IIEA Talk on Sovereign Debt

This post was written by Karl Whelan

Given that Irish politicians and media have decided that Leo Varadkar’s comments about Ireland probably having to get a second EU-IMF deal is some kind of faux pas, it is perhaps worth pointing out that this opinion is widely shared by pretty much everyone I have to talked to in recent months.

Anyway, given that this issue is being discussed, now might be a good time to put up a link to this talk that I gave at the IIEA a few weeks ago. I discuss the risks relating to the current EU-IMF plan the likelihood of the need for a new deal. The slides for the talk are also on the page.

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22 Responses to “IIEA Talk on Sovereign Debt”

  1. Seamus Coffey Says:

    I think that Kenny and Noonan may also hold the same view as Varadkar but for some reason don’t want to admit it. Looking at their comments from the Irish Times piece:

    Kenny: “People can have their views about the meaning of words, but let me clarify for you again: there will be no need for a second bailout for Ireland in 2012”

    Noonan: “The programme is due to run until the end of 2013 and the start of 2014 and there is sufficient money in the programme to meet all eventualities; so categorically, there will be absolutely no bailout next year in Ireland”

    Of course, there won’t be a second bailout in 2012. We have plenty money to get us through 2012 - and a good bit of 2013. I think they are being disengenious when they put the “2012″ proviso on their statements. If they felt there would be no additional bailout they would have no need to add this.

    As Karl’s presentation rightfully points out we will need more institutional support to get past 2013 and the big bond redemption in early 2014. We should be upfront and honest about the problems we face. The above statements do not help.

  2. ceteris paribus Says:

    It is not only Leo that believes a second bailout will be required. Mr Fink of Blackrock -
    ““The European problem is way beyond Greece,” Fink said in the interview in Hong Kong. “Greece is the most immediate problem. I find it very difficult to restructure Greece without the understanding that we’re probably going to have to restructure Ireland and restructure Portugal.” ”

    Now he would have a unique view of our situation or is he behind a Chinese wall?

  3. grumpy Says:

    @seamus

    I noticed those qualifications too and find it revealing that even now Ireland’s journalists are dozy enough to fail to ask the obvious follow-up questions.

  4. Brian Flanagan Says:

    @Karl
    On slide 6 you plot Debt/GDP and Debt/GNP projections.

    Last Sunday, the SBP posted a letter (link below) from me on this matter. Care to comment?
    http://www.planware.org/briansblog/2011/05/default-is-inevitable-unless.html

  5. Karl Whelan Says:

    @ Brian

    Well, I have a long track record on this blog of arguing that GDP is the correct measure of the tax base

    http://www.irisheconomy.ie/index.php/2009/01/17/where-is-irelands-tax-burden-heading/

    so I’m not going to change my mind now. But given the likely constraints on raising corporation tax, it seems worth showing a GNP based ratio also.

  6. wow Says:

    So when folks say that FG/LAB is no different to FF maybe its this type of casual untruth they are talking about.

    As Juncker said: When it becomes serious, you have to lie

  7. David O'Donnell Says:

    “The Bundesbank is not opposed to a debt restructuring per se.”

    http://www.spiegel.de/international/europe/0,1518,765601,00.html#ref=nlint

  8. Brian Flanagan Says:

    OK, accept that GDP is relevant when talking purely about tax but we are discussing GDP and GNP in the context of Ireland’s capacity to service its debts.
    Is GNP+(GDP-GNP)*12.5% not a more realistic measure than GDP?

  9. Incognito Says:

    Ireland has build up imbalances over many many years. It is 6 months into the bailout program, has not yet much to show for it, but is nevertheless worrying mad about what will happen in 2 years time …

  10. Bond. Eoin Bond Says:

    @ Karl/Seamus

    I don’t think Leo’s comments are as much a faux pas as in danger of making this a lame duck government less than 3 months after its taken power. Given that we’re talking about events roughly 24-30 months down the line, perhaps we should give the Enda and Noonan just a little bit more time to come up with some good ideas before announcing that we’re waving the white flag. The sense of perma-crisis definitely isn’t helping domestic sentiment, and even a brief bit of normalacy couldn’t hurt matters.

  11. Edward Says:

    “A gaffe is when…”

  12. Philip II Says:

    End of 2012 is not 24m down the line its 18m. And I assume a roadshow takes some time to get roadshowing. So…a year maybe away from a decision Eoin?

  13. Bond. Eoin Bond Says:

    @ Phillip II

    cash is scheduled to run out either early 2013 (per Karl Base, i imagine the April 13 redemption would be the date in mind), mid 2013 (per Karl Optimistic or Seamus Base), or end 2013 (Seamus Optimistic or Noonan/Kenny). So 22-30 months depending on your viewpoint.

    And the roadshowing began today in Paris i believe, so they’re already reopening discussions with investors.

    Like i said, lets give them a little bit of time, Varadkar’s comments this week were foolish in that they served no purpose other than fueling his own ego.

