“The agenda for the Irish Government is not altered by the Greek crisis…an end to payouts to unguaranteed bondholders in failed Irish banks. ”
Does that include AIB? ILP? Bank of Ireland?
“Concessions on these three critical issues will not be enough to make the situation manageable without the elimination of the budget deficit in the shortest possible time span”
Have you a view on the “shortest possible time span”?
‘The refusal to contemplate a Greek default is touted as a defence against contagion and spillover effects on other troubled eurozone members. It is having precisely the opposite impact.’
Agree.
You either write down debt or expand the base – the ECB base is static to falling this past year or so.
Its obvious to me they want the crisis to continue so that their clients can pick up state assets on the cheap.
Once these vultures gain assets especially Greek assets since we sold our soul many years ago they will monetize as it is impossible to make money out of a utility otherwise.
They probably have grander strategic goals they wish to accomplish but this is their present tactical objective.
This base contraction was FED policey 1937/38 ,possibly as a reaction against the nationalisation of Gold.
This game has been played many times me thinks.
Far too early for debt forgiveness. If Greece shows that it can live up to its commitments under the Euro’s Stability Pact, that might be the time to say “you are now behaving well but we recognise that the sins of the past are just too great a burden, so we will forgive those sins”.
A windfall giveaway now to any PIG would pose huge moral hazard. How, just for example, could Spain force through some unpopular austerity measure when its populace will be aware that ultimately there is debt forgiveness on the cards.
The Sunday Times, which quoted an unnamed ECB official in the following terms: “In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100bn into Irish banks. What we are doing is actually illegal, but we have being doing it because we want to help Ireland. Maybe we might come to the conclusion that we should stop.”
Anonymous quotations… How convenient!
If I am not mistaken, according to the Bank for International Settlements, Spanish banks currently hold $600 million in Greek debt, Italian banks hold $2.6 billion, UK banks hold $3.2 billion, French banks hold $19.8 billion, German banks hold $26.3 billion and other Eurozone countries hold a combined total of around $15.7 billion in Greek debt. U.S. banks also hold $1.8 billion in Greek debt and Japanese banks hold $500 million in Greek debt.
Dare I ask again, a question I am repeating since March 2010, who are the owners of CDS?
The longer these protracted defaults continue, the more I come to think, they are doing it for they have no answer to the question above. All this has the makings of what i would call the perfect crime.
Jagdip,
relieving less than the total still outstanding in unguaranteed debt of Irish banks (eg only the Anglo and INBS amounts) is not going to be enough. If the bond market is correct (ten-year yielding 12%) the bank bondholders can only get paid at the expense of sovereign bondholders.
On the deficit, we should have got the number below 10% of GDP this year. The new target of 3% in 2015 is not persuasive, if you believe that the objective should be to avoid a sovereign default. What’s wrong with 7, 3, zero for 2012, 2013 and 2014?
What do you think would have happened to Irish yields if credible fiscal action had been taken along these lines, and our European partners had agreed to stop paying unguaranteed and junior bank bondholders, last November?
@Colm McCarthy
If Europe had political leadership, it would long since have taken the necessary steps to isolate the sovereign debt problem to Greece, Ireland and Portugal, with individual tailor-made solutions.
The absence of political leadership is the nub of the problem. And it appears right now that is going to change anytime soon. But events often overtake leadership inertia.
And assuming Brendan Keenan is correct (Sun Ind today), then the Greeks are in a far better position to tell the bondholders to get lost than most people believe.
From his article:
But not all the Greek statistics are worse than ours. Believe it or not, their public finances are better. Revenues are covering government spending before interest payments — ours are still a massive 6 per cent of GDP short.
Again you are correct in bringing up the issue of closing the deficit. Difficult though it might be, it seems far better to take a faster planned approach than what could be a forced chaotic cutting, the timing of which will be completely outside our control.
good article. One would have to assume that the Irish govt. would be as keen to see a reduction in our debt as much as a reduction in the greek debt.
By the way a shame that such a fine article appeared in such a disreputble paper as the Sindo.
@colm
“Ten-year yields for Italy, Europe’s largest bond market, have shot back up towards five per cent, close to the danger zone, and one of the ratings agencies (Moody’s) has threatened a downgrade.”…..and…”There is a high risk of accident in the Spanish or Italian bond markets, or of an unexpected bank failure or a government collapsing somewhere”
couple of points on Italy. First, what to me seemed very odd trading – and lack of – in Italian bank shares on Friday. Second, the debt dynamics for Italy are different because of the total outstanding. You can pick any number you like for a GDP path but you don’t have to be too cynical about it to conclude that if the spread over bunds does not compress then Italy’s debt profile is not sustainable. For those who have been knocking around a while it doesn’t seem that long ago that the idea of Italian bonds yielding just 2% more than bunds would have raises a few eyebrows.
“Had the May 2010 deal provided for debt writedown, the Greek crisis would be over by now. The crises in Ireland and Portugal would probably have happened anyway but would have been easier to handle and the European sovereign debt market would surely be less fragile.”…….might overstate things a bit. There is surely a problem in both directions in that re-setting Greece with lower outstanding debt without genuine reform would have been an interesting calculation for potential buyers of longer dated Greek bonds. How would the reforms have happened? It must be the case that the pressure for reform in the piigs would have been reduced. If I were employed as a policy advised to a public sector union I would point out that the tactical imperative of resisting reform to whatever extent possible would be significantly boosted.
“The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks.”
…..cue Noonan on RTE radio today.
He confirmed Ireland’s decision to excuse senior unsecured unguaranteed bank bondholders from “participation” has been entirely voluntary – at least under the new government, making it clear that JCT throughout many conversations never said or threatened that such action might lead to the ECB withdrawing its liquidity provision to Irish banks. He directly contrasted this with the threat made in respect of the collateral eligibility for Greek paper recently. He then went on to say “but a nod is as good as a wink to a blind horse”.
So Irish negotiators have done the ECB a great favour of behaving as if they had been threatened – and granting the ECB the positive benefit to their negotiating position of the threat – but without making the ECB suffer the consequences in terms of reputation or responsibility for the ultimate course of action of having made the threat. What a gift.
Ireland’s negotiators should have extracted the threat in reality if they were going to proceed as if it had been made. Once made, the threat could have been used to batter the ECB at every opportunity, firmly dumping discontent among the public (not just in Ireland) on the institution. It is not hard to imagine a popular movement of discontent among the wider European population over this (now) clearly ECB instigated policy. Getting rid of that unpopularity would have now been part of an incentive for the ECB to back down on the question of senior bondholders. as it is Ireland’s government have shielded them from the flack.
Who is it that is coming up with Ireland’s strategic thinking?
@ Colm McCarthy
“If Europe had political leadership, it would long since have taken the necessary steps to isolate the sovereign debt problem to Greece, Ireland and Portugal, with individual tailor-made solutions”.
One cannot, unfortunately, overlook the political difficulties associated with selling to national electorates in creditor countries the cost of such solutions although, in my view, this is the objective towards which the EZ is stumbling. The picture should become clearer when we have the actual texts of the changes to the EFSF and ESM which, one assumes, will not be released until the next round of Russian roulette is over (with, hopefully, nothing terminal having occurred).
“The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks”.
There should be some resolution of (i) in the not too distant future as the choreography at the recent European Council suggests that the “Gallic spat” is becoming a liability for all concerned. Apart from anything else, the changes in the EFSF should trigger some adjustment as indicated by Klaus Regling.
As regards (ii), this is a non-starter. The overall movement is in the other direction. Irish banks have to recover credibility on the back of the sovereign recovering its credibility (which is not helped by unnecessary announcements of no increases in income tax and no cuts in social welfare).
As regards (iii), Noonan said today that he would be returning to this issue in the Autumn in the context of a big Anglo-Irish redemption due in December.
@ Brian Woods II
I agree completely. This is the “inconvenient truth” which many in Ireland case are trying to avoid.
@ Georg Baumann
From what I have been reading, a lot of the CDS contracts have been written by US banks (which might help explain the attitude of Geithner).
@Colm
Actually IMHO the risk of (economic and political) contagion is much bigger. Belgium ,as well as Italy and Spain, is in serious trouble as well and also has the the added inconvenience of not actually having a Government.
