A better friend than we know

The ECB’s position of “no default” has come in for much derision here, and indeed the Schauble letter makes clear that such an uncompromising stance is not credible.    I believe, however, that Ireland gains from a distinct leaning towards a “default-as-last-resort” position, which is why any Greek precedent is so important. 

A useful approach is to view the possibility of default as a valuable option, with an orderly, officially supported “restructuring” at the more valuable end of the spectrum.   However, the very existence of such an option makes it harder to regain market access.   Potential investors will be repelled by the likelihood of getting caught up in a later restructuring. 

We thus have a trade-off in the design of the bail-out/bail-in regime, with the optimal point along the trade-off being quite different for Greece and Ireland.  A good regime for Ireland, in my view, is still one that offers additional funding on reasonable terms to countries meeting their ex ante conditions  without a requirement of restructuring; in other words, a reliable, though certainly not unconditional, lender of last resort (LOLR).  Potential investors need to know that funding will be there even in a bad state of the world.   Under such arrangements, belief in the country’s capacity to meet pre-specified conditions should be sufficient for renewed market access (assuming of course the LOLR is seen as having the financial capacity to meet its commitment).   For all its communication faults, the ECB does push policy in this direction, and I think is more of a friend in the European policy debate than we realise.

The Irish Times’ Cantillon reports the government is increasingly shifting its focus to the design of the ESM.   This is the right focus.   While I hope that an interest-rate cut is not completely off the table, the reliability of the LOLR function is the most critical factor in resolving the Irish creditworthiness crisis. 

65 replies on “A better friend than we know”

I don’t understand the logic of this argument at all. How can one reconcile the statement “a useful approach is to view the possibility of default as a valuable option” and endorse the ECB “no default under any circumstances ever?”
How can an ECB whose policy is “not credible” be a friend to anyone except someone at the ECB wanting to postpone the day when their errors are finally revealed?


First of all, I did not endorse the “no default” position.   The main point is that there is a trade-off between two valuable things: the default option (because there certainly are circumstances where it should be exercised) and a regime in which investors believe that default is unlikely because they believe a reliable LOLR is present.   Needless to say, these pull in different directions and so we need to recognise what regime serves our interests best.  My point is that these interests are best served by a regime that takes default off the table except in extremis and instead provides a reliable LOLR. 

@John McHale

As empirical evidence against your view, I cite the 10-year bond-yield. The ECB has been showing off its muscle increasingly since September. The more it does so the higher the bond yield goes. I can’t believe the correlation is accidental.

Might it not be an error to believe that the lender of last resort will always be in place.


Perhaps you have better information than I do but historically what has been the experience of investors who bought bonds in a country following a restructuring/default event? My analysis suggests that the outcomes have been very favourable insofar as developed economies are concerned.

It seems odd to me that all manner of commentators suggest that nobody would be willing to offer us a dime after a default/restructure/reprofiling exercise is completed.

As somebody who works in this market the credit worthiness of a country simply has to be improved after such an event for new investors. The basic thinking here is that the size of the outstanding debt is obviously a lot lower, tax that would otherwise be diverted in supporting interest payments can now be put to more productive uses and generally the monkey is off the said country’s back which can lead (not always) to improved confidence levels over time.

If the country in question can demonstrate the ability to run a balanced budget or indeed a small surplus following a credit default/restructuring event there has to be significant merit and returns for investors in buying that country’s bonds.

Simply don’t understand the consensus view that finding marginal investors post a default will be the equivalent of searching for hen’s teeth. To me this is flawed analysis and takes no cognizance of the forward looking view of market participants along the lines of DMcWs ‘market has no memory’ view of the world. Whilst I dispute the simplification of that view there is some merit in it but that merit comes from the post default analysis of the country in question which on virtually all debt metrics has to be better – reputational issues aside.

Are you suggesting that the ECB saying ‘no default no matter what’ is what is pushing up bond yields?

Perhaps a more sensible reason would be that the political developments that are causing the ECB to be more vocal are what are actually pushing the bond yields.


