Regaining Creditworthiness

Much of the pessimism about Ireland’s predicament has centred on the challenge of stabilising the debt to income ratio.   Undoubtedly this will be challenging, with good outcomes on nominal GDP growth and fiscal adjustment capacity required.    Of course, it has been made much more difficult by the massive bank losses the State has had to absorb.   But I think a focus on the stabilisation challenge misses a critical issue, which is regaining market access at a high if stable debt to GDP ratio (probably somewhere in the region of 120 percent of GDP).   

Martin Wolf’s column from last week provides a useful starting point for a diagnosis of the problem – an article that garnered all of one comment on the blog (from DOCM).   It draws on Paul de Grauwe’s insightful work on the susceptibility of countries in a monetary union to a debt crisis (see here), where a country without its own currency and central bank to act as lender of last resort is vulnerable to self fulfilling expectations that it will not be able to roll over its debts.   The EFSF/ESFM/ESM were put in place to help fill this LOLR gap, but have so far proven to be a poor substitute.   It is understandable that Germany and other likely net funders want to eventually reinstate market discipline, and so demand losses are borne by private creditors as part of any new bailout.   It is also understandable that they want to protect themselves from losses under the permanent bailout mechanism (the ESM) by demanding preferred creditor status.   But it is becoming increasingly evident that crisis-hit countries will find it extremely hard to regain market access with a half-hearted LOLR facility in place given any doubts that they will not be able to pass a debt sustainability test under the ESM. 

The official funders have to be willing to take on some additional risk if a mutually damaging combination of default and ongoing dependency is to be avoided.   One element is to clarify the way the debt sustainability test will be applied.   A current problem is that austerity measures weaken growth, thus making it harder to pass the test.   A useful amendment would be to assess growth in the debt sustainability calculation assuming a neutral fiscal stance.   Another useful amendment would be to set a ceiling on the size of any haircut, thereby limiting the uncertainty faced by potential new investors.   

As a quid pro quo for these amendments the government could offer to speed up the fiscal adjustment (along the lines recommended by the ESRI in its Spring QEC).   Of course, more fiscal adjustment is the last thing the economy needs as it struggles to pull out of recession.   Yet a quasi-permanent loss of creditworthiness and dependency on unreliable official support looks to be the bigger threat, as it saps confidence and undermines the perception of the economy’s stability.   Those resisting fiscal discipline must realise that the situation changed profoundly when Ireland’s creditworthiness disappeared in the second half of last year.   Some observers are putting forward the same fiscal policy prescriptions as they did when bond yields were around 5 percent.   They must see that the ground has fundamentally shifted.  

It is hard to see how further public sector pay cuts could not be part of any balanced additional adjustment.   A credible new regime for long-run fiscal discipline is also essential.  

The government should take the offensive in pointing out the incoherence of the current international support approach, while avoiding playing a self-defeating grievance card.   What is needed is a hard-headed look for a mutually advantageous set of policies that allow Ireland to shed its dependency.    The first step is a proper diagnosis of creditworthiness challenge. 

44 thoughts on “Regaining Creditworthiness”

  1. @ John McHale

    I am not seeking to minimise the problem, but Ireland’s loss of creditworthiness is just one of the realities which need to be faced. Other critical realities include, for example:

    * the ecological limits to growth
    * the legacy of problems bequeathed by ‘free markets’ ideology
    * structural imbalances which affllict the global economy
    * regional imbalances within Europe
    * the limitations of our FDI based economic development model
    * entrenched vested interests within our state and our professions
    * the prevalence of mass unemployment

    and more besides of course

    Any ‘solutions’ to the creditworthiness issue need to be designed in a way which does not disregard context. It’s fine to argue that we ought to clean up our own backyard, but the how and why really matters.

    There are no rules in history. History makes the rules, and if Spain looks like going to the wall along with us, ‘austerity’ may be a less popular tune.

  2. If you choose to assume that the politics in the periphery will mean objective number ! is as little disruption to the current order as possible (and unless I am mistaken, that is the sort of assumption asset managers will make as their “default” (sorry) assumption until proven otherwise) then is isn’t hard to assume that debt sustainability – at least for a while – will be imposed via the size of the haircut. So the more unwilling you are to sort your economy out, the more your bondholders loose.

    Obviously there is a problem in that and in the end, once the core start to think things through a bit more, they may conclude there is no alternative but to start imposing through withheld payments, the reforms they think necessary. This would please both peripheral politicians who could blame foreigners, and core EZ politicians who could demonstrate they are taking tough action on the people who keep “sending the bill” for their political choices to their electorates.

  3. @paul quigley

    No disagreement that we face many other problems. But I do believe it is our first-order challenge, as the effectiveness of the State to deal with any other problems will be extremely limited until it is solved. Creditworthiness would not be a big deal with no deficit, no debt and domestic depositor-funded banks. Alas . . .