Belgium poses a significant risk to the other Benelux countries. Greece (and some other Balkan/Central European states) poses a serious risk to Italy and Austria. Portugal poses a big risk to Spain. Ireland poses a big risk to the UK and some Northern European states. The Baltics pose a big risk to Sweden.
France has serious troubles of its own and the whole lot poses a serious risk to Germany (together with its East European satelite states )while this whole crisis is not very good for Russia, which like Germany and France, also face national elections next year.
It was interesting last week that the Greek Parliament held a vote of confidence in the PM (which he survived) but postponed a vote on austerity measures ,until the last minute next week.
IMHO internal Greek politics and EZ/EU confusion are no longer operating on the same page. Greeks want to avoid attracting the interest of their military (so have chosen their leadership accordingly) but have had enough of austerity measures which they believe are counter-productive.
The Greeks (at least 75% of the population) do not want a further austerity plan. nNw that the Prime Minister has survived for another while (and understands that Germany and France need this deal more than Greece ) it is reasonable to speculate that the Greek parliament will not vote for these measures.
The consequences for Greece are not necesarily acopalyptic and the Euro will still remain in circulation (as they are in some FYR states which are not members of the Euro) within Greece until it can be gradually replaced by the Drachma.
IMHO European politics, not economics, will bring this crisis to a speedy (hopefully not messy) resolution. Viewed from a political perspective Ireland is actually less vulnerable than vast swathes of European nations inside and outside the EZ and EU. This is one important reason why recent FDI in Ireland is a very high percentage (possibly 10-1 on a per-capita basis) of the total in the EU. It is also illustrated by the fact that there has not been “a race for the airports” among our recent, mainly European, immigant population.
Ireland needs to support the European Project (if its has a future), realise that the the era of Euro currency may well be coming to an end AND ALSO realise that we do not have an obligation (or ability) to dispropotionately”carry” the rest of Europe. It is fortunate that we have a very long continuous democracy and a proven history of (despite what “post boom mourners” like to claim) comparitively good Governance.
I enjoyed your article ,Colm, as it gave me (and no doubt many others) plenty of food for thought.
Best…L
@Colm McCarthy – it’s tangential to the thrust of your article, but CDS rear their amorphous head again, when you reference the freezing of the credit insurance market, mention the near-impossibility of selling non-insurable debt, and raise a major issue concerning the shape of a Greek restructuring – will it or will it not be deemed a credit event (by ISDA – the rating agencies have no say)?
Firstly, there WAS no CDS market 10 years ago – and bond markets functioned quite well without them. As they became popular – due to the complete mispricing of their option content by the likes of AIG up to 2007/08 – they have become more mainstream, but are not in fact that widely used. The cost of a CDS on Irish 5-year, for example, has for years exceeded the spread over German 5-year yields, and this is true of all eurozone countries – including Germany, where you would reduce the already meagre yield by about 40bp if you bought CDS today. In the US, 5-year CDS on Treasuries will cost 50bp per annum – against a yield on the Treasury of 1.40% or so.
The only public data on CDS comes from DTCC ( http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5), and noone seems to know what percentage of the market they hold, nor if that unknown percentage is either representative or constant. Greek debt, according to the data, has extant a gross $79.2bn of CDS, and a net of $5bn; the equivalent numbers on Irish debt are $40.1bn and $4.1bn. For both countries the gross has increased in the last year, but the net has declined.
On the face of it, these net data show CDS as a complete sideshow. Yet there are rumblings that Geithner is extremely worried about US banks’ exposures to the market – they would have been the main writers of CDS business generally, along with a handful of larger European banks. If true – and a Graham O’Neill alludes to the potential American banking problem in a SBP article today – the market in CDS is possibly a lot larger than the public can see, and the net exposures reported by DTCC may be meaningless.
Alternatively, maybe the DTCC data should be looked at from a gross point of view, as it’s unclear what netting process produces the data published.
A lot of maybes and ifs, but there’s definitely a smell coming from the whole CDS area, and the potential exposures arising.
Indeed…we are in a monetary union, yet lack unified political thinking, a fine mess. At this stage it’s in Ireland’s best interest to help formulate and promote an overall solution. It is time for us to be bold, the attention is on us, so a quality argument can thrive.
I’d suggest we set up a small working group, and sponsor a symposium. Put Peter Sutherland in as chairman, and utilize capable spokespeople (e.g. Pat Cox). Get some hefty academics/public policy people involved, e.g. Stanley Fischer type experience. Give them 6 weeks to trash out ideas, and then have the symposium. Put good PR people on it and have some catchy ‘6 point plan’ , work international media contacts and diplomatic channels.
It would be a lot better than sitting around on our collective ass, and there’s a good chance it’d work
@Desmond
Why did you write that rubbish , you made this Dork vomit all over his PC.
Please post a clear warning before mentioning those names in civilised or semi – civilised discourse.
@George
The Spanish exposure to Greek debt from the figures you quote appear manageable ….but the real problem for Spain appears to have been identified by Frank Daly today. Apparently their banks have 450b exposure to property loans with only 45b of provisions. He thinks they are being delusional. If he is correct with the numbers then this is the next time bomb set to blow regardless of what happens in Greece this coming week.
@Colm
“What’s wrong with [deficit:GDP%] 7, 3, zero for 2012, 2013 and 2014?”
I suppose the thinking is that the 15% compound growth between now and 2015 together with five years of emigration will both cushion the austerity, relieve the strain on the dole and increase the likelihood that austerity doesn’t lead to a double-dip.
In practice recognising now that most of the adjustment will be in cuts and new taxes and considering the total picture now to help shape a better society together with a competition czar to drive down costs and a better personal bankruptcy regime to deal with legacy debt, might be better plan.
It is apparent from the above that some commenters missed the revelation, via alphaville last week, about the distribution of cds writers in Greek debt. Here is the link:
I do not want to “throw water” on your idea for a “symposium”.
Actually I belive a 4-6 week symposium would be a good idea provided the superannuated facilitators , academics/public policy people realise it is a national duty and not expect to be paid for it.
Personally I would be delighted to participate for the price of a train ticket and refreshments. It would also be a good idea if PR people charged fees which reflected the fact that this may actualy ensure future earnings. (Perhaps Minister Howlin should “sign the cheques” for the symposium)
However IMHO the focus should be on saving the Irish “collective ass”.
We comprise 1% of the European population (considerably less if we consider Russia, the European CIS states and EEA members) and while IMHO we have every obligation to support the European Project, if it still has a future, we need to recognise our limitations.
We may have preserved (and eventually restored) civilisation in Europe after the Roman Empire collapsed but personally I think ,unless we have divine assistance, we may be better off concentrating our energies on our selves and our role within Europe.
By all means an affordable 4-6 week symposium but if we can help our selves (or “collective ass”) first than perhaps we may be more helpful to our European partners who seem to be increasingly confused about what the European Project actually means to them and their neighbours.
Your well thought through proposal (even if I differ slighlty on the objective )is an excellent example of why I take time to follow this site with avid interest.
Colm, you continue to massive figures for holdings of debt for Continental banks. But like I’ve told you, your figures (I don’t know where you fish them from) for the holdings of banks of Greek debt are a massive overestimate or else out of date. For proof Just look up, either 1) what the banks said in their most recent reporting of quarterly results. Or 2) look at reports by ratings agencies (that have easier and more reliable access to info). Whatever, you need recent data as holdings can change quickly.
Unfortunately if we go on repeating numbers like these, we might begin to believe them and believe the narratives based on such numbers. What the rating agencies say makes much more sense to me – the real danger for Europe’s banks is the indirect one from financial instability and the hit to prospects for growth. The danger is not from direct holdings… were that to be the only worry!.
As for Gerog’s comment about the BIS data source, well many of us know here how such data has been used and abused when applied to Ireland. The data above does not reflect today’s reality or risks.
Anybody got any idea what the source is for these figures, and the DoF quote? It appears to be an official one. But I didn’t come across it.
Colm
I enjoyed the article and agreed with most of your arguments, but the following caught my attention (I note Aiman above has already made a similar point):
“… the credit insurance market is beginning to freeze. This may seem a technical point but it is important: investors will be reluctant to hold uninsurable risks, including Spanish bonds, if the lack of clarity continues.”