The bond yield does show the markets believe the ECB will not win the day.   But I don’t see that it invalidates the argument that I am making.   The current design of the ESM — with its (unspecified) debt sustainability triggers, private sector involvement requirements, and official creditor preference — are serious impediments to Ireland’s creditworthiness.   The ECB is trying to push policy in a different direction

@Yields or Bust 

I am not making a reputational argument here, although that is another factor.   Rather  it is a regime argument.   A regime such as the proposed ESM will make it extremely difficult for a country to return to the markets.   In the instance where Ireland goes through a restructuring under the ESM, the regime stays in place going forward.   We can’t be sure how the balance between damaged reputation, a lower starting debt level and an ongoing regime that demands restructuring as part of any official financing package will play out.  But I would suspect that we would face a long-term structural creditworthiness problem.


The bond yield shows the markets believe the ECB will win the day. Bank bondholders will be protected and sovereign bondholders will be left chairless when the music stops.

@Yields or Bust
Recent economic history has thought us any country that runs a balanced budget or a small surplus is heading for economic collapse withen less then 10 years.
The strong dollar policey of the Clinton years and the very low fiscal debts in the Euro area western periphery are the most dramatic examples.
You can go back to the days of Jackson if you want.
The ratio of goverment money relative to private credit must always be high to prevent malinvestment.
The standard metric of measuring goverment debt relative to GDP is flawed as people who are wealthy can reduce their consumption dramatically to protect their wealth.
Its the monetory ratio thats important.
I personally would not invest equity in a country that runs a balanced budget – I would be wiped out in less then a decade.
If they were running a “conservative” fiscal regeime I would buy only short term debt.
The fact of the matter now is that the ECB will have to introduce more goverment or private money into its balance sheet to counter the epic malinvestment during the Orwellian named stability and growth pact years

@John McHale

The real issue here is the credibility of the ECB, when they now talk of
“default-as-last-resort” position.

When does last resort arise for banks, when does last resort arise for the State?

When in everybody’s opinion last resort came for the banks, the only people the ECB wanted to bail-in were Irish taxpayers.

The first Greek and Irish ‘bail-out’ programs were a last resort position in most people’s mind. Yet again the ECB only wanted the taxpayers of those countries ‘bailed-in’.

So now the ECB, having brutally failed so far, wants to redefine its own ‘last-resort-position’ and pick its targets to bail-in. Again with the citizens of the respective countries doing most of the bailing in.

Personally I no longer accept the arguments of the ECB. Neither do I accept the bona fides of the ECB to manage the crisis in a manner that is not blatantly favourable to financiers and large creditors and not blatantly discriminatory towards ordinary citizens.

The sooner that there is complete clean out of that neo-con organization and a replacement by genuine Europeans, the better for everybody.

I am no defender of the ESM approach. But let’s be clear what the ECB has done as a “friend.” It facilitated through the repo mechanism funding of Irish banks so that they could pay huge amounts of money to German banks. The attempt to pay debts which are so large that they cannot be paid means that the ECB is not the lender of last resort. It is the lender of only resort. With friends like these……
Meanwhile, Iceland which rejected an agreement to pay the Netherlands and Britain is coming back to the markets soon.

@Humble Student: “Are you suggesting that the ECB saying ‘no default no matter what’ is what is pushing up bond yields?”

Exactly. The sight of ECB officials with their heads stuck in the sand does not inspire confidence. Sovereign bond yields would be a lot lower if the IMF was running the show without ECB input. Bank bond yields would be up off the charts however, or more likely bank bondholders would have been practically wiped out. Rational creditors want to deal with rational debtors, not bitter-enders.

Their is method to the ECBs madness – they want investors to buy Gold , they might prefer dollar reserves rushing for the exits but if that is not the case they are prepared to instill full scale panic on the periphery of the Euro.

The ECBs strategic Goal is to slowly dislodge the dollar as the worlds reserve currency and propel the worlds dollar savings on to the asset side of its balance sheet.

Ok, if bank debt default was advocated then sovereign investors would feel more likely to be repaid and sovereign yields would go down (possibly).

But if we limit the argument to sovereign debt. The ECBs opposition to sovereign debt default would surely leave it less likely that Ireland will default in future, and more likely that investors would be repaid hence lower yields.

So the ECBs position on being against soverign default in Greece is helpful but opposition to bank default in Ireland possibly not so.

@ JMcH

I dislike the term default “option”, and I wonder do you really mean it. I’m with LBS and Morgan Kelly here, default should never be an option, default should only occur when there is no option i.e. there simply is no money or funding available to pay the debt. One admits that there is always a certain amount of optionality at the Troika level, they can always make a call whether they want to precipitate a default in a country. That country itself should never see it as a strategic option certainly not within the EZ.

