” levels. The gamble is a dangerous one though. Once you have that 95% living on scant resources, any shock can tip them to unrest. And once the rich start getting richer they also start getting greedier.

    So the ECB is just a part of a bigger game involving paring back public services and pressurising the welfare state. It is merely an instrument whereby the true nature of capitalism reasserts itself.

  36. michaelburke Says:

    Didn’t Colm McCarthy predict that his cuts would reduce the deficit to zero, by 2011?

  37. Jake Watts Says:

    Sorry, forgot one other thing Brian claimed:

    The new head of the ECB would be from Goldman Sachs.

  38. clintideal Says:

    Greece ,Ireland ,Portugal in the dock

    Spain ,unemployment now standing @21.3%
    retail sales down over 8% on last year ,not out of the woods at all
    could be joining our club much sooner than thought ?

    Italy & Belgium not far behind with austerity pulling them to in to the mire

    ECB responce protect the core(eurozone)countries and protect the banks
    raise interest rates due to inflationry pressures (imported inflation)
    if ECB raise interest rates in may or june will show that they are blind to the train crash scenario

    it looks to me that the ECB / EU are completly spooked by the markets and have a tunnel vision approach to the detriment of all the above mentioned countries

  39. The Dork of Cork Says:

    In old style sovergin countries the deposits (credit) somehow were relative to goverment debt(money) on a reasonable ratio.
    There was undoubtedly cronyism and the like but the money signals were enough to give warning of impending disaster if things went too far.

    But now we live in a world of independent credit creation without reference to gov debt – I think the executive might have thought that when they socialised deposits and private bonds they were socialising money and therefore this money would flow back into the system.
    But deposits and particullary term deposits is not money.

    The true leverage when you factor this in is gigantic.

    I continue to think that term deposits should be converted into goverment debt and therefore asset prices should go back to their true cash value.

    This will purge the toxins / leverage from the system.

    Talk of fiscal tightening is absurd in such a system – there needs to be a massive increase in goverment debt financed from inside the country so that domestic savers can get a return from the undoubted wealth in the country.
    But property wealth needs to go to very low levels – the risk capital can renegotiate mortgage assets at lets say 5 to 10 cent on the euro.
    Ain’t going to happen however – the false mantra of fiscal austerity 1980s style is a meme in Ireland that cannot be budged.
    This was just a transfer and acceleration of debt off goverment books and into private credit which now has been socialised.

    The economic establishment in Ireland is either retarded , corrupt or both.

  40. Brian O' Hanlon Says:

    Ciaran O’ Hagan says,

    The worst policy reaction of all is hysterity, the pretence of austerity, where faith is put elevated fiscal multipliers and yet more pump priming, and where there is talk of budget cuts relative to some hypothetical no change scenario. I think the evidence indicates such ideas and advice have failed miserably.

    I believe the point that McCarthy went to lengths to illustrate in the Irish Independent article is a political one. A point about politics in Ireland, and a point about politics in European in general. The point is simple and worth bringing bear the debate. The place where politics finds itself in Ireland in 2011, is not a place where politics would wish to remain for very long. If the political remains in the space referred to by Ciaran O’Hagan in the above quotation, for the medium term, the administration will be exposed to attack from a variety of new directions. Directions which cannot be predicted by anyone as of now. What that does, is to introduce another unknown variable of uncertainty and risk which the market will have to factor in addition to everything else. I don’t know about the other contributors to the Irish Economy blog, but I was of a mind, that Ireland (and other troubled European nation states), are attempting to move away from un-predictability in the medium term, and NOT back towards more of the same. The later case is what McCarthy theorized in his Irish Independent article today. The consequence of what McCarthy has theorized, is worse than not going forward. It is worse than remaining in an endless debate over ‘fiscal multipliers and pump priming’. It will be much worse than NOT implementing austerity measures. The political space in which Ireland finds itself at the moment, is exactly the kind of space, in which bush fires do break out. The likes of which, may prove to be too large and unwieldy for even the European community to figure out. BOH.

  41. clintideal Says:

    @jake watts

    super mario draghi ex goldman sachs expected new ECB chief in waiting

    who needs regulation when a ex vice president of goldman sachs will
    be runing the show for bankers interests ?

  42. clintideal Says:

    leaving the Euro

    ECB handling of the Euro crisis aided by our hopeless FF/GREEN goverment we need to rethink what our long term national interest is?

    clearly by not being able to impose hair cuts on senior bank bond holders
    we are now looking at huge soverigne default in the near future

    is it not time that we the people of the Irish state had a debate in decoupling from the Euro

    lets put all the pros and cons on the table

  43. Bunbury Says:

    Can anyone out there answer a simple question: what would a ‘sovereign default’ mean for the man on the 46A omnibus?

  44. Eureka Says:

    @ DOCM
    I hate to say this but I kind of agree with you. We have failed to see this crisis in its proper European context. Ireland alone did not cause the problem and Ireland alone cannot solve the problem but Ireland must
    strengthen its position whatever happens.