I am not convinced that the CDS market is improving market stability and liquidity. As a general rule “increasing the span” of available securities is positive but perhaps not in this case. the CDS market seems a dysfunctional one which perhaps does not really increase liquidity when it is needed and contributes to market instability.
Good article as usual
There is a story about a man falling from a 50 storey building. All along his fall, in order to reassure himself he says “up until now everything is fine”, “up until now everything is fine”, “up until now everything is fine”.
But what’s important is not the fall – it’s the landing….
That’s us..
@Colm
Good article.
From an Irish perspective, I do think that the best resolution of the Greek situation is more subtle than you suggest, however.
For Greece, the best course does seem to be an early and decisive restructuring. The primary surpluses required to first stabilise and then bring down the debt ratio to safe levels does look beyond their political capacity. Postponing the necessary action leaves the nature of the future bailout\bail-in regime up in the air, repelling potential investors for all countries where any doubts about solvency exist, and so risking a spread of the crisis.
What Ireland and other vulnerable countries need most is clarity about a future regime that gives investors comfort as is feasible that they will get their money back. This requires a reliable yet realistic fiscal Lender of last resort for countries meeting the ex ante conditions of their programmes. A regime that only triggered restructuring for such countries as part of an extension of a financing package when the debt ratio reached, say, 130 to 140 percent of GDP (the precise trigger might be country specific) , would allow for negative shocks to growth and even to the extent of the ultimately revealed bank losses.
You are absolutely right about the importance of a reliable LOLR to the banking system, though we probably have to accept that this will not be forthcoming as a medium term facility. But a reliable fiscal LOLR is also critical; much more important, in my view, than the other two items on your list.
What I am suggesting does require that the net lending countries take on more risk in certain dimensions. But by giving countries committed to making the necessary adjustments a credible route back to the market — and by reducing the risk of other countries getting sucked in — it is ultimately in the common interest of both net lenders and (actual and potential) net borrowers.
I know I have said this before, but I don’t think it helps our cause to push the grievance against Europe too far — not least for what it does to political support for the adjustment at home. Although I’m sure many will not want to hear it, I think Donal Donovan did a nice job in the Irish Times yesterday noting the differing objectives of the various parties involved in the bailouts. In additional to recognising where they are coming from, it is important to note what we are getting now as well where we think the nature of the support is falling short. In addition to the funding we are getting from the ECB at 1.25 percent on a semi-permanent if as yet insufficiently reliable basis, we are also getting fiscal support at less than half the market rate we would face.
It was almost funny to hear Michael Noonan say today on the radio that the premium above the cost of funds to the ESFS is akin to a handling charge. The ESFS is able to borrow at these rates because it is guaranteed by triple A governments. These governments are already taking on risk — now permanently without preferred creditor status given changes to the proposed ESM — lending to the countries in bailouts, substantially so in the case of Greece. I doubt that the current premium comes close to being adequate compensation for this risk. I think we would have a more balanced and fruitful debate here at home if we recognised this.
Lastly, while the case for loss imposition on Anglo and INBS seniors is a strong one, the amounts are relatively small in terms of the debt stabilisation effort. However, I believe it is incumbent on anyone advocating loss imposition on seniors in the now pillar banks to explain how they will deal with the equal ranking between depositors and seniors in a context where the government would be unable to make depositors whole.
@Colm McCarty
I still hope that a Greek default can be avoided, but I must admit this looks less and less likely. What I do not understand is why you believe that such a default can be in any way a favorable development for Ireland .Don’t you think that Ireland sovereign, if it can avoid default itself, will be shut out of the bond market for years and will be obliged to negotiate a new bail-out and maybe another one after that .Defaulting without balancing the budget first and without a real banking system is not an option, in my opinion.
@Desmond Brennan
“Put Peter Sutherland in as chairman, and utilize capable spokespeople (e.g. Pat Cox). . . ”
Absolutely. We haven’t heard enough from the Goldman point of view. Perhaps Mary Harney and Charlie McCreevy could be prevailed upon to reenter public life and do the state some service.
FWIW Nomura’s figures are
Exposure to Greek Sovereign Debt: France 11bn; Germany 17bn
Exposure to Greek Sovereign + Interbank + Private: France 42bn; Germany 25bn
While at first sight it seems plausible to withhold the “reward” of a writedown until after the reforms have been completed, I’m not sure it works like that in practice. If the Greeks know that sooner or later there will be a debt-writedown, then they have an incentive to borrow more now, since they know they won’t be paying it all back. The ‘sustainable’ level of debt is going to be the same, so the more they borrow the greater the writedown will be, and the more money they will have obtained “for free”.
The problem with delaying any writedown is that existing bondholders are getting out at par and being replaced with official creditors, who will surely take most of the losses when the inevitable occurs. Banks and other parts of the financial industry have a huge incentive to overstate the risks of contagion, since they would be the direct losers of any writedowns. It is an easy game to play – wave your arms in the air about not wanting another Lehman’s (despite the fact that Lehmans was totally different to Greece) or collapsing the Euro, and watch Merkel and everybody else fall into line. Cui bono? Once the game is kept up for another couple of years it will essentially be job done.
@ Colm
Fair play to you for puting your views out there so consistently.
‘The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks.
Concessions on these three critical issues will not be enough to make the situation manageable without the elimination of the budget deficit in the shortest possible time span. If that is not enough, some additional debt relief may also be necessary’
i) and ii) are outside our control. The EU/ECB have bigger fish to fry.
iii) is verboten. Jagdip’s point about AIB, ILP and BoI is also on the money. The rot is spreading at home and abroad.
iv) Progress towards primary balance will be slowed by the political composition of the government, the dead weight of customary expectations in the machinery of state, the centrality of social welfare payments to our domestic economy, and the knock on from slowing global growth.
Eureka has it. We’re going to hit the ground before the parachute opens.
Ciaran sees it too. Its’ the 1930s again. Sauve qui peut.
@john Mch
“In additional to recognising where they are coming from, it is important to note what we are getting now as well where we think the nature of the support is falling short. In addition to the funding we are getting from the ECB at 1.25 percent on a semi-permanent if as yet insufficiently reliable basis”
I think it is incumbent on those presenting the liquidity provisions of the ECB as cheap, to say how they would value the option the ECB have granted themselves to withdraw it at a weeks notice – particularly given Noonan’s wink wink, nod nod stuff from earlier today.
@ All
The following is from a report by Laura Slattery and Derek Scally in today’s IT in case anyone has missed it.
“German finance minister Wolfgang Schäuble has admitted the EU is hoping for the best but bracing itself for the worst ahead of this week’s parliamentary vote in Greece.
If MPs in Athens fail to back austerity measures, that could trigger a full or partial Greek default. If this happened, Mr Schäuble said the EU would “act quickly to ensure that the danger of contagion for the financial system and other euro states is kept in check”.
He expressed confidence that further austerity measures demanded from Greece would be passed but, in a notable rhetorical shift, said the euro zone would survive the possible knock-on effect of a default. “We are doing everything we can to prevent a perilous escalation for Europe but must at the same time be prepared for the worst,” Mr Schäuble said to Bild am Sonntag newspaper”.
@ grumpy
I’ll have a go. I would say that the correct commercial rate for the ECB subsidy is about 10% p.a. So the “option” to withdraw that support is worth about 9% x N x €150Bn.
However, they are not exercising this option. That is what we are grateful for. I would far rather that than to have a non-conditional but still subsidised support at say 9% interest.
@ Colm McCarthy
You may be interested in the link below from this morning’s Le Figaro in the context of the following comment made by you.
“The overall cost of a decisive resolution need not be greater than €250bn and could be less.
This sounds a lot, but it amounts to less than two per cent (once-off) of the EU’s GDP for a year. The financing cost on a long-dated bond would cost as little as one-tenth of one per cent of Europe’s annual output. Some of this burden needs to be borne by private creditors and some by taxpayers”.
The Google translate function does a pretty good job of translation. The French approach heads Merkel off at the pass and puts it up to the German banks.