On a second point, I think maybe some contributors are confused by the term LOLR in this context or maybe it is me what is confused. The usual reference to LOLR is of course to the Central Bank bunding of the banking system but I presume you mean here the Troika type arrangements for the sovereign.

@Kevin Donoghue
“The bond yield shows the markets believe the ECB will win the day. Bank bondholders will be protected and sovereign bondholders will be left chairless when the music stops.”
Indeed. And why is that? Could it be because there is twice the amount of bank debt issued in the eurozone as there is sovereign debt? And that bank debt, like sovereign debt, is treated as money good, both by the ECB and on bank balance sheets?

Introduce a risk element to bank debt and the banking and insurance industries (and probably pensions) will take significant haircuts. The main problem, as I see it, is the model for assessing bank debt ratings. They were so wrong that few can accept that formerly AAA bonds are now effectively junk – because they don’t accept this, they make sure that is not the case. If the bonds are fully paid back, everyone can say “see, AAA was right all along, you don’t need to look closely at bank balance sheets and see what is sustainable”.

The largest pig is squealing the most.

@Humble Student
I don’t think the ECB’s position is helpful even in the Greek case. Threats of sanctions, for example, may raise the costs of default but what if, despite the threats, Greece actually does default? (A scary ultimatum isn’t a reliable way to prevent a war; default likewise.) Then either the ECB does a U-turn, or the default ends up costing creditors even more than otherwise, thanks to the damage inflicted on the economy when the sanctions come into force.

Even if I held Greek bonds, which thankfully I don’t, rather than Irish (which alas, I do), my feeling would be that the ECB is anything but a friend to me.


Vienna Initiative is a great idea in the ECB’s opinion….just don’t expect them to take part themselves…bizarre….


I agree with your view in relation to balanced budgets and surpluses – what I was suggesting (probably badly) that the country in question will need to prove that running such a regime is possible which at least in the short term would help to entice skeptical (correcly so) potentially new investors who would be fearful that the Govt in question would revert to marketedly perceived errand ways.

This short term policy would be a signalling event only – longer term I agree it is far from optimal.


Vienna Initiative is a great idea in the ECB’s opinion….just don’t expect them to take part themselves…bizarre….”

That does not surprise me at all. Rolling over their debt would effectively mean that the ECB buys government debt in the primary market. That is explicitly forbidden by the EU treaties.

It’s looking like Germany will win the argument. The coalition have agreed a stategy and will put it to Parliament tomorrow. Why would they bother if they thought that the ECB would not agree.
Der Spiegel has the Troika report and it’s dire…
It may be just nine pages long, but the report by the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) packs a punch. According to the keenly awaited report, which has been obtained by SPIEGEL ONLINE, it is unlikely that Greece will be able to return to borrowing money on the capital markets in 2012 as previously foreseen — meaning European taxpayers will probably have to prop up Greece with billions in payments for much longer than was originally planned.

The troika’s prognosis is bleak. Although there is some evidence that “the rebalancing of the economy is ongoing and the quarter of deepest contraction (has) already been passed,” the report warns that “a further contraction in real GDP is still expected in the second half of 2011.” The real GDP growth rate for 2011 is now protected to be minus 3.8 percent, the authors conclude, adding that positive growth rates are not expected before 2012. Even then, they will only be “moderate.”

Our problems are not that bad….yet.

@ Incognito

they could quite easily accept new bonds in return for the old ones, would not amount to “primary market purchasing”. How exactly are the maturing debt owed by the ECB going to be rolled over if they won’t take part themselves? “Plan”, meet “hole”….


According to the keenly awaited report, which has been obtained by SPIEGEL ONLINE, it is unlikely that Greece will be able to return to borrowing money on the capital markets in 2012 as previously foreseen

It was the word foreseen that caught my eye, no pun intended.
Now a different scenario is foreseen, probably with equally poor foresight.
And these are all people well paid well to foresee.

I disagree. I think the refusal to contemplate private default has instead led us to threatened sovereign default.

In Ireland’s case, the ECB has totally misjudged the scale of the problem (hard to blame them when we did the same ourselves). They have pursued the no private defaults line to the point where the sovereign is now responsible for almost all of this debt and looks set for a sovereign default.