  4. John McHale wrote,

    But it is becoming increasingly evident that crisis-hit countries will find it extremely hard to regain market access with a half-hearted LOLR facility in place given any doubts that they will not be able to pass a debt sustainability test under the ESM.

    John, I haven’t a huge amount of time, but I wish to offer one input into this debate. I understand there is a re-focusing lately in EU policy regarding debts on member states, and what should inform strategy. You probably understand it a lot better than I do. However, lets take this out of economics for a moment, and turn to the literature of business schools instead. I don’t know how you perceive business school academia, but I know that Galbraith certainly didn’t under estimate it. Therefore I will present a suggestion, which is coming from the above blog entry of yours and the way in which you have gone about defining the European problem at the moment. As an entertainment, more than anything, I would suggest getting some interns, or Phd students, or some other resource you have access to, to do a little bit of research. During the credit boom era, I used to keep abreast of things published in the Harvard Business Review, in relation to joint ventures. I did come across one article in particular. It was very interesting to me at the time, and here is why. There was a new body created during the Celtic Tiger in Ireland, known as the Dublin Transport Organisation. I cannot remember which exact year, but I know that at one seminar I did question the Railway Procurement Agency senior staff on some issues regarding transport in the capital city, and it was like bouncing a rubber ball off a wall. Many of my queries were responded to with a suggestion, the new DTO body is looking into that problem, and should be addressing the problem in due course. It was a bit un-satisfactory to me. But essentially, the DTO’s purpose was to try and coordinate overall, the plans of sub-organisations like Transport 21, Railway Procurement Agency, Dublin bus, National Roads Authority and what have you. Every other body, which was responsible for the way that the city moved, was to be coordinated in some fashion by a single Dublin Transportation Organisation. Anyhow, getting back to my HBR article on joint ventures. The article was important to me, because at the time I was writing up something in detail about the new DTO initiative by the government. No one really understood how the new DTO strategy would play out, and what sorts of bumps in the road (no pun intended), it would encounter. I was using the HBR review article on joint ventures as a way to structure my arguments. The nub of the matter, in my mind at the time, turned out to be based a lot on how joint ventures operated either A) badly, or B) successfully. Which in turn, depends a lot on the accountability and sharing methods devised between the parties. I don’t know, but I read some very recently, from academic economics literature (I’m sure it was an Econtalk short article by Tyler Cowen), on the free rider notion. Essentially, I think the business school literature on joint ventures, sometimes does a neat job of wrapping in that idea of the free rider, to propose advice on good JV administration. What we have got in the case of Europe, as you describe it, is quite typical of the problems commonly faced in the joint venture type of structure. Unfortunately, I never got to do my essay on the Dublin Transport Organisation, and I have since given away my hard copy of the HBR article to someone, so I cannot offer neither. But it is really exciting sometimes, when you find an academic resources, in the course of your study, which really can shed a light on the subject, as I remember happened back then. My own views on the European situation, were summarized in a blog entry I wrote not so long ago. BOH.

    http://designcomment.blogspot.com/2011/04/carrying-burden.html

  5. The Wolf man is not so chirpy this week

    http://www.ft.com/cms/s/0/f3f54cd6-7b36-11e0-9b06-00144feabdc0.html#ixzz1M56BK0eb

    ” Other peripheral countries – Ireland and Portugal, for example – are also likely to find themselves locked out of private markets for a long time. In neither case is a return to fiscal health in any way guaranteed, given the extremely difficult starting points.

    Overindebted countries with their own currencies inflate. But countries that borrow in foreign currencies default. By joining the eurozone, members have moved from the former state to the latter. If restructuring is ruled out, members must both finance and police one another. More precisely, the bigger and the stronger will finance and police the smaller and the weaker. Worse, they will have to go on doing so until all these horses can talk. Is that the future they want?”

  6. @ John McHale

    Yes. This is about the effectiveness of our state, and its capacity to survive as an autonomous entity. Although it is deeply flawed, many of our disorders have their roots in a flawed global order and in our colonial past. The task is not just one of fitting in a ‘well governed’ Europe. Our plight is also ‘their’ responsibility.

    Without wishing to sound anti-German, or anti-French indeed, it is the responsibility of the rich and powerful to order their affairs in such away as to make room for the rest of us. There are no ‘chosen’ nations.

    ‘If you view the current crisis as driven by the challenge of maintaining consumers’ standard of living measured in tradable goods, then losing the ability to run current account deficits seems harsh. But if you view the crisis as driven by frustration within countries over insufficient opportunity and employment, then shifting to international balance or even to surplus helps. Losing the capacity to run a fiscal deficit has the opposite effect. Where current account austerity increases labor demand, fiscal austerity reduces it. So if you think that underemployment is the pressing problem in the Europeriphery, current account austerity plus continued fiscal deficit is a golden combination.
    Lots of countries, obviously emerging Asia but also Germany, seem to prefer the social goods that come with full employment and financial security to the consumer purchasing power gains that accompany current account deficits. The countries of the Eurozone periphery have so far “chosen” the path of excess consumption, but it’s not clear whether that represents a genuine preference or a historical accident. This isn’t to minimize the pain and disruption that would undoubtedly attend import scarcity. Changing human habits hurts. But, as Joni Mitchell might say, something’s lost but something’s gained. This would not be a novel sort of transition. It would be a reprise of the aftermath of the Asian financial crisis.
    Leaving the Euro would not be all bows and flows of angel’s hair. But it would not necessarily be catastrophe, and there is no fixed quantity of austerity that Europeriphery countries have to face one way or some other. These countries have difficult choices before them, and should think carefully about the tradeoffs and just what sort of outcomes they hope to engineer.

    http://www.interfluidity.com/

  7. PS

    The distortive effects of our FDI sector naturally have to be taken into account in applying the above analysis to Ireland.
    What would our economy look like absent the US MNCs ?

  8. Since 1922 Ireland has been an independent country a republic with an elected government. Along with independence comes a responsibility to govern responsibly. We seem to have a large majority that believe we are not responsible for our own performance or lack of performance because we were occupied by the Sassenachs. This has changed in the last decade or so to the “rich European countries” who owe us big time. There is a distinct lack of emotional maturity coupled with an inability to see the facts and deal with problems in a businesslike fashion.

    It slightly rankles me when I see “had to bail out the banks” or “forced to rescue the banks”. Really all we were obligated to do was follow previous examples of countries whose banks had seriously over extended themselves. Normal, customary and reasonable would be to push the banks into receivership and have the Regulator (god help us) take over what is left and operate it in survival mode until it can be sold/given to a reputable institution who promises to carry on the business.

    Depositor insurance is the political dynamite issue and the state usually compensates small depositors up to a ceiling determined by affordability.

    In Ireland we weave ourselves a tangled mess that is bringing down the country along with the banks. Are we trying to distinguish ourselves from the Anglo-Saxons, Germans, French and other people who know business is business and countries have interests not friends.

  9. @ John McHale

    I think that this is a very timely intervention. However, it may be a situation where everything is not left entirely to the country(ies) trying to recover creditworthiness. You say:

    “But it is becoming increasingly evident that crisis-hit countries will find it extremely hard to regain market access with a half-hearted LOLR facility in place given any doubts that they will not be able to pass a debt sustainability test under the ESM”.

    This is the problem identified by Adalbert Winkler in his paper “The joint production of confidence” to which I repeat the link below.

    http://www.eurointelligence.com/uploads/media/110419_winkler_joint_production.pdf

    cf. in particular pages 18 and 19.

    I have also posted on another thread information (unfortunately seemingly drowned in a sea of extraneous or irrelevant posts) pointing out that the Portuguese rescue is based on the EFSM (two thirds) and the IMF (one third), not the EFSF. This is curious, given the size of the package and the reservations the UK, in particular has, with regard to the use of the “disaster” Article 122.2 TFEU and the strain that it might put on the loan capacity of the EU budget.

    The Portuguese MOU is to be found on another thread below.

    One general point that I would make is that (a) the penny still has to drop with the new government that the route to returning to the markets is largely in our own hands and (b) doing so has to involve ALL sectors of the economy on a basis which is seen as equitable by all concerned. Picking out particular elements for extra “pain” at this stage is premature.

    There is a need for really radical thinking to meet a radical situation. It seems to me that many contributors have elements of the possible solution but there is, as yet, no consensus on how to put them together. The fiasco with regard to the “raid” on private pensions may, hopefully, provide the catalyst.

  10. @ JMH

    Are you suggesting that Govt goes back to Croke Partnership and negotiate a new deal with the carrot of less wage cuts now vs. alot more wage cuts post end of agreement 2014?

  11. Are you so sure we will be debating in several years time ?

    If the ECB don’t monetize will will cannibalise.

  12. Sorry wrong bone…. I mean thread….. I made a right stew out of the above ..sorry Mr Trichet

  13. @ John McHale,

    “… centred on the challenge of stabilising the debt to income ratio. Undoubtedly this will be challenging, with good outcomes on nominal GDP growth and fiscal adjustment capacity required. … But I think a focus on the stabilisation challenge misses a critical issue, which is regaining market access at a high if stable debt to GDP ratio …”:

    Yes, presumably regaining market access depends on how high the stable ratio of one to the other (debt to GDP).

    ” But it is becoming increasingly evident that crisis-hit countries will find it extremely hard to regain market access with a half-hearted LOLR facility in place given any doubts that they will not be able to pass a debt sustainability test under the ESM.”.

    “The official funders have to be willing to take on some additional risk if a mutually damaging combination of default and ongoing dependency is to be avoided.”:

    The last quoted sentence, I’m presuming that you mean by “official funders” a potential LOLR, and I’m replying in the context of you apparently preparing a contingency model for such a possible effective stepping in by a LOLR:

    It seems to me one would look at the existing losses. They would already be there- -incurred and would not seem to have potential for “additional risk” (their potential to bite the EZ does not change), and so there should be clear- -open details of the extent to which they are guaranteed by the LOLR, whether or not fully wiped off the distressed nations’ slate and if not fully cleared then serviced by the nation as an interest only loan at a low rate, or whatever. Then one would look at “ongoing dependency”. This would seem to be simply dealt with by the LOLR being explicit that it is undertaking _no_ responsibility for any new bonds taken out.

    “One element is to clarify the way the debt sustainability test will be applied.”:

    The test would be based on the above criteria – the terms on incurred debt and the current extent of fiscal deficit.

    “A current problem is that austerity measures weaken growth, thus making it harder to pass the test.”:

    I think it only weakens growth if one has a false measure of growth; that part of GDP which is based on borrowing which is not self servicing (however one would establish that) should not be counted as (GDP) growth. In which case, under austerity conditions the calculated growth figure should be the same – no weakening.

    “Of course, more fiscal adjustment is the last thing the economy needs as it struggles to pull out of recession.”:

    Again, this is only so if one does not recognise that the current fiscal situation involves much borrowing which is not self financing- -servicing. However, it may be “the last thing” that is needed in a humanitarian or political sense.

    So, the attractiveness of a nation’s application to “regain market access” involves clarity on the terms under which established debts are secured by any such LOLR, that such a LOLR would not undertake any responsibility for new loans from the market and details of the fiscal situation.

    We should not expect anyone to accommodate us while our fiscal situation is out of control. When we show much success or indeed much potential to manage it, then we might be accommodated as above by something of an LOLR.

    If we did have success with our fiscal situation and received good terms for our established debt, then presumably we should be able to service the debt and the fiscal situation through our foreign trade balance of payments. In other words, there should be no need for credit! This would make us really creditworthy”

  14. @Michael Hickey

    +1

    In a system of limited accountability, the blame always resides elsewhere.

    We blamed the Brits for the near death of our language but when we had an opportunity to restore it to a bilingual level, what happened?

    If we were a well-run core country four years after the end of the global credit boom and a struggling small country that had become a reckless ‘petro-economy,’ came calling for help, we would surely ask about structural reforms that have been put in place in the interval?

    That’s a rhetorical question not an invitation to posters to engage in whataboutery.

  15. As DOCM infers, I think, the crisis has exposed serious weakness in our state. In my view, the current structures are no longer fit for purpose in terms of protecting us or ensuring our economic development. Absent some significant reforms, we can look foward to chronic decline, emigration or anarchy.

    One way or the other, major adjustments are coming. We can enter into them or be dragged into them. If we are going to enter into them, lets not do so blindly, or naively. We ought not to measure ourselves by the standards of countries with very different histories, but seek to do the best we can with our particular inheritance. As BO’H said recently, we are discarding our human capital once more. That’s crazy.

    Joe Lee’s argument about the contradiction between the possessor principle and the performer principle is a key to understanding our economic development problems. (Ireland 1912-85 Cambridge Univ Press). Rentseeking behaviour, of whatever variety, is economically and socially damaging, and fair competition needs to be enshrined in our constitution.

    Very convincing arguments are put forward on this board about the need to work constructively with Europe. We may speak English, but we need to relinguish our dream of being the 51st state of the union. We can’t have it every way.

    The Dork is being unusually succinct in his comment above, so the view from the top of the Kerry mountains must be good this morning. The smart money says the EZ austerity strategy is going to hit a wall. Trichet will be glad to get off the stage. Central banking is all about the things you would never ever do. Until you have to.

  16. Further to my post above:

    Regarding the final paragraph, I’m not well informed about our balance of payments.

    Also there is a major defect in my presentation: It treats as if our incurred debt was with EZ creditors. However, a substantial portion probably is not. For example, there may be a large value with the UK and perhaps some with others. So, any such debt incurred with non EZ parties would remain a problem, regardless of accommodative EZ policy on internal imbalances.

  17. John McHale,

    “A current problem is that austerity measures weaken growth, thus making it harder to pass the test.”

    Precisely.

  18. @John McHale

    I would draw your attention to other comments in yesterday’s ESRI QEC:

    “A feature of the forecast is that the balance of payments on the current account is expected to be in surplus both this year and next, amounting to 1.2 per cent in 2011 and 2.8 per cent of GNP in 2012. These surpluses represent NET SAVINGS BY IRELAND and are a big change in the position since the early 2000s when the balance of payments on the current account went into deficit. The existence of a balance of payments surplus suggests that government may be able to RAISE MORE OF ITS BORROWING NEEDS DOMESTICALLY. This requires an imaginative approach to selling government bonds to households with substantial savings and those capable of generating future savings.”

    JTO again:

    This is the obvious solution, one I have pointed out many times here.

    Ireland Inc is allready a net saver. There is a huge private sector surplus cancelling out a huge government deficit. At the moment, the former is just slightly greater than the latter, so it would be unrealistic to expect the entire government deficit to be funded domestically, as that would require nearly all domestic savings to be used to fund the government deficit.

    However, projecting forward a few years to the point in time when we are supposedly going to be crushed under the weight of debt and the economy is supposedly going to disintegrate – by that time:

    (a) The huge private sector surplus will be even huger and Ireland will be running one of the largest balance-of-payments surpluses in the world

    (b) The huge government deficit will be much less huge. We don’t know exactly how much less, but, so far in 2011, tax revenues are running ahead of target and spending is running below target.

    So, the upshot is that, by 2013/14, Ireland’s domestic savings will be much greater, possibly several times greater, than the government deficit, and the gap between the two will be growing each year. In that situation, it would only require a very modest and falling proportion of domestic savings to be used to fund the still-falling government deficit. This will be a much more favourable situation than countries like the US and UK, which are likely to have similar government deficits to Ireland then, but much less domestic savings and still in balance-of-payments deficits.

    So, the ESRI presrciption is bang-on and very realistic, when they say:

    “This requires an imaginative approach to selling government bonds to households with substantial savings and those capable of generating future savings.”

    The government should act on this advice asap. Naturally, there are many difficulties in the way, not least that ‘doom’ is now big business in Ireland, and there is lots of lolly to be made by convincing domestic savers in Ireland that Ireland Inc is going bust and that they should get their money out as quickly as possible. I trust that Saint Columbanus is watching recent developments from up in heaven, and will act to ensure that those who are usurping his name for their own financial ends down here will get what they deserve.

  19. Perhaps to address credit worthiness, the great dragon monster Grendel black hole of NAMA must be confronted in its inflation of property prices causing ongoing havoc to fiscal adjustment alongside outdated bankruptcy laws. We need firesales and property portfolios cleansed asap.

    Where is that report that would tell us what to do with the 2800 ghost estates approx 60 homes per estate?

    NAMA is not alone keeping these off the market, but is also protecting developers who should be subject to public scrutiny on how they got permission from local councils and money from the banks; all these matters are withheld from public scrutiny by Nama supporters in the present government and the banks. Upward only rent reviews and ultimately Irish banking liquidity are part of this old currency in Ireland, so we have an elephant in a glasshouse situation. This bubble burst new Nama bubble that interferes with market place fair competition should be lanced as part of any wider restructuring.

    @ Paul Quigley,

    I agree with your point, its worth repeating: “the crisis has exposed serious weakness in our state. In my view, the current structures are no longer fit for purpose in terms of protecting us or ensuring our economic development. Absent some significant reforms, we can look foward to chronic decline, emigration or anarchy”

    Ghost estates:

    http://bit.ly/mqdh2w

    We’ve got to move away from a rent seeking financial paper economy that
    Grendel Nama seeking to preserve a culture of toxic waste is working everyday to preserve:)

    Unfortunately NAMA is a great trough feeding bowl for the legal and other property based professions…..

  20. @John McHale

    A current problem is that austerity measures weaken growth, thus making it harder to pass the test.

    JTO again:

    But, in their QEC yesterday, ESRI revised UP their forecasts for GDP growth in 2011 and 2012 (to 2% in 2011 and 3% in 2012). Naturally, it received negligible publicity. True, this is only a forecast, and it could be wrong. However, the assumption that cutting the government deficit weakens a country’s growth significantly is by no means proven. Look at Ireland 1986 to 1990.

    In particular:

    (a) It has no effect whatever on external demand (exports), which in Ireland amount to over 100 per cent of GDP. In fact, it may even improve exports as cutting the deficit generally reduces costs.

    (b) It clearly has some effect on domestic demand, in particular household spending. But, this is only one component of domestic demand. The other component is business investment. It is quite conceivable that this will rise as cutting the deficit results in increasing business confidence. I don’t like to base conclusions on a couple of months figures. In Ireland these can be very volatile. But, after four years of very steep falls, the figures for imports of machinery and transport equipment in January and February 2011 show a very large rise on January and February 2010, up 41% from 1933bn to 2723bn. In addition, SIMI reported last week (link below) that sales of commercial vehicles (which are not affected by the scrappage scheme), and again after four years of very steep falls, suddenly rose by close to 50% in April 2011 over April 2010. These might be freak figures, we have to wait and see. Or they could be that the falling government deficit is resulting in an increase in business confidence and investment, if not household confidence and spending.

    http://www.simi.ie/utilities/news_details.aspx?id=362

  21. @JtO.

    You’re a so much nicer person when you reduce the abuse flinging (a bit) 🙂

    You’re bang on the money (literally) on this.

    And it’s where privatisation of the semi-states comes in – and a restructuring of the water industry (and other utility and infrastructure services). The trick will be to mobilise these savings to finance the purchase of these businesses – operating under sensible regulation as opposed to the dysfunctional nonsense we currently have. And it would kick-start the transformation of the government balance sheet and present some good news to external investors.

  22. In support of my view that there is a flaw in the conventional definition of GDP:

    I do not regard borrowing for consumption to be production for consumption.

  23. @JTO

    We have discussed the interpretation and implications of the current account surplus before and I can see I have moved you very little. While I see the advantages of being a net international lender, the way a big shift to surplus in the current account comes about is often a sign of weakness rather than of strength. It is exactly what you would expect to happen if there is a “sudden stop” of capital inflow, as occurs in a banking crisis. Indeed, the flip side of a shift from current account deficit to surplus is a shift from net capital inflow to net capital outflow. A big part of the shift in the current account has resulted from the collapse in investment (and it is good to see some positive signs on this front). Some of this fall was driven by the credit squeeze associated with the funding difficulties of the banks, and some due to a combination of falls in the creditworthiness of borrowers and a fall in demand for investible funds. Part of the turnaround has also been due to the rise in the saving rate, though I think it is important not to exaggerate this given the large fall in disposable incomes works against this in terms of the volume of actual saving.

    To the extent that the pool of saving has increased, I do agree it is worth thinking about how this could be tapped as a relatively cheap source of funding for the banks and the government. But in the absence of capital controls, it is not obvious how this can be achieved given the weak home bias effect evident in Ireland. Exhortation can only go so far, though I have no objection to it being tried and creative marketing approaches being used. I do have doubts about ideas such as sovereign annuities, which seem to be based on the idea that the government has no intention in defaulting, so the extra yield that can presently be earned is free return. Information on the market assessment of the risks involved should not be underplayed.

    On the St. Columbanus debate, it can of course help people individually to facilitate the exit of their capital from the domestic market. But what might be individually advantageous can be collectively damaging. It is not surprising to see businesses appear to meet individual needs. One might have expected people involved in the public debate and presumably public spirited to put more weight on the collective consequences of their actions, but it is something we have to accept given the system we have.

    On your growth comment, it is good to see the somewhat more positive forecast for real GDP (though the real GNP growth forecast is still very low). It is also good to see the ESRI willing to take an independent stand. Individual forecasts can become effectively worthless if there is herding among forecasters. Where I differ with you is that I do see fiscal austerity as being damaging to domestic demand. But there is a positive side to this: if we can eek out 2 percent real GDP growth with a roughly 4 percent of GDP discretionary fiscal contraction, then it suggests something positive about the underlying growth potential of the economy. This is partly behind my suggestion that in a debt sustainability analysis that growth is evaluated based on a fiscally neutral stance, which could give a very different picture.

  24. John
    I know you think of me as a mere troll but I will just make one short point on your current post.

    “The official funders have to be willing to take on some additional risk if a mutually damaging combination of default and ongoing dependency is to be avoided.”

    Does their lack of willingness to do this not give you an indication that they see Irish default as more likely?
    Since last year the ECB have been making moves to unwind their support for Ireland as much as possible. Getting the ICB to become LOLR on much of new cash injections to replace deposits , demanding asset sales in the banks to get back as much of their cash injections back ASAP.
    These are not signs of an institution that believes that we are going to pull through without default.
    I have to admire your persistence in trying to maintain status quo at all costs but the measures you are having to propose to maintain this position are getting less and less based reality and more in blind hope.

  25. @Paul 

    I missed your comment as I was deep in middle of my own long-winded response to JTO.   I certainly would not have an objection to savings being mobilised at home due to improved investment opportunities (after removing damaging government impediments).   But I fear a danger of much less welcome ideas for mobilising Irish savings creeping in.

  26. @Eamonn

    I certainly do not see you as a troll and welcome your challenging responses.  (On the broader issue of the ubiquitous use of the troll insult, while it does capture a real phenomenon, it is in my view too easily thrown around as a term of abuse, and often shows the thrower lacks a decent response.)

    The official funders certainly do see default risk — and are right to do so. But I think part of their motivation is to limit both creditor and debtor moral hazard in the future. The problem is that by stifling the chance of a country like Ireland to return to the market, they make an eventual destabilising debt restructuring — in which they themselves might take losses — more likely. That is why I appeal to mutual advantage in giving countries that have a reasonable chance of achieving debt sustainability and a market route out of the bailout. I do think it is a bit unfair of you to say I am just defending the status quo. I am just giving my judgment of what I think is the most robust route through the crisis given the very large economic and political uncertainties involved. I am more than happy to criticise the status quo when I think it is wrong.

  27. @John McHale,

    Thank you. I’m just making the case for generating some good news from Ireland. Market sentiment and perception are crucial to securing creditworthiness. The sovereign bond market is driving sov yields in the peripherals up as a means of encouraging the core EZ players to get a grip – in particular on their banks.

    ‘Sort your banks’ is the clear message from the latest IMF report on Europe:
    http://www.imf.org/external/pubs/ft/survey/so/2011/CAR051111B.htm
    but I suppose we’ll have to wait for the next round of EZ bank stress tests.

    However, we can add to this pressure by doing sensible things ourselves. But there seems to be a sullen resistance to doing anything that would make sense. It’s probably down to the reluctance of anyone to make a concession that would be in the public good for fear of being seen as an eejit by others better positioned to make a concession and who now feel they don’t have to. This, of course, is why we elect a government in a democracy – to enforce concessions in a balanced manner in the public interest.

    But the government is only doing what it is being required to do by the external official lenders – and reluctantly and slowly at that. And where it does exercise discretion, e.g., the private pension raid, it sends out all the wrong signals. And there is so much more it could be doing that would be positive and sensible.

    This is probably what is so darn frustrating.

  28. @ John,

    “… the way a big shift to surplus in the current account comes about … It is exactly what you would expect to happen if there is a “sudden stop” of capital inflow, as occurs in a banking crisis.”:

    If I read you correctly, you are saying that the improvement in the current account (balance of trade) may be due to a stop- -drop in capital inflow.

    I think this is a bit akin to including as growth in GDP borrowing for consumption.
    I would think, in the current account, an inflow of capital should be seen as a positive – an increase in assets, thereby making the bottom line look better. Reversely, a drop in such inflow, I would see as a deterioration in the current account.
    (In which case, an improvement in the current account would not be explained by a drop in capital inflow).

  29. @ John McHale

    I am afraid that referring to “official funders” is not sufficiently precise. Who are they?

  30. @ John McHale

    “I am just giving my judgment of what I think is the most robust route through the crisis given the very large economic and political uncertainties involved.”

    I do appreciate your willingness to put out analysis, offer a possible course forward and debate the issues.

    The nagging bit of the vision as I understand it, is that it includes the willingness to write off minimum 50bn to the banks in return for our ‘twin pillars’ (an ominous phrase, it makes me think of the weakness of the temple Sampson pulled down).

    I think the overall vision would gain more traction if a part of it was to show how, when the economy returns to robust health 3 – 4 years down the line, the banking system in Ireland were to be paying back, even over a long time, this money. The Programme for Government does mention it as a levy, and others have said that the EU/IMF deal doesn’t envision it. Any thoughts?

  31. @JtO and John McHale

    In relation to the emerging current account surplus would we agree that a key distinction between one caused by capital flight and one caused by growth would be the extent to which the surplus is caused by falling imports vs rising exports?

  32. @John McH

    “To the extent that the pool of saving has increased, I do agree it is worth thinking about how this could be tapped as a relatively cheap source of funding for the banks and the government.”

    There have been times in Ireland where certain tax liabilities could be cleared using gilts at par value.

    If it is impossible to borrow from markets to supply Euros for 100% of certain expenditure like government payroll, there is a possibility of effectively issuing gilts to cover the shortfall. It amounts to a choice between an agreement by (say) better paid public sector workers to lend to the government the money it cannot afford to pay them – or pay cuts. A menu of local goods or services these can be exchanged for as money could be drawn up.

    I would suggest that rather than dismiss out of hand this sort of idea, it might be worthwhile quietly trying to think of ways to make it work, rather than trying to think of reasons to dismiss it.

    There may come a point where borrowing from “official lenders” is broadly thought to be no longer a good idea. The politics of pay cuts is unlikely to change and a simultaneous reduction in some local costs and pay (in international terms) may end up being the only effective way of breaking the logjam.

    Part of the Euros problem is that the politicians wanted it to be all or nothing – but in having no fiscal union they overreaching. If the Germans won’t do the fiscal transfers and yet the Euro has to stay, it might be handy to have a third way drafted out.

  33. @John mchale

    “To the extent that the pool of saving has increased, I do agree it is worth thinking about how this could be tapped as a relatively cheap source of funding for the banks and the government”

    I recently read that 3 out of 4 of the euro in increased saving is actually just paying down debts. That being the case and given it is policy of the banks to continue debt consolidation I dont think this is as big a pot of gold as you or JTO may think. There is also a problem that the citizens no longer trust the government with their money.

  34. @christy

    In relation to the emerging current account surplus would we agree that a key distinction between one caused by capital flight and one caused by growth would be the extent to which the surplus is caused by falling imports vs rising exports?

    JTO again:

    It depends which period of time you are talking about.

    During the global recession, between 2007 Q4 and 2009 Q4, both exports and imports fell, but exports fell much less than imports.

    Since 2009 Q4, both exports and imports have risen, but exports have have risen much more than imports.

    In my opinion, it is wrong simply to attribute all the improvement in the balance-of-payments to a “sudden stop” of capital inflow. That is certainly part of it. But, the other part is a large improvement in competitiveness. Ireland has had the lowest inflation rate in the entire EU27 virtually every month since mid 2008. It is absurd to say that this is not also a factor

    @Eamonn Moran

    There is also a problem that the citizens no longer trust the government with their money.

    JTO again:

    With regard to Eamonn Moran’s point about domestic savers in Ireland not being willing to lend to the government here because they don’t trust the government here, and preferring instead to lend to foreign governments for a much lower rates of interest (plus, in the case of those savers in Ireland who are lending to the UK government, having a large loss from the sterling devaluation thrown in), that, of course, is their choice. I am certainly not suggesting that they should be forced to lend to the Irish government, rather than, for example, the UK government. If, after reading last Saturday’s Irish Times, they are frightened and in a panic about lending to the Irish government, let them go and lend their money to the UK government, which will bring them a much lower return, but will at least allow them to sleep at night.

    However, some beople get fightened and panic too much for their own good and come to regret it. According to the link below, some 20 per cent of Romans stayed off work yesterday because some mad scientist predicted that the city would be destroyed in an earthquake. The Italian equivalent of Messrs McWilliams and Kelly.

    So, while respecting the right of people to invest their money where they want, in relation to those people, who are currently turning their noses up at the prospect of lending to the Irish government at 8-10%, and instead are preferring to lend to the UK government at 2-3% (with a good chance of a further loss from sterling devaluation thrown in), it should be a key objective of the government here to ensure that they end up making a huge loss on their choice of which government to lend to. This will indeed happen if (a) Ireland does not default (b) Ireland remains in the euro (c) Ireland’s inflation remains beloe euro inflation (d) euro inflation remains below UK inflation (e) sterling continues to fall in the medium-term against the euro. The dawning realisation of this is probably a factor behind a lot of the media-inspired panic to force Ireland into certain drastic courses of action that have been recommended recently.

    http://news.yahoo.com/s/afp/20110511/od_afp/italyquakeromeoffbeat_20110511173450

  35. @Eamonn Moran
    “I recently read that 3 out of 4 of the euro in increased saving is actually just paying down debts. ”
    Yeah, you’d want to watch out for those economists and their hokey ideas of what constitutes ‘savings’. Watch out for what they think of as ‘investments’ too…

  36. PS to my previous post, where I wrote: “It is absurd to say that this (improvement in competitiveness) is not also a factor”. Just to make it clear, I was arguing in general terms and I did not mean to suggest that John McHale was saying “this is not also a factor”. My wording was a bit unclear. Apologies to him.

  37. “But it is becoming increasingly evident that crisis-hit countries will find it extremely hard to regain market access with a half-hearted LOLR facility in place given any doubts that they will not be able to pass a debt sustainability test under the ESM. ”

    This is the key issue also for business investment. If the country persists in planning to stagger along the sheer edge of sustainability then it’ll deter investment (domestic and foreign) from being deployed in the country and reduce the role of savings to that of a cash reserve in case people need to GTFO.

    The continued strength of the multinational exports proves that Ireland can succeed, but we need more heavy capital investments to be made.

    Meantime, continued high borrowing is only adding to the debt that workers will have to repay (strangely enough) rather than really sustaining any productive economic assets that are likely to be brought back into use after a short recession passes. A policy of getting our finances more clearly away from the sustainability cliff would pay significant returns for the country and allow investment to replace some of the lost economic activity that just ain’t coming back no matter how long we wait.

  38. Good news:

    The company I work for (ESRI) is doubling its workforce in Dublin, from 26 to 53.

    http://www.irishtimes.com/newspaper/finance/2011/0513/1224296836701.html

    Not to be confused with the organisation of the same name that JohnMcHale refers to in his post. No connection at all between the two. Confusing.

    There are similar announcements now being made almost daily. In fact, this one is slightly overshadowed by another company that has announced today that it is adding 100 jobs in Athlone. Another 70 were announced in Cork yesterday. Nearly all in the services export sector. Just to be clear, I work for the UK branch of this company, and have no connection with the Dublin office, or with this announcement.

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