@ DOCM,
as for who owns CDS, yes, it is no secret that Goldman Sachs and others have positions, however, they do treat the true exposure a secret in their quarterly reports.
This is why I am saying, we do not know who owns them to what degrees., and herein I see the problem.
Perhaps I am wrong in my line of thought here, but if I take Greece as an example, and I stand to be corrected, but it would appear to me that apart from this here:
we do not know the true CDS exposure of Institutions such as Bank of America, Morgan Stanley, Goldman Sachs etc. as they ‘are allowed’ to treat their CDS position a secret in their reports.
Correct?
This is my point, I conclude this to be the true secrecy which enables a certain blackmail potential, as the Banks in question will always threaten systemic risk when faced with demands they dislike. I remember to well how all this started, the drip feeding of Information flow Banks -> Government, with always a few weeks later, ‘we need more’ to be the result.
Not?
As for BIS, while Greek liabilities for example are 93,5 % with European Banks and only 5% with US banks, 30% of the total has CDS contracts attached, in the total value of over USD 60 billion and here the relationship changes dramatically, as these both, direct and indirect derivatives are held to 56,3% by the US and 43,1% by European Banks.
Hence, with 30 billion on the US side, theoretically, depending on how it is concentrated, it could cause a severe solvency Issue for one of the big banks.
In essence, the power of Banks to threaten systemic risk in negotiations only exists because they are still allowed to treat this information as a business secret.
Axel Weber: EU should guarantee all of Greece’s outstanding debt.
We focus too much on Greece. Greeks are quite capable of taking care of their own affairs and look upon Gov’t as an impediment to progress. Greek liquid assets are already placed in secure institutions outside of the EU. There are countries where all you need is a drivers license (photo ID) to open a bank account.
Here in Ireland we are reaping the results of almost a century of cronyism, nepotism and highly questionable ethics. It was generally accepted that in 1947 after 25 years of self government that we would stop blaming the British and others for our own short comings. Over sixty years later we are still in the helpless mode quite incapable of focusing on what we should be doing to help ourselves.
Collectively we created the candy shop on Kildare Street culture and now in order to keep the shelves stocked we go cap in hand beggaring ourselves all over the world.
I see very little on this blog addressing the gov’ts inability to reduce its expenditures or increase its revenues. Liquidity problem or solvency problem at some point in the near future the ECB in particular will stop throwing good money after bad. Reality is for people who cannot face up to impending sovereign debt default and are all in favour of digging the hole deeper. It’d enough to send one back to fingering the Rosary beads.
Would it have been possible to take the bank debt onto the national balance sheet as some sort of subordinated liability?
@ Colm McCarthy
Had the May 2010 deal provided for debt writedown, the Greek crisis would be over by now.
Would this not be akin to giving an alcoholic a crate of whiskey on condition he stops drinking?
It strikes me that that Greece is rotten to the core and say halving its debt last year would hardly have promoted any serious reform.
Ireland has been lucky that after 30 years, it has a credible tax collection system but as regards tackling sacred cows, one can only wonder how many more lives have to be wasted on the dole before the vested interests are beaten.
UCC’s Seamus Coffey has produced data on expected public debt in 2015; deficits account for €100bn and gross current expenditure through all government departments and offices was €53.4bn in 2008. For 2011, the forecast is that this expenditure will be €52.8bn, a reduction of just €0.6bn or 1%.
Corruption in Greece has simply destroyed the country.
Greece’s revenue from income tax was 4.7 % of GDP in 2007, compared with an EU average of 8% according to Eurostat statistics. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a Eurozone low of 32% even as economic growth averaged 4.1% a year.
A survey published by the anti-corruption group Transparency International in March 2010 said 13.5% of Greek households paid a bribe in 2009 – – €1,355 on average.
George Papandreou in 2010: “In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption.”
Greece has 180,000 teachers and one of the world’s best teacher-student ratios but 20,000 teachers “work” in administration because there are no classrooms for them.
Nevertheless, an EU report shows that private tuition in Greece was estimated at more than €950m per year, which is equivalent to 20% of government expenditure on primary and secondary education.
@Micheal
God you are self righteous – the money flow in Ireland was centered on private credit formation – so that is where the majority of the corruption occurred.
The Irish goverment adopted a stance of see no evil hear no evil.
Much of the money flow in Greece went through Goverment coffers so that is where the majority of the corruption occurred.
Now Irish people are breaking their debt contracts with banks & Greeks are not paying their taxes to service Goverment expenditure.
Its the same thing different mechanism – all of this was about recycling excess credit from core surplus countries that were prevented from getting into healthy fiscal debt due to the crazy stability & growth pact.
This is the kind of stuff the Greeks paid for – they neither had sufficient domestic defence industry nor a reserve currency yet had the highest defence expenditure per capita in Europe !!
carecon.org.uk/Armsproduction/Papers/efidpe.pdf
Given that Germany & France had a very low defence expenditure now they had to find a credit mechanism to export this industry and thus save it.
Its either high taxes to pay for goverment or large private debt contracts – you cannot have both.
@ Dork, Karl, Michael
I think the attacks on Michael are unwarranted. He speaks eminent sense.
@Brian
Ok I admit I like using colourful language as I am a Dork – sorry about that but it wasn’t that colourful – there’s simply a fundamental problem with the Euro – its the stability & growth pact thingy , it does not foster stability nor does it create the conditions for long term growth.
Its a ticking leverage time bomb thats about to go off unless they flood the system with cash to prevent a credit nuclear reaction.
well done colm very good peice as usual
i must say i thought grumpy hit the nail on its head with irish goverment policy seems to be badly thought out and consists of doing what we are told to do even against our own interests such as bank bond holder hair cuts versus soverigne default
if we are being threatened by the ECB let the people know it will strenghten our position as regards bank bond holder restructuring it will also open european eyes to the shenaigans that the ECB is up to at the behest of the french and germans
btw here`s a quote from Stefan Homburg a german economist in an article from Der Speigel
“Many politicians have also come to the realization that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU”.
The Germans are not without blame either.
They ran down domestic consumption and created false markets for their goods with cheap credit. They don’t have a minimum wage. They were one of the last countries in Europe to open up to Eastern European workers. They consistently score low on satisfaction with life surveys.
It’s simple. Helmut has some money that he doesn’t want to spend. He gives it to the banker. The banker must give him a guaranteed return. So the banker invests in what were seen as risk free options – the sovereign debt market (and a really risky dumb option – peripheral banks)
It all began because Helmut wanted interest on the money he wouldn’t spend. Would have been much better if he had gone on holiday to Greece or bought a nice Irish steak.
Now we’ve reached a stage where the Minister for Health has to check babies in prams for loose change on his way to open up hospitals ……I tell you….
@ Dork
“Its a ticking leverage time bomb thats about to go off unless they flood the system with cash to prevent a credit nuclear reaction.”
John McHale note, this is surely the Metaphor of the year.
The Germans went through a rough spell in the 90s when their wages became uncompetitive. The evidence was clear to see with second hand stores on every corner and shops boarded up. The Germans addressed the problem by reducing Gov’t expenditures and pressuring wages down. In Ireland we address a similar problem by increasing Gov’t expenditures and propping wages up. Our present problems are not new as we have consistently since 1922 made every endeavour to keep wages uncompetitive even when immigration was running at 50,000 per year. The I am all right Jack mentality is firmly entrenched and extends into the heart of Gov’t where the idea that they are there for the greater good not to foster cronyism, favouritism and nepotism has yet to permeate.
The Germans do the right thing, they work efficiently, they are aware that there is a concept known as the “greater good”, they save, they are honest, they punish shady politicians at the ballot box, and of course they recognise that balancing budgets is a good thing.
As to the Germans not letting in Eastern European immigrants, this was done because they had 16% unemployment in East Germany. It was pointed out to me in Germany that Ireland overbuilt because skilled Eastern European workers facilitated the orgy of overbuilding that ended badly. The Germans also recognised that the ECB policy of low interest rates allowed the German banks to lend to banks on the periphery who in turn fanned the flames of speculation by lending recklessly to anyone driving a Mercedes and having a van with builder, contractor or developer written on it. I might add that only a couple of weeks ago it was pointed out to me that the workers on a now completed and NAMA administered project was built by Poles without benefit of a single Irish supervisor. The Germans I meet are not happy about the lack of due diligence exhibited by their banks and would be opposed to bailing out failed banks in Germany.