In short, the pursuit of this policy, though correct in theory has been botched in practice. Yes, default should always be the last option, but noone can look at how we have managed to turn a wrecked banking system into a wrecked nation AND a wrecked banking system -without concluding that we have gone way beyond merely maintaining default as a last resort. Instead we have doubled our bets, hoping that by using the sovereign as an additional underpinning for these debts we would carry the day -but it looks like that calculation was misjudged.

We are ruined.

@Yields or bust
If a country only spends money on Goverment wages then that will indeed lead to a decline in wealth over time.
At one time Governments spent money on the commons also – particullary in utilities.

In Europe’s case state run electricity companies were the norm at one time.
They spent large amounts of money on capital intensive projects that would not increase profits of a private company over a decade or more period but greatly added to the combined wealth in the juristiction.
Now that governance is given to Finance they will endeavour to run down capital to extract the maximum amount of short term profit through not investing in the commons.
EU policey has been going down this cul de sac for 20 years now via its attack on national utilties using the “free market” mantra on natural monopolies
The deindustrialisation of Europe by finance is quite extraordinary as without wealth you eventually cannot service interest at the current value of the paper.

Just look at the nonsense emanating from Juncker….
“”We acknowledged the significant progress achieved so far by the Greek authorities, in particular as regards fiscal consolidation, although a reinvigoration of fiscal and broader structural reforms remains necessary,» Juncker said in a press release.

Juncker praised the Greek government’s commitment to a 50-billion-euro privatization program and underlined the importance of cross-party political support in Greece.”

2 year Greek through the roof today….

“In Ireland’s case, the ECB has totally misjudged the scale of the problem (hard to blame them when we did the same ourselves).”

Were they surprised when all the liquidity left the banks and the CB was left holding the baby? Ireland is in some hole considering debt to GDP was 25% or so not so long ago and now with the CB commitment to the banks included the ratio is almost 200%


@john mccale

“belief in the country’s capacity to meet pre-specified conditions should be sufficient for renewed market access (assuming of course the LOLR is seen as having the financial capacity to meet its commitment). For all its communication faults, the ECB does push policy in this direction”


Perhaps the ECB has pushed policy in this direction in terms of the sovereign debt problem? But surely the key defining feature of the ECB’s role as a LOLR is that it has threatened the withdrawal of emergency funding from the Irish/Greek banks during EU negotiations. bizarre behaviour for a central bank ostensibly responsible for financial stability

the perceived threat of the ECB withdrawing emergency support not only stops the Irish banks from re-entering private markets, but also heightens investors perception of the states contingent liabilities with respect to the banks. So the murky role of the ECB as a LOLR for the banks also stops the government from re-entering bond markets

This is all getting a bit silly. It’s just a few vested interests jostling about to see who’ll end up with the baby.
ECB is pretending it isn’t a baby, German’s are adamant that it’s not their baby and the bondholders had a dirty one night stand with the periphery and are hoping nobody does the paternity test on whose mess this really is.
Jerry Springer on a grander scale!

Unca Jean-Claude announced today that the non-standard liquidity measures prog upon which our banks depend has been extended to Q3, 2011 which is no doubt good news, though presumably it will cost 1.5% from next month to access the funding.

But surely it is no way to run a nation’s banking system being dependent from one week to the next on an external body of 17 governors of which Patrick Honohan is but one. Not to mention the six members of the ECB board who could do with what Unca JC called “verbal discipline”.

Where is the medium term prog?

@ All

I would agree with the analysis of John McHale except in one respect. The idea of any member state of the EU – the richest collection of states on te planet – being allowed to default is difficult enough, the idea of a member state of the currency union doing so is unthinkable without unforseeable political and economic consequences.

The proof of the pudding, if there is a pudding, the ESM, will be in the eating. The indigesitible bits are in the texts in square brackets and the annex of the draft treaty establishing the ESM which has been freely available on the net for weeks past.

As to the Cantillon article, when I read it, I asked myself why, after banging one’s head on a brick wall for weeks past, choose another instead? The issues underlying the dispute are between France and Germany and they will decide the outcome. The one thing that all parties in both countries are agreed on, however, is that they want their money back. The idea of a country such as Ireland that is without question solvent toying with the very idea of default calls into question the very willingness of the state to remain sovereign.

Economists may be good with concepts and graphs, but they collectively have a tin ear for politics.


‘The idea of a country such as Ireland that is without question solvent toying with the very idea of default calls into question the very willingness of the state to remain sovereign’

The prime measure of a country’s sovereignty is its ability to tax its citizens. That is certainly being done in Ireland, with obvious negative consequences for employment and growth. Political will is bound to be degraded in coming years, as the full extent of our economic paralysis emerges. It will be a quare sort of solvency.