    No matter who is at the helm of the ECB we have to only spend what we take in. Public spending must be cut – it really must.
    But there must also be bank debt restructuring.
    One without the other will not work. And I think the only sequence will be to implement the public sector cuts first and then to swiftly restructure whatever the consequences.

    The public sector cuts should involve implementing most (if not all) of Colm McCarthy’s reforms. We also need to cut public sector pay and we must have social welfare reform.
    The issue of social welfare reform is not mentioned enough but we cannot afford the amount we are paying.

    Nobody wants to touch this one but if we don’t start tackling this it will be tackled for us and much more savagely than we can imagine. It deserves a thread all to itself.

  45. colm mccarthy Says:

    michaelburke: I make as few predictions as possible in this business, and have no recollection of this one. Source?

  46. Brian O' Hanlon Says:

    @ All,

    I tried to address an issue in John McHale’s thread Is the grievance against the ECB overdone? The solution for Ireland maybe, is not the ‘pump priming’ solution, which Ciaran O’Hagan detests so much (because he has logical reason to believe it will not work). Part of the solution in Ireland I would argue, will look something like as follows. In all payment systems, there is a part of that system which requires authentification and reputation. For instance, when you send somebody an e-mail, there is one part of the message, whose only function, is to allow one individual to authenticate the other. In the case of the Irish economy, pump priming will probably not work. Because what is most important to fix, is the kind of fuel which is used to run the pump. What we had in Ireland was a kind of dual component fuel. You could not acquire credit, without a property asset, or visa versa. Having a property asset was the key to running a successful business. The property asset was the authentification system in the transaction for the lenders. There was no good reason to adopt property, I would argue. It just happened. It may be the case that we have to re-introduce some component (as distasteful and all as that may seem), or some substitute, in order to feed the pump with the right fuel. You only have to look at Quinn’s empire to see it, the nurturing of medium and large entreprise, in co-existence with non-core (though essential), property assets, which formed part of the credit and audit transactions. BOH.

  47. The Bass of Common Knowledge Says:

    So do we have any idea how a sovereign default will play out in the Eurozone? Can the Euro with stand such an event? Or does this mean Ireland will be placed in a position more akin to Greece whereby massive privatizations are on the table, regardless of whether they’re strategic or not?

  48. Michael Hennigan - Finfacts Says:

    @ Gavin Kostick

    The forecast deficit for 2011 is €18bn comprising a current spending deficit of €12bn and a capital budget of €6bn.

    Taxation receipts in 2011 are projected to be around 2004 levels, gross voted expenditure of Government Departments and Offices in 2011 is projected to be about 40% above the 2004 level.

    As Karl Whelan has pointed out, there are additional income receipts besides direct tax and with the universal social charge replacing the health levy, there has also been a change in spending/revenue classification.

    However, thee is stil a big gap between sustainable income and spending.

  49. Ciarán O'Hagan Says:

    @ Gavin Kostick
    Yes sure, true austerity would be very painful. If it were for real, it’s mean a severe and immediate hit to living standards. In return, the future stream of growth prospects would probably be seen as improving (more so if you buy into analysis like that of John Taylor).
    If you are looking for an analogy with real life, do you rip off a bandage in one go, or peel it off little by little? There is no escaping more deep pain or trouble (with still some choice in the matter as Brian Lucey suggests).
    I read the analysis (the market an rating agencies probably do so too) as suggesting that immediate adjustments to the trauma that has hit Ireland and elsewhere are the least cost way out, and the path most likely to favour financial stability. Whether politically feasible is another issue. The time to have gone there would have been at the formation of the last coalition.

    @ Eoin, more info here
    http://www.minfin.gr/portal/en/resource/contentObject/id/c0980b9b-564d-4a57-a65a-afc624db5033
    This has been only part of the story

    Also see
    http://www.isda.org/uploadfiles/_docs/IssueNo2011031101_Republic_of_Ireland.pdf
    Some even see this as in the same kind of light, as reflected in the prices moves, even if ISDA since ruled No.

  50. Gavin Kostick Says:

    @ Ciarán O’Hagan

    Thanks for the reply.

    If I have you right you’re advocating closing the e12bn current account gap noted by Michael in one go. Is that about right?

    Apart from real world problems such as the Labour Party having to leave government, I’m more saying that the story so far seems to suggest that such an adjustment would be so damaging to the economy that it would not succeed in even its basic aim of closing the gap.

    So, if the aim is to stay the course, I would be more inclined to hold hands with Nurse (the IMF seem surprisingly reasonable in this case), and unwrap the bandage slowly as the wounds heal.

  51. michaelburke Says:

    Colm,

    I’m surprised you’ve forgotten this prediction. It arises in Volume I of your eponymous report (chairing ‘An Bord Snip Nua’).

    It’s not a throwaway line either. It is stated in Appendix 1 Terms of Reference, point

    “1. The objectives of the Group are to:

    a. Review the scope for reducing or discontinuing Expenditure Programmes with a view to eliminating the current bdget deficit by 2011.

    b. To that end…………….” (p.8)

    http://www.finance.gov.ie/viewdoc.asp?fn=/documents/PressReleases/2009/bl100vol1fin.pdf

    The Group’s terms of reference and the objectives of its recommendations were to eliminate the deficit by this year.