We are very quick to spread blame and it is high time that we looked around us to see who did the right things and followed their example
@ Eureka and Mickey Hickey
I respectfully suggest that the real point is not what Germany has done but what other member countries of the EU allowed it to do. There should, for example, have been no agreement on enlargement other than on the basis of ALL countries of the EU applying the same rules on free labour from the outset. Arguing high levels of unemployment is not credible as the same argument could be used by most countries.
It is also demonstrably inaccurate to argue that Germany has achieved a level of competitivenes that has to be emulated by the othe countries of the EU because this is a logical impossibility. Germany runs a near 6% surplus on its trade in goods and services and this has to be matched by equivalent deficits in the countries to which it is selling. The overall level of growth in the German economy has been anaemic because of the weakness of internal demand, a problem which the government has done nothing to remedy.
After all, what is the purpose of exports other than to pay for imports?
As to honesty, German business practice is as peppered with scandals as any other major exporting state and, indeed, and I stand to be corrected on this, the country’s standing in the corruption league is not that high.
But the bottom line is that the continuation of major economic imbalances in the EU can only lead to one thing: its destruction. The Euro Plus Pact is a very timid recognition of the need to try and avoid this outcome which would be unfortunate for all concerned, Germany included.
We live in a world where competition is global and there is no place to run, hide and be safe. Each country in the EU has a lot of latitude to arrange its internal affairs as it sees fit. The most important aspects of the EU is that it provides small countries like Ireland with unfettered access to a large market and a level playing field. Within this framework we were very successful largely because we had to observe EU practices as did every member of the EU. The Euro Zone protected us from currency fluctuations and gave all of us access to low cost loans which could be used prudently or irresponsibly. The overwhelming majority of the population used low cost loans prudently. However, due to irresponsible Gov’t, an absence of Bank regulation, and bankers who would have been grossly overpaid at minimum wage we went off the cliff in 2007 and immediately started to dig the hole deeper with each passing month.
The imbalances in the Euro Zone are in descending order Greece, Ireland, Portugal, Spain, Slovenia, Italy, Belgium and not in Germany, France or the other nine members.
I am not one to cry over spilt milk. What infuriates me is that month after month and now year after year we continue to dig the hole deeper. The world is looking at us and wonders what happened to the Irish who at one
time in the not so distant past were looked upon as being intelligent and businesslike.
What happened to us was, in large part, the Euro. There is no country in the world that wouldn’t have an asset bubble if real interest rates were negative.
47 replies on “Spreading Contagion”
@Colm,
“The agenda for the Irish Government is not altered by the Greek crisis…an end to payouts to unguaranteed bondholders in failed Irish banks. ”
Does that include AIB? ILP? Bank of Ireland?
“Concessions on these three critical issues will not be enough to make the situation manageable without the elimination of the budget deficit in the shortest possible time span”
Have you a view on the “shortest possible time span”?
‘The refusal to contemplate a Greek default is touted as a defence against contagion and spillover effects on other troubled eurozone members. It is having precisely the opposite impact.’
Agree.
You either write down debt or expand the base – the ECB base is static to falling this past year or so.
Its obvious to me they want the crisis to continue so that their clients can pick up state assets on the cheap.
Once these vultures gain assets especially Greek assets since we sold our soul many years ago they will monetize as it is impossible to make money out of a utility otherwise.
They probably have grander strategic goals they wish to accomplish but this is their present tactical objective.
This base contraction was FED policey 1937/38 ,possibly as a reaction against the nationalisation of Gold.
This game has been played many times me thinks.
Far too early for debt forgiveness. If Greece shows that it can live up to its commitments under the Euro’s Stability Pact, that might be the time to say “you are now behaving well but we recognise that the sins of the past are just too great a burden, so we will forgive those sins”.
A windfall giveaway now to any PIG would pose huge moral hazard. How, just for example, could Spain force through some unpopular austerity measure when its populace will be aware that ultimately there is debt forgiveness on the cards.
The Sunday Times, which quoted an unnamed ECB official in the following terms: “In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100bn into Irish banks. What we are doing is actually illegal, but we have being doing it because we want to help Ireland. Maybe we might come to the conclusion that we should stop.”
Anonymous quotations… How convenient!
If I am not mistaken, according to the Bank for International Settlements, Spanish banks currently hold $600 million in Greek debt, Italian banks hold $2.6 billion, UK banks hold $3.2 billion, French banks hold $19.8 billion, German banks hold $26.3 billion and other Eurozone countries hold a combined total of around $15.7 billion in Greek debt. U.S. banks also hold $1.8 billion in Greek debt and Japanese banks hold $500 million in Greek debt.
Dare I ask again, a question I am repeating since March 2010, who are the owners of CDS?
The longer these protracted defaults continue, the more I come to think, they are doing it for they have no answer to the question above. All this has the makings of what i would call the perfect crime.
Jagdip,
relieving less than the total still outstanding in unguaranteed debt of Irish banks (eg only the Anglo and INBS amounts) is not going to be enough. If the bond market is correct (ten-year yielding 12%) the bank bondholders can only get paid at the expense of sovereign bondholders.
On the deficit, we should have got the number below 10% of GDP this year. The new target of 3% in 2015 is not persuasive, if you believe that the objective should be to avoid a sovereign default. What’s wrong with 7, 3, zero for 2012, 2013 and 2014?
What do you think would have happened to Irish yields if credible fiscal action had been taken along these lines, and our European partners had agreed to stop paying unguaranteed and junior bank bondholders, last November?
@Colm McCarthy
The absence of political leadership is the nub of the problem. And it appears right now that is going to change anytime soon. But events often overtake leadership inertia.
And assuming Brendan Keenan is correct (Sun Ind today), then the Greeks are in a far better position to tell the bondholders to get lost than most people believe.
From his article:
Again you are correct in bringing up the issue of closing the deficit. Difficult though it might be, it seems far better to take a faster planned approach than what could be a forced chaotic cutting, the timing of which will be completely outside our control.
good article. One would have to assume that the Irish govt. would be as keen to see a reduction in our debt as much as a reduction in the greek debt.
By the way a shame that such a fine article appeared in such a disreputble paper as the Sindo.
@colm
“Ten-year yields for Italy, Europe’s largest bond market, have shot back up towards five per cent, close to the danger zone, and one of the ratings agencies (Moody’s) has threatened a downgrade.”…..and…”There is a high risk of accident in the Spanish or Italian bond markets, or of an unexpected bank failure or a government collapsing somewhere”
couple of points on Italy. First, what to me seemed very odd trading – and lack of – in Italian bank shares on Friday. Second, the debt dynamics for Italy are different because of the total outstanding. You can pick any number you like for a GDP path but you don’t have to be too cynical about it to conclude that if the spread over bunds does not compress then Italy’s debt profile is not sustainable. For those who have been knocking around a while it doesn’t seem that long ago that the idea of Italian bonds yielding just 2% more than bunds would have raises a few eyebrows.
“Had the May 2010 deal provided for debt writedown, the Greek crisis would be over by now. The crises in Ireland and Portugal would probably have happened anyway but would have been easier to handle and the European sovereign debt market would surely be less fragile.”…….might overstate things a bit. There is surely a problem in both directions in that re-setting Greece with lower outstanding debt without genuine reform would have been an interesting calculation for potential buyers of longer dated Greek bonds. How would the reforms have happened? It must be the case that the pressure for reform in the piigs would have been reduced. If I were employed as a policy advised to a public sector union I would point out that the tactical imperative of resisting reform to whatever extent possible would be significantly boosted.
“The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks.”
…..cue Noonan on RTE radio today.
He confirmed Ireland’s decision to excuse senior unsecured unguaranteed bank bondholders from “participation” has been entirely voluntary – at least under the new government, making it clear that JCT throughout many conversations never said or threatened that such action might lead to the ECB withdrawing its liquidity provision to Irish banks. He directly contrasted this with the threat made in respect of the collateral eligibility for Greek paper recently. He then went on to say “but a nod is as good as a wink to a blind horse”.