How does the process enable the parties in France and Germany to get their money back ? Isn’t this ultimately a transfer problem, like the German war reparations, with similar kinds of political, distributional and macroeconomic limits ?


You do your best. And you have the tone of man whose head is really hurting from the series of walls it has chosen knock on. The walls however remain as unmovable as ever. Why is this?

In my mind the people of the country would have been prepared to endure very difficult times to maintain the sovereignty of the country and recover the self respect lost to the country by its disastrous leadership.

However the imposition of the private banking debts onto the backs of the citizens has changed the situation forever. The imposition of the debts and the forcing of that imposition by the ECB has not only changed the economics of the situation but more importantly it has destroyed beyond redemption the willingness of the citizens to bear any burden. The destruction of that willingness is (paradoxically?) most apparant at the upper levels of society.

The ECB decision to force these debts onto the Irish citizens is a decision that will live in financial infamy. It will turn out in fact to be one one the most stupid and costly decisions of the whole debacle. It changed utterly the whole idea of justice or fair play and was blatantly pro elite and anti-social. It was a decision that was the antithesis of what Europe stood for over 50 years.

It has become a power game, as you point out, where the Great Powers once again decide the future of Europe. The decisions being made for the moment are on behalf of the most influential class, the financial class. They just want their money back. And if the debts were the other way round, this country would have to sing for its money. That is how power works.
Europe has been ‘changed utterly’ by the ECB.

@Joseph Ryan

You could also observe that Ireland’s leaders (and I don’t just mean politicians) played a part in that by failing to urge to country to stand up for itself.

The judgement was that first, it could not be proven beyond doubt that the incrementalist policies would not work, and second, that even if they did not work, following them would leave said “leaders” personally in a more predictable and quite comfortable position anyway – so why rock the boat.

@ Paul Quigley

Apart from the right to raise taxes, democratic sovereign governments also have the duty to match their income to their expenditure. Even without the burden of the banking bailout, the previous and current government would still be failing to do so. If one needs an explanation, one need do no more than read the piece by Colm McCarthy in last weekend’s Sindo.

On the broader international political context, Philip Stephens of the FT has a very good piece in today’s FT.


I would subscribe to the view that the change taking place in Germany is due more to accident than design. The country, with the help of the Allies, has a very decentralised system of decision-making and the result can be seen, for example, in health being a land rather than a federal responsibility.

Stephens also underestimates the lobster pot analogy of Dan O’Brien implicit in the euro: easy to enter but impossible to exit (without destroying the pot that is).

Anyone watching Prime Time?

Lucinda Cringworthy hasn’t mastered talking nonsense yet, not to the level of the Brians anyway.

Anyone have a take on the ‘waiting game’ idea. The idea that the European Commission will be better to us in 2013 (when we’re rolling over our debt) than the ‘Troika’ is now.

Lucinda always appears to be struggling to keep up with a brief and unlikely to be in a position to think around it. The impression is of heavy dependence on officials. That implies a minister who is unlikely to make a big gaffe – but is likely to be predictable to representatives of other states.

No government ever admits it has mishandled things or mislead the electorate but it is hard to sustain an argument that these have not happened.

The commission probably would be more easily persuaded but if Greece indicated that can-kicking has limits, this in itself might be helpful. The timing is unlikely to inconvenience the real bailout – of corporate bondholders.



‘What Ms Merkel’s generation has left behind is the intuitive belief that Germany’s national interest is inextricably bound to Europe’

I hope Stephens is misreading it. If not, the conequences are going to be dire.

“The commission probably would be more easily persuaded but if Greece indicated that can-kicking has limits, this in itself might be helpful. The timing is unlikely to inconvenience the real bailout – of corporate bondholders.”

It appears that the Greeks have so indicated. A major story in the NYT today has it that Papandreou favours a scheme whereby the ECB would take over a substantial part of the debt and issue Euro bonds to finance it at 3%. One of the promoters of the proposal is a Greek economist Yanis Varoufakis who wrote an open letter to the PM urging him to reject the bailout terms and said ” I want George to look into the camera and tell the German taxpayer ” I cannot in good conscience take any more of your money because if I do so, this money will just go to the bankers who will only hoard it.”