  52. paul quigley Says:

    I read this as a a sharpenig dispute between folk like Ciaran O’Hagan/ DOCM with a market/EC centred view on one side and the Irish sovereign/social perspective which Colm McCarthy is ever more strongly articulating. Sorry if that is a caricature, but I think we an agree that the political engineering of solutions is as difficult as the economic engineering.

    The kind of austerity sought by @ Ciaran is blocked by the political composition of the current government, which is heavily constrained by its public and private sector stakeholders. Those groups who are ‘in’ are trying to preserve the status quo, and many have succeeded to date, with increasing resentment on the part of those who are being hit hardest.

    Confidence in the political system is damaged and the temptation to evade by means which include criminality or wholesale resort to the informal economy, will rise. Taxes could become as hard to collect as they are in Greece.

    @ Michael Hennigan says:

    ‘ As regards a buy-in from core country voters, we do not have to engage in what is termed ‘austerity’ but absent reform which shows a serious intent to end at least the most egregious examples of public and private sector gouging, we will continue to lack credibility’

    That seems to me a fair and realistic proposition. Not only are such preliminary steps necessary to restore our external credibility, and our economy, they are absolutely necessary to re-establish the integrity of our state. For which many people gave their lives. So who will bell the( fat) cat ?

    I refer again to the closing chapters of Joe Lee’s Ireland 1912-85.

  53. The Dork of Cork Says:

    @Ciaran o Hagan

    We are currently running a current account surplus again – so we are paying our bills but at extreme social cost.
    I would have prefered the core taking some austerity medicine so that we would not have to run such a extreme trade surplus but the mechanism is in process.
    However the domestic economy is in tatters – the core of the problem is overvalued property assets which has created huge distortions and uncompetitiveness withen the system.
    It seems we can fund at least a significant part of our fiscal debt with our wealth but for that to happen at least AIB term deposits need to become goverment debt leaving perhaps BOI to provide what little credit is needed for business needs.
    The only flaw in a cash only property market is that outside players with credit on their side could buy all property on the cheap due to their comparative credit advantages – capital controls on money flowing into this sector maybe needed so that we can get back to the true market cost of these assets.
    Talk of cutting fiscal expenditure further is madness as it would stop all internal trade withen the country and would only make monetory and not economic sense.
    The divorce of economic study from the physical world to the world of finance is astounding – our world is now based on farcical trade relationships with its grounding on the production of false bills to justify very strange commercial practise.
    Unless there is a resurgence in a real bills doctrine I suspect this farce will continue until it cannot.

  54. Mickey Hickey Says:

    I do not see the choices as being private bank default now or sovereign debt default later. Since our gov’t in 2008 famously and foolishly back stopped banking losses we are on the hook for all debt outstanding in 2008 and incurred after the guarantee was made. In question are the senior bank bond tranches which amount to Euro 6 Bln. to Euro 10 Bln. according to accounts which may or may not be credible. For all practical purposes Bank default and Sovereign default are one and the same. indivisible before god and man. We have many choices choices but only a couple are sensible. Balance the budget, stabilise the economy and start paying down the debt. Amongst the foolish choices are leave the Euro Zone, leave the EU, default on sovereign debt (includes banks). We are capable of anything as we have demonstrated recently and from 1932 onward. I give 1932 for two reasons, the first 10 years after 1922 were a learning period and in 1932 we whole heartedly adopted protectionism. I would not rule anything out, we are an impulsive lot given to venting our emotions in positive and negative ways.

  55. David O'Donnell Says:

    @ALL Irish Citizens

    The Proclamation of the New Republic May 1, 2011

    ‘We place the cause of the Irish Republic under the protection of the Most High God of the Financial Markets, Whose blessing we invoke upon our actions, and we pray that no one who serves that cause will dishonour it by courage, humanity, or generosity. In this supreme hour the Irish nation must, by its docility and lack of organisation and by the readiness of its children to sacrifice themselves for the senior bondholders, prove itself worthy of the supine destiny to which we have called it.’

    Full detail here:

    http://www.afri.ie/new-proclamation-read-at-afri-event-in-arbour-hill-easter-monday/

  56. DOCM Says:

    @ Paul Quigley

    As you mention the position that I take, I would just like to add that the characterisation of my position does not really concern me one way or the other or that of any other contributors for that matter. What matters is the accuracy or otherwise of what those contributions happen to be.

    Some weeks ago, I said that the policy being followed at a European level was one of “quarantining” the Greek, Irish and Portuguese problem cf. last section of speech by Rehn today.

    http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/298

    If we want to get out of this company, the only way to demonstrate to the markets our intention and our capacity to do so is to follow the advice of Ciarán O’Hagan and others – notably John McHale – and get control of our public finances as rapidly as possible. Everything else, including dealing with – in a manner to the country’s advantage – the toxic Irish assets on the balance sheets of foreign banks, pension fund, hedge funds or whatever, will then fall into place.

    What is most reassuring is that (i) the new government seems to be waking up to this fact and (ii) if it does not, the Troika will ensure that it does.

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