So Irish negotiators have done the ECB a great favour of behaving as if they had been threatened – and granting the ECB the positive benefit to their negotiating position of the threat – but without making the ECB suffer the consequences in terms of reputation or responsibility for the ultimate course of action of having made the threat. What a gift.
Ireland’s negotiators should have extracted the threat in reality if they were going to proceed as if it had been made. Once made, the threat could have been used to batter the ECB at every opportunity, firmly dumping discontent among the public (not just in Ireland) on the institution. It is not hard to imagine a popular movement of discontent among the wider European population over this (now) clearly ECB instigated policy. Getting rid of that unpopularity would have now been part of an incentive for the ECB to back down on the question of senior bondholders. as it is Ireland’s government have shielded them from the flack.
Who is it that is coming up with Ireland’s strategic thinking?
@ Colm McCarthy
“If Europe had political leadership, it would long since have taken the necessary steps to isolate the sovereign debt problem to Greece, Ireland and Portugal, with individual tailor-made solutions”.
One cannot, unfortunately, overlook the political difficulties associated with selling to national electorates in creditor countries the cost of such solutions although, in my view, this is the objective towards which the EZ is stumbling. The picture should become clearer when we have the actual texts of the changes to the EFSF and ESM which, one assumes, will not be released until the next round of Russian roulette is over (with, hopefully, nothing terminal having occurred).
“The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks”.
There should be some resolution of (i) in the not too distant future as the choreography at the recent European Council suggests that the “Gallic spat” is becoming a liability for all concerned. Apart from anything else, the changes in the EFSF should trigger some adjustment as indicated by Klaus Regling.
As regards (ii), this is a non-starter. The overall movement is in the other direction. Irish banks have to recover credibility on the back of the sovereign recovering its credibility (which is not helped by unnecessary announcements of no increases in income tax and no cuts in social welfare).
As regards (iii), Noonan said today that he would be returning to this issue in the Autumn in the context of a big Anglo-Irish redemption due in December.
@ Brian Woods II
I agree completely. This is the “inconvenient truth” which many in Ireland case are trying to avoid.
@ Georg Baumann
From what I have been reading, a lot of the CDS contracts have been written by US banks (which might help explain the attitude of Geithner).
@Colm
Actually IMHO the risk of (economic and political) contagion is much bigger. Belgium ,as well as Italy and Spain, is in serious trouble as well and also has the the added inconvenience of not actually having a Government.
Belgium poses a significant risk to the other Benelux countries. Greece (and some other Balkan/Central European states) poses a serious risk to Italy and Austria. Portugal poses a big risk to Spain. Ireland poses a big risk to the UK and some Northern European states. The Baltics pose a big risk to Sweden.
France has serious troubles of its own and the whole lot poses a serious risk to Germany (together with its East European satelite states )while this whole crisis is not very good for Russia, which like Germany and France, also face national elections next year.
It was interesting last week that the Greek Parliament held a vote of confidence in the PM (which he survived) but postponed a vote on austerity measures ,until the last minute next week.
IMHO internal Greek politics and EZ/EU confusion are no longer operating on the same page. Greeks want to avoid attracting the interest of their military (so have chosen their leadership accordingly) but have had enough of austerity measures which they believe are counter-productive.
The Greeks (at least 75% of the population) do not want a further austerity plan. nNw that the Prime Minister has survived for another while (and understands that Germany and France need this deal more than Greece ) it is reasonable to speculate that the Greek parliament will not vote for these measures.
The consequences for Greece are not necesarily acopalyptic and the Euro will still remain in circulation (as they are in some FYR states which are not members of the Euro) within Greece until it can be gradually replaced by the Drachma.
IMHO European politics, not economics, will bring this crisis to a speedy (hopefully not messy) resolution. Viewed from a political perspective Ireland is actually less vulnerable than vast swathes of European nations inside and outside the EZ and EU. This is one important reason why recent FDI in Ireland is a very high percentage (possibly 10-1 on a per-capita basis) of the total in the EU. It is also illustrated by the fact that there has not been “a race for the airports” among our recent, mainly European, immigant population.
Ireland needs to support the European Project (if its has a future), realise that the the era of Euro currency may well be coming to an end AND ALSO realise that we do not have an obligation (or ability) to dispropotionately”carry” the rest of Europe. It is fortunate that we have a very long continuous democracy and a proven history of (despite what “post boom mourners” like to claim) comparitively good Governance.
I enjoyed your article ,Colm, as it gave me (and no doubt many others) plenty of food for thought.
Best…L
@Colm McCarthy – it’s tangential to the thrust of your article, but CDS rear their amorphous head again, when you reference the freezing of the credit insurance market, mention the near-impossibility of selling non-insurable debt, and raise a major issue concerning the shape of a Greek restructuring – will it or will it not be deemed a credit event (by ISDA – the rating agencies have no say)?
Firstly, there WAS no CDS market 10 years ago – and bond markets functioned quite well without them. As they became popular – due to the complete mispricing of their option content by the likes of AIG up to 2007/08 – they have become more mainstream, but are not in fact that widely used. The cost of a CDS on Irish 5-year, for example, has for years exceeded the spread over German 5-year yields, and this is true of all eurozone countries – including Germany, where you would reduce the already meagre yield by about 40bp if you bought CDS today. In the US, 5-year CDS on Treasuries will cost 50bp per annum – against a yield on the Treasury of 1.40% or so.
The only public data on CDS comes from DTCC ( http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5), and noone seems to know what percentage of the market they hold, nor if that unknown percentage is either representative or constant. Greek debt, according to the data, has extant a gross $79.2bn of CDS, and a net of $5bn; the equivalent numbers on Irish debt are $40.1bn and $4.1bn. For both countries the gross has increased in the last year, but the net has declined.
On the face of it, these net data show CDS as a complete sideshow. Yet there are rumblings that Geithner is extremely worried about US banks’ exposures to the market – they would have been the main writers of CDS business generally, along with a handful of larger European banks. If true – and a Graham O’Neill alludes to the potential American banking problem in a SBP article today – the market in CDS is possibly a lot larger than the public can see, and the net exposures reported by DTCC may be meaningless.
Alternatively, maybe the DTCC data should be looked at from a gross point of view, as it’s unclear what netting process produces the data published.
A lot of maybes and ifs, but there’s definitely a smell coming from the whole CDS area, and the potential exposures arising.
Indeed…we are in a monetary union, yet lack unified political thinking, a fine mess. At this stage it’s in Ireland’s best interest to help formulate and promote an overall solution. It is time for us to be bold, the attention is on us, so a quality argument can thrive.
I’d suggest we set up a small working group, and sponsor a symposium. Put Peter Sutherland in as chairman, and utilize capable spokespeople (e.g. Pat Cox). Get some hefty academics/public policy people involved, e.g. Stanley Fischer type experience. Give them 6 weeks to trash out ideas, and then have the symposium. Put good PR people on it and have some catchy ‘6 point plan’ , work international media contacts and diplomatic channels.
It would be a lot better than sitting around on our collective ass, and there’s a good chance it’d work
@Desmond
Why did you write that rubbish , you made this Dork vomit all over his PC.
Please post a clear warning before mentioning those names in civilised or semi – civilised discourse.
@George
The Spanish exposure to Greek debt from the figures you quote appear manageable ….but the real problem for Spain appears to have been identified by Frank Daly today. Apparently their banks have 450b exposure to property loans with only 45b of provisions. He thinks they are being delusional. If he is correct with the numbers then this is the next time bomb set to blow regardless of what happens in Greece this coming week.
@Colm
“What’s wrong with [deficit:GDP%] 7, 3, zero for 2012, 2013 and 2014?”
I suppose the thinking is that the 15% compound growth between now and 2015 together with five years of emigration will both cushion the austerity, relieve the strain on the dole and increase the likelihood that austerity doesn’t lead to a double-dip.
In practice recognising now that most of the adjustment will be in cuts and new taxes and considering the total picture now to help shape a better society together with a competition czar to drive down costs and a better personal bankruptcy regime to deal with legacy debt, might be better plan.
It is apparent from the above that some commenters missed the revelation, via alphaville last week, about the distribution of cds writers in Greek debt. Here is the link:
http://www.videozer.com/video/a7MU
@ Desmond
I do not want to “throw water” on your idea for a “symposium”.
Actually I belive a 4-6 week symposium would be a good idea provided the superannuated facilitators , academics/public policy people realise it is a national duty and not expect to be paid for it.
Personally I would be delighted to participate for the price of a train ticket and refreshments. It would also be a good idea if PR people charged fees which reflected the fact that this may actualy ensure future earnings. (Perhaps Minister Howlin should “sign the cheques” for the symposium)
However IMHO the focus should be on saving the Irish “collective ass”.
We comprise 1% of the European population (considerably less if we consider Russia, the European CIS states and EEA members) and while IMHO we have every obligation to support the European Project, if it still has a future, we need to recognise our limitations.
We may have preserved (and eventually restored) civilisation in Europe after the Roman Empire collapsed but personally I think ,unless we have divine assistance, we may be better off concentrating our energies on our selves and our role within Europe.
By all means an affordable 4-6 week symposium but if we can help our selves (or “collective ass”) first than perhaps we may be more helpful to our European partners who seem to be increasingly confused about what the European Project actually means to them and their neighbours.
Your well thought through proposal (even if I differ slighlty on the objective )is an excellent example of why I take time to follow this site with avid interest.
Colm, you continue to massive figures for holdings of debt for Continental banks. But like I’ve told you, your figures (I don’t know where you fish them from) for the holdings of banks of Greek debt are a massive overestimate or else out of date. For proof Just look up, either 1) what the banks said in their most recent reporting of quarterly results. Or 2) look at reports by ratings agencies (that have easier and more reliable access to info). Whatever, you need recent data as holdings can change quickly.
Unfortunately if we go on repeating numbers like these, we might begin to believe them and believe the narratives based on such numbers. What the rating agencies say makes much more sense to me – the real danger for Europe’s banks is the indirect one from financial instability and the hit to prospects for growth. The danger is not from direct holdings… were that to be the only worry!.
As for Gerog’s comment about the BIS data source, well many of us know here how such data has been used and abused when applied to Ireland. The data above does not reflect today’s reality or risks.
On the fiscal issues, I noted last week an article
“€60bn needed to run State this year. Taoiseach’s tax pledge in jeopardy as State must borrow equivalent of tax take in 2011” . http://www.independent.ie/national-news/euro60bn-needed-to-run-state-this-year-2800161.html
Anybody got any idea what the source is for these figures, and the DoF quote? It appears to be an official one. But I didn’t come across it.
Colm
I enjoyed the article and agreed with most of your arguments, but the following caught my attention (I note Aiman above has already made a similar point):
“… the credit insurance market is beginning to freeze. This may seem a technical point but it is important: investors will be reluctant to hold uninsurable risks, including Spanish bonds, if the lack of clarity continues.”
I am not convinced that the CDS market is improving market stability and liquidity. As a general rule “increasing the span” of available securities is positive but perhaps not in this case. the CDS market seems a dysfunctional one which perhaps does not really increase liquidity when it is needed and contributes to market instability.
Good article as usual
There is a story about a man falling from a 50 storey building. All along his fall, in order to reassure himself he says “up until now everything is fine”, “up until now everything is fine”, “up until now everything is fine”.
But what’s important is not the fall – it’s the landing….
That’s us..
@Colm
Good article.
From an Irish perspective, I do think that the best resolution of the Greek situation is more subtle than you suggest, however.
For Greece, the best course does seem to be an early and decisive restructuring. The primary surpluses required to first stabilise and then bring down the debt ratio to safe levels does look beyond their political capacity. Postponing the necessary action leaves the nature of the future bailout\bail-in regime up in the air, repelling potential investors for all countries where any doubts about solvency exist, and so risking a spread of the crisis.
What Ireland and other vulnerable countries need most is clarity about a future regime that gives investors comfort as is feasible that they will get their money back. This requires a reliable yet realistic fiscal Lender of last resort for countries meeting the ex ante conditions of their programmes. A regime that only triggered restructuring for such countries as part of an extension of a financing package when the debt ratio reached, say, 130 to 140 percent of GDP (the precise trigger might be country specific) , would allow for negative shocks to growth and even to the extent of the ultimately revealed bank losses.
You are absolutely right about the importance of a reliable LOLR to the banking system, though we probably have to accept that this will not be forthcoming as a medium term facility. But a reliable fiscal LOLR is also critical; much more important, in my view, than the other two items on your list.
What I am suggesting does require that the net lending countries take on more risk in certain dimensions. But by giving countries committed to making the necessary adjustments a credible route back to the market — and by reducing the risk of other countries getting sucked in — it is ultimately in the common interest of both net lenders and (actual and potential) net borrowers.
I know I have said this before, but I don’t think it helps our cause to push the grievance against Europe too far — not least for what it does to political support for the adjustment at home. Although I’m sure many will not want to hear it, I think Donal Donovan did a nice job in the Irish Times yesterday noting the differing objectives of the various parties involved in the bailouts. In additional to recognising where they are coming from, it is important to note what we are getting now as well where we think the nature of the support is falling short. In addition to the funding we are getting from the ECB at 1.25 percent on a semi-permanent if as yet insufficiently reliable basis, we are also getting fiscal support at less than half the market rate we would face.
It was almost funny to hear Michael Noonan say today on the radio that the premium above the cost of funds to the ESFS is akin to a handling charge. The ESFS is able to borrow at these rates because it is guaranteed by triple A governments. These governments are already taking on risk — now permanently without preferred creditor status given changes to the proposed ESM — lending to the countries in bailouts, substantially so in the case of Greece. I doubt that the current premium comes close to being adequate compensation for this risk. I think we would have a more balanced and fruitful debate here at home if we recognised this.
Lastly, while the case for loss imposition on Anglo and INBS seniors is a strong one, the amounts are relatively small in terms of the debt stabilisation effort. However, I believe it is incumbent on anyone advocating loss imposition on seniors in the now pillar banks to explain how they will deal with the equal ranking between depositors and seniors in a context where the government would be unable to make depositors whole.
@Colm McCarty
I still hope that a Greek default can be avoided, but I must admit this looks less and less likely. What I do not understand is why you believe that such a default can be in any way a favorable development for Ireland .Don’t you think that Ireland sovereign, if it can avoid default itself, will be shut out of the bond market for years and will be obliged to negotiate a new bail-out and maybe another one after that .Defaulting without balancing the budget first and without a real banking system is not an option, in my opinion.
@Desmond Brennan
“Put Peter Sutherland in as chairman, and utilize capable spokespeople (e.g. Pat Cox). . . ”
Absolutely. We haven’t heard enough from the Goldman point of view. Perhaps Mary Harney and Charlie McCreevy could be prevailed upon to reenter public life and do the state some service.
FWIW Nomura’s figures are
Exposure to Greek Sovereign Debt: France 11bn; Germany 17bn
Exposure to Greek Sovereign + Interbank + Private: France 42bn; Germany 25bn
While at first sight it seems plausible to withhold the “reward” of a writedown until after the reforms have been completed, I’m not sure it works like that in practice. If the Greeks know that sooner or later there will be a debt-writedown, then they have an incentive to borrow more now, since they know they won’t be paying it all back. The ‘sustainable’ level of debt is going to be the same, so the more they borrow the greater the writedown will be, and the more money they will have obtained “for free”.
The problem with delaying any writedown is that existing bondholders are getting out at par and being replaced with official creditors, who will surely take most of the losses when the inevitable occurs. Banks and other parts of the financial industry have a huge incentive to overstate the risks of contagion, since they would be the direct losers of any writedowns. It is an easy game to play – wave your arms in the air about not wanting another Lehman’s (despite the fact that Lehmans was totally different to Greece) or collapsing the Euro, and watch Merkel and everybody else fall into line. Cui bono? Once the game is kept up for another couple of years it will essentially be job done.
@ Colm
Fair play to you for puting your views out there so consistently.
‘The agenda for the Irish Government is not altered by the Greek crisis. It remains (i) the reduction in the interest rate on EU loans to a level consistent with debt sustainability; (ii) the provision of medium-term ECB financing to the Irish banks; and (iii) an end to payouts to unguaranteed bondholders in failed Irish banks.
Concessions on these three critical issues will not be enough to make the situation manageable without the elimination of the budget deficit in the shortest possible time span. If that is not enough, some additional debt relief may also be necessary’
i) and ii) are outside our control. The EU/ECB have bigger fish to fry.
iii) is verboten. Jagdip’s point about AIB, ILP and BoI is also on the money. The rot is spreading at home and abroad.
iv) Progress towards primary balance will be slowed by the political composition of the government, the dead weight of customary expectations in the machinery of state, the centrality of social welfare payments to our domestic economy, and the knock on from slowing global growth.
Eureka has it. We’re going to hit the ground before the parachute opens.
Ciaran sees it too. Its’ the 1930s again. Sauve qui peut.
@john Mch
“In additional to recognising where they are coming from, it is important to note what we are getting now as well where we think the nature of the support is falling short. In addition to the funding we are getting from the ECB at 1.25 percent on a semi-permanent if as yet insufficiently reliable basis”
I think it is incumbent on those presenting the liquidity provisions of the ECB as cheap, to say how they would value the option the ECB have granted themselves to withdraw it at a weeks notice – particularly given Noonan’s wink wink, nod nod stuff from earlier today.
@ All
The following is from a report by Laura Slattery and Derek Scally in today’s IT in case anyone has missed it.
“German finance minister Wolfgang Schäuble has admitted the EU is hoping for the best but bracing itself for the worst ahead of this week’s parliamentary vote in Greece.
If MPs in Athens fail to back austerity measures, that could trigger a full or partial Greek default. If this happened, Mr Schäuble said the EU would “act quickly to ensure that the danger of contagion for the financial system and other euro states is kept in check”.
He expressed confidence that further austerity measures demanded from Greece would be passed but, in a notable rhetorical shift, said the euro zone would survive the possible knock-on effect of a default. “We are doing everything we can to prevent a perilous escalation for Europe but must at the same time be prepared for the worst,” Mr Schäuble said to Bild am Sonntag newspaper”.
@ grumpy
I’ll have a go. I would say that the correct commercial rate for the ECB subsidy is about 10% p.a. So the “option” to withdraw that support is worth about 9% x N x €150Bn.
However, they are not exercising this option. That is what we are grateful for. I would far rather that than to have a non-conditional but still subsidised support at say 9% interest.
@ Colm McCarthy
You may be interested in the link below from this morning’s Le Figaro in the context of the following comment made by you.
“The overall cost of a decisive resolution need not be greater than €250bn and could be less.
This sounds a lot, but it amounts to less than two per cent (once-off) of the EU’s GDP for a year. The financing cost on a long-dated bond would cost as little as one-tenth of one per cent of Europe’s annual output. Some of this burden needs to be borne by private creditors and some by taxpayers”.
http://www.lefigaro.fr/conjoncture/2011/06/26/04016-20110626ARTFIG00049-grece-la-solution-que-propose-la-france.php
@ All
The Google translate function does a pretty good job of translation. The French approach heads Merkel off at the pass and puts it up to the German banks.
@ DOCM,
as for who owns CDS, yes, it is no secret that Goldman Sachs and others have positions, however, they do treat the true exposure a secret in their quarterly reports.
This is why I am saying, we do not know who owns them to what degrees., and herein I see the problem.
Perhaps I am wrong in my line of thought here, but if I take Greece as an example, and I stand to be corrected, but it would appear to me that apart from this here:
http://bis.org/publ/qtrpdf/r_qa1106.pdf
we do not know the true CDS exposure of Institutions such as Bank of America, Morgan Stanley, Goldman Sachs etc. as they ‘are allowed’ to treat their CDS position a secret in their reports.
Correct?
This is my point, I conclude this to be the true secrecy which enables a certain blackmail potential, as the Banks in question will always threaten systemic risk when faced with demands they dislike. I remember to well how all this started, the drip feeding of Information flow Banks -> Government, with always a few weeks later, ‘we need more’ to be the result.
Not?
As for BIS, while Greek liabilities for example are 93,5 % with European Banks and only 5% with US banks, 30% of the total has CDS contracts attached, in the total value of over USD 60 billion and here the relationship changes dramatically, as these both, direct and indirect derivatives are held to 56,3% by the US and 43,1% by European Banks.
Hence, with 30 billion on the US side, theoretically, depending on how it is concentrated, it could cause a severe solvency Issue for one of the big banks.
In essence, the power of Banks to threaten systemic risk in negotiations only exists because they are still allowed to treat this information as a business secret.
Axel Weber: EU should guarantee all of Greece’s outstanding debt.
@ All
Brady Bonds à la Française.
http://www.ft.com/intl/cms/s/0/7c1a1f94-a0a6-11e0-b14e-00144feabdc0.html#axzz1QPyNcEKp
We focus too much on Greece. Greeks are quite capable of taking care of their own affairs and look upon Gov’t as an impediment to progress. Greek liquid assets are already placed in secure institutions outside of the EU. There are countries where all you need is a drivers license (photo ID) to open a bank account.
Here in Ireland we are reaping the results of almost a century of cronyism, nepotism and highly questionable ethics. It was generally accepted that in 1947 after 25 years of self government that we would stop blaming the British and others for our own short comings. Over sixty years later we are still in the helpless mode quite incapable of focusing on what we should be doing to help ourselves.
Collectively we created the candy shop on Kildare Street culture and now in order to keep the shelves stocked we go cap in hand beggaring ourselves all over the world.
I see very little on this blog addressing the gov’ts inability to reduce its expenditures or increase its revenues. Liquidity problem or solvency problem at some point in the near future the ECB in particular will stop throwing good money after bad. Reality is for people who cannot face up to impending sovereign debt default and are all in favour of digging the hole deeper. It’d enough to send one back to fingering the Rosary beads.
Would it have been possible to take the bank debt onto the national balance sheet as some sort of subordinated liability?
@ Colm McCarthy
Would this not be akin to giving an alcoholic a crate of whiskey on condition he stops drinking?
It strikes me that that Greece is rotten to the core and say halving its debt last year would hardly have promoted any serious reform.
Ireland has been lucky that after 30 years, it has a credible tax collection system but as regards tackling sacred cows, one can only wonder how many more lives have to be wasted on the dole before the vested interests are beaten.
UCC’s Seamus Coffey has produced data on expected public debt in 2015; deficits account for €100bn and gross current expenditure through all government departments and offices was €53.4bn in 2008. For 2011, the forecast is that this expenditure will be €52.8bn, a reduction of just €0.6bn or 1%.
Corruption in Greece has simply destroyed the country.
Greece’s revenue from income tax was 4.7 % of GDP in 2007, compared with an EU average of 8% according to Eurostat statistics. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a Eurozone low of 32% even as economic growth averaged 4.1% a year.
A survey published by the anti-corruption group Transparency International in March 2010 said 13.5% of Greek households paid a bribe in 2009 – – €1,355 on average.
George Papandreou in 2010: “In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption.”
Greece has 180,000 teachers and one of the world’s best teacher-student ratios but 20,000 teachers “work” in administration because there are no classrooms for them.
Nevertheless, an EU report shows that private tuition in Greece was estimated at more than €950m per year, which is equivalent to 20% of government expenditure on primary and secondary education.
@Micheal
God you are self righteous – the money flow in Ireland was centered on private credit formation – so that is where the majority of the corruption occurred.
The Irish goverment adopted a stance of see no evil hear no evil.
Much of the money flow in Greece went through Goverment coffers so that is where the majority of the corruption occurred.
Now Irish people are breaking their debt contracts with banks & Greeks are not paying their taxes to service Goverment expenditure.
Its the same thing different mechanism – all of this was about recycling excess credit from core surplus countries that were prevented from getting into healthy fiscal debt due to the crazy stability & growth pact.
This is the kind of stuff the Greeks paid for – they neither had sufficient domestic defence industry nor a reserve currency yet had the highest defence expenditure per capita in Europe !!
carecon.org.uk/Armsproduction/Papers/efidpe.pdf
Given that Germany & France had a very low defence expenditure now they had to find a credit mechanism to export this industry and thus save it.
Its either high taxes to pay for goverment or large