According to Varoufakis Papandreou recognizes that the current plan is not going to work and that the PM is”like an atheist now, crossing himself and hoping for a miracle”.


The idea of a country such as Ireland that is without question solvent toying with the very idea of default calls into question the very willingness of the state to remain sovereign.

Are the posts you make at the Irish Economy part of the responsibilities of your current employment and does your career involve lobbying on behalf of any organization, political group or company?

@ Shay Begorrah

The answer is no.

In any case, the question is irrelevant. What matters on a blog is the discussion and whether others find one’s arguments persuasive or not. Indeed, it is regrettable when the bona fides of any contributor are put up for discussion, something which I never do and have never done.

Arthur Beesley reports on reactions of Troika officials to recent political developments.

The officials involved in the rescue said the Government had a strong mandate to implement the bailout programme and added that it would not be lightly forgiven by the public if the recovery effort was found not to work due to any failure to quickly tackle difficult reforms.

Saying the political crisis in Greece over its bailout should spur Dublin to redouble its effort to regain market confidence, they also expressed anxiety over loose talk by senior Cabinet figures on the possibility of a second bailout or longer loan terms.

The point about demonstrating capacity to implement difficult reforms is well made. However, as argued in the post, the Troika can help by encouraging confidence in a reliable lender of last resort for countries that are meeting their commitments to those difficult reforms and adjustments.

“they also expressed anxiety over loose talk by senior Cabinet figures on the possibility of a second bailout or longer loan terms.”


Varadakar should have been sacked immediately.

In addition, as I have said before, a default/devaluation scenario would result in the biggest transfer of wealth ever within Ireland. Those on low incomes with no savings, and those on higher incomes with all their savings in Ireland (such as myself), would lose out, while those who have been shipping their savings abroad in the capital flight would make a huge profit. The public are entitled to know exactly how every politician, financial journalist and economist with the power to influence any default/devaluation decision would fare (either way) in regard to his/her own finances from that decision. It is perfectly possible that there are government ministers who, if they have been following David McWilliams advice and moving all their savings abroad, would stand to benefit financially in a very big way from the government’s current policy (no default/no devaluation) being reversed. If so, the public are entitled to know.

“as I have said before, a default/devaluation scenario would result in the biggest transfer of wealth ever within Ireland.”
yes,,,,not that you would care because of course you are only thinking of the children. No, you are totally neutral…
John. your squeals get more and more hysterical every time your mammy lets you use the computer! Your rantings about bond funds last few weeks have been 100% busted.


@Philip II

I am not totally neutral. I have come down very firmly on one side.

I have no need to squeal as my savings continue to blossom and are not affected by day-to-day movements in bond markets. In fact, the likelihood of a small increase in ECB interest rates announced yesterday, along with the fall in Ireland’s inflation rate announced yesterday, along with the B of E decision announced yesterday to keep the base rate at 0.5% while UK inflation heads for 5%, along with the recent strength of the euro and weakness of sterling, all these confirm the wisdom of my decision to move my savings into a euro account in Dublin rather than a sterling account in Belfast. The ones who are squealing are those who moved their savings in the opposite direction and are now seeing them eroded away at a frightening rate.

Probably also of some relevance here is that M. Trichet has completely rejected the thrust of Herr Dr. Schauble’s missive. There is to be no ‘compulsion’ of bondholders. But the point is that there will have to be some compulsion. Greece, Ireland and Portugal are trapped in a really frightening version of the Eagle’s ‘Hotel California’ – “You can check out any time you like, but can never leave”.

Somehow or other core EZ banks and financial institutions must be ‘encouraged’ or ‘compelled’ to accept something like Brady Bonds for Greece and Portugal and to provide funding (equity investment, large scale commercial deposits or bond purchases or a combination of all three) to allow the ECB and the ICB to unwind its ‘liquidity’ (aka indefinite funding support) for the Irish banking system.

It’s obviously fraught with difficulty, but there is no other way out.

@Paul H

If there was a proper default, with banks having to be re-capped around Europe I can more or less guarantee you that common sense would return to the markets.

The “Greenspan put” is still assumed to apply and it has led to the markets leading real economies astray. The markets should be allowed to function the way they are supposed to.

Is things stand, you are a naive market participant if you don’t do your analysis, then put it away and make your investment decisions based on who is likely to rig the market next, in what way and how effectively.

The whole thing is ridiculous.

I agree with John that the ECB is more of a friend than many realise. It is clear that they are horrified by the way the German politicians are dealing with the EU periphery debt problems. If the ECB were in sole charge of the situation, we would be in reasonably safe hands.

Unfortunately, they are not. It is true, as John notes, that the restructuring option of the ESM makes it harder to regain market access, although striking “harder” with “next to impossible” probably gets us nearer to the truth. It is also true that “… potential investors need to know that funding will be there even in a bad state of the world …”, but while that funding comes with the restructuring option they will not be interested, not enough of them at least.

If nothing else, the restructuring option costs up to three notches in credit rating. Without the ESM, we would probably not be flirting with junk (a status which now looks inevitable, not because of anything to do with the Irish economy, but because the Germans have insisted that Greece defaults).

In a sane environment, it would be worthwhile expending political effort on this issue. However, by now it is self-evident that the ESM terms will not be fundamentally changed, and that the Germans will push for restructuring as something more akin to a normal tool of policy rather than a true last resort. The “German Narrative” was nicely nailed in the WSJ response to Sinn (link on Karl’s thread below), and even though this narrative is flawed, unfair and hypocritical, we have no hope of changing it.

If we want to avoid a sovereign default then we have come to the point where we must take matters into our own hands. We must ensure our finances are in such a position so as to not need the ESM in 2013. Professor Kelly argued for a sharp fiscal adjustment. There’s got to be a less painful way than that and fortunately there is. Daniel Gros’ work makes it clear that we as a country are not insolvent. We have a large public debt yes, but also large private sector foreign assets. We need to use a small proportion of the assets to provide long-term funding to the state.

In practical terms, and assuming no further banking system surprises, we will be 20-25bn short come 2014. After that there is over a two year window without redemptions, by which time the situation should be fundamentally better than now. Therefore we must raise this 20bn or so from our own pension and insurance funds by their purchase of 20/30 year sovereign annuities. Such an outcome, by the way, would only put us into the position of most other countries’ pension funds –and one we were in once – in having a minority percentage held in domestic government debt.

In a sense, we need our own internal “Vienna Initiative”. Our institutions should be strongly encouraged to purchase new long-term Irish securities – possibly aided in this matter by a third party rather than the NTMA setting the coupon level. They should do so voluntarily – they will certainly get a good yield, and their very participation would practically eliminate the risk of a default.

I can understand many folk being extremely uncomfortable with this kind of initiative. I am too, and in normal circumstances, would never support it. But it doesn’t get any more serious than the situation right now. A sovereign default is not simply a matter of wiping the slate clean – it could see capital controls, multinational flight, and our banks literally having to close the doors. And these things certainly aren’t in the general interest of the pension fund beneficiaries.

We either do this, or it’s the sharp fiscal adjustment. But we have to do something. Dependence on the whims of these clowns in Germany could destroy us.

I met Brian Lenihan briefly this Christmas at the St Patrick’s Cathedral Carol Service.

It was an odd situation given what the the country was going through and all the very strong opinions about the government’s various decisions, but I was struck by his out-going engergy, willingness to talk affably with one and all, and perhaps more charisma than came across on television. he was a very handsome man too.


In any case, the question is irrelevant. What matters on a blog is the discussion and whether others find one’s arguments persuasive or not.

It is incredible that you would think that, which was in a roundabout way why I asked in the first place.

You say things that are difficult to credit as being part of an personal political philosophy (the dignity of debt springs to mind, how Thomas Davis would have been behind the moral logic of the bailout, and so on and so forth) while clearly being well informed generally about all the issues involved. As a result I have gradually become suspicious about whether you are contributing in an individual capacity. It could just be that we are dogs who have very different ideas on what the “good” is.

The thing is that the Internet is a medium for the exchange of ideas (and “facts”) which is more amenable to poisoning, astroturfing and planting than any so far invented. Very many kinds of organizations, but particularly PR firms, privately funded think tanks and government bodies, are engaged in both monitoring and attempting to gently shape or cloud debate. For this reason one of the first things to ask about any argument made on the Internet is why it is being made and by whom, particularly if the arguments’ unconventional wisdom, hard-headed realism and radical insight seems surprisingly supportive of capital, large institutions or land war in Asia.

As an example it is interesting to me how the idea that the state might end up with unlimited liability for the debts of private financial institutions, in a currency union or otherwise, became popular.

There is a lot at stake here, not just money and not just for Ireland.

The policy straitjacket that comes from the ECB cuts two ways with providers of sovereign funding. On the one hand, it raises the pain threshold that has to be breached before we default. On the other hand, it guarantees that if a default actually occurs it will be really bad for holders of sovereign debt, with much less available to holders of sovereign debt once official lenders and bank bondholders get their cuts.

My judgment is that the first outweighs the second in the eyes of sovereign bond markets.

I would argue, also, that the ECB’s intervention is screwing up the country’s ability to repay by damaging medium to long run growth potential, through a toxic combination of high public debt levels and protection for sheltered sectors.

A worse enemy than we are prepared to admit.


Broadly agree, but default does not arise in the Irish situation. The Greek and Portuguese debt overhang is unsustainable because future growth prospects and the ability to generate tax revenue to service that level of debt are non-existent. Ireland’s debt overhang is primarily caused by bank losses, bank recap and any liability for the ICB’s ELA. But most of this is backed by assets, to some extent, that may and probably will be realised. With some sensible structural reforms the structural fiscal deficit is manageable and there should be no question of default on holders of existing sovereign bonds. The key task is to replace the ECB’s and ICB’s ‘liquidity’ support with appropriate funding to take the banks off the state’s back.

Btw, any idead when these EZ bank stress test results will be revealed.

And it seems the US TARP made a profit, but they weren’t generous enough with household debt relief so the market is still tanking.

@Shay Begorrah – your real name of course


That is not an unreasonable request Mr Hunt, and it is not an unreasonable policy for a blog to require real names to be used.

However since I work mainly in the private corporate sector and on a contract basis I prefer not to live a public life. I have commented on the Internet in my own name only a handful of times in the the last fifteen years, and only on the least contentious of issues, the combination of Internet search engines and touchy clients being an awkward one.

The attached Der Spiegel link will bring bloggers up to date on the situation in Germany.


I would agree with igsy in regard to his analysis of the situation but would be uncertain as to the exit route that he proposes. In the short term, Ireland can do little but sit and watch while, no doubt, pointless comparisons are drawn with Iceland which has returned successfully to the bond markets. Pointless because the secret of the success of Iceland lay in having a plan, sticking to it and having the freedom of action to do so. Ireland has no plan and is giving every indication of not wishing to stick to the plan which a majority of the population seems to think was inflicted upon it (largely as a result of both naive political behaviour in Ireland and a lack of any consensus at expert academic level).

The bright spot is that the “German narrative” is clearly running out of steam. Apart from the article in the WSJ, Gavyn Davis in his blog on the FT has also demolished the Sinn thesis.

On the point made by Paul Quigley as to whether there is a sea change in the direction of German policy, I would think not. One school of thought is that Germany has hitherto lacked a respectable outlet for eurosceptic opinion and that this role was taken up by a conservative constitutional court. What is now happening is that the consensus is breaking up and euroscepticism becoming respectable with the FDP (Liberals) moving from the most pro-Europe party to the one being most opposed, a position hotly contested by the CSU (Bavarian wing of the Christian Democrats)

Far from having a plan and sticking to it, Iceland had a plan which could not be implemented because the people got to vote on it. More direct democracy and less sticking to plans designed to appease outsiders could do us a power of good.

@ BeeCeeTee

I tried to cover this point, no doubt inadequately, by referring to the “freedom of action” that the Icelanders enjoyed, including direct consultation of the people.

If Ireland is to create a credible narrative – in the eyes of the country’s creditors which are the only ones that matter – it has to identify the point at which the country’s freedom of action is limited by its responsibilities as a member of the euro i.e. where joint responsibility begins. This is a difficult exercise and I suspect that the dividing line will be drawn in a rough and ready fashion as the ECB exits its “non-standard” measures.

But the government has to come to grips with the real problem which is as identfied by igsy. We do need an Irish version of the Vienna Initiative. Official utterances to date suggest that policymakers are simply insensible to the implications of a second bailout.

@ All

It seems that Merkel has finally begun to recognise which side Germany’s bread is buttered on.


The title reads that Merkel sees the economic upswing in Germany threatened by the Greek crisis, refers to the threat of a repeat of the Lehman’s experience, which resulted in a 5% drop in German GNP, underlines that 60% of German exports go to other European countries and warns against the dangers of a disorderly sovereign default.

Her interview is available on the net, no doubt nicely timed to head off the popular German press tomorrow (Sunday) and the markets on Monday.

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