  14. grumpy Says:

    @Eoin

    Not sure I agree in that there is way too much institutionalised inertia in Ireland towards the idea that you needn’t bother thinking ahead, because…..that’s next years/ months/ weeks news cycle.

    The country’s “leaders” are inclined towards an assumption that they govern Cloud Cuckoo Land - look at the Croke Park fiasco in the current context for example. Backing off and giving them more room to play politics is just going to increase the market’s certainty the effective restructuring of gilts will be costly - in all sorts of ways.

    They need a WAKE UP call or all they will do is as little as they are forced to until the grown ups take over.

  15. seafóid Says:

    @BEB

    any feedback from the roadshow?

  16. Karl Whelan Says:

    @ Incognito

    “Ireland has build up imbalances over many many years. It is 6 months into the bailout program, has not yet much to show for it, but is nevertheless worrying mad about what will happen in 2 years time …”

    Because, of course, if your country was two years (or less) from a potential sovereign default, everyone would just ignore it!

    Give me a break.

  17. Ceteris paribus Says:

    Slightly off topic …are the wheels coming off the BOI recap scheme with the shares closing at 13 cent down 27% . Will they attempt to issue more paper for debt at this level? More importantly, is the Government pillar strategy going down the tubes?

  18. David O'Donnell Says:

    @KW

    Cease payments on the Promissory Notes; otherwise wave goodbye to a relationship with the genuine sovereign bond market for decade or more. 2012 is now a joke ……. and all know so. Lunacy that genuine sovereign bonds hit in 2013/14 as ESM ‘black hole’ arrives while private banking risk, including recent vulture funds, fully paid up. The ECB’s bluff really has to be called in before the Deauville tsunami rolls in to really finish us off. Unilateralism has to remain an option …. if ICB insolvent, Anglo-INBS insolvent, and ECB take a hit ……… minor in comparison to the wasteland that awaits the serfs post 2013 ……… could make the clearances of the early 19th century look like a picnic in comparison. Sad to relate - but in present direction Europe is not worth it ……. day that is in it - TITANIC is the metaphor.

  19. Ciarán O'Hagan Says:

    Great delivery! Presentation makes the sometimes complex issues quite understandable. Pity the solutions are less obvious.

  20. The Dork of Cork Says:

    I wonder is it possible to get a consensus in Munster to finally secede from the Pale ?
    You can have North Tip however as we will have our hands full with the pirates of South Kerry,anyhow Tralee North Kerry is a honest old industrial town so things might balance out.
    Your charts on labour productivity are interesting and are perhaps correct although I have heard many respected commentators in the States state that this is skewed by imports of physical goods as jobs move to services that in my mind do not really add much to productivity in real terms - are these two lines related to such a phenomena ?

    Anyhow there is a difference between productivity and effeciency - the lack of private debt in the 80s would point to extreme effeciency while the huge private debts of the “productive years” would point to the opposite.
    I would contend that the primary reason for the emigration of the 80s was the lack of awareness and use of condoms in the 60s but hey everybody has a theory right?
    I would like to see complete debt graphs for Ireland now rather then fiscal debts as non default on bonds now makes this obsolete.

    Ps - did anybody catch the money doctor show on Newstalk today - although I have realised in my gut that the Euro system was a anti - sov money system it was quite striking to hear a Sunday times commentator state that he did not know what the seniority of post office bonds are withen the financial system.
    In my mind the ECB does not want to create a island of economic stability withen this bog and needs peripheral credit deposits to flow into Gold to build its balance sheet and thus save its blushes - but thats just a Dorks view.

  21. Joseph Says:

    At least LV was telling the public what he thinks. Which is more than most government ministers seem to have been doing (are still doing?) in the past (according to Wikileaks), putting US interests before the opposition and the public. This from todays Independent:

    “Other cables reveal the ease of access the US has to the top levels of successive Irish governments – often being briefed on matters of huge public interest prior to the Opposition or the Irish people. “

  22. paul quigley Says:

    @ Karl

    Interesting and very informative talk. Many thanks for an excellent public service. I think I heard Governor Honohan said recently that ‘nothing will work’ in the absence of growth. Given the dual economy which we have, that’s an open question.

    I was fascinated by your remarks that you did not ‘know what insolvency of the ICB’ might mean. I refer to the paper by Knittel et al mentioned previously. It’s nice intro to LLR issues for anyone whio can get their hands on a copy.

    http://www.irisheconomy.ie/index.php/2011/05/31/anglo-inbs-loan-loss-assessments/#comments

    Published in 2006, the authors conclude:
    ‘Most probably a banking crisis in needed to overcome the institutional difficulties which presently hinder the establishment of an LLR at European level’.

    I guess Ireland has a historic role here, though not such a pleasant one.

    Am I correct in believing that:
    * the ICB has acted as Lender of Last Resort in the case of Anglo
    * that facility is guaranteed by the Irish state, and not by the ECB
    * default on Anglo promissory notes will render the ICB insolvent
    * Absent new aid, Irish sovereign default is a logical consequence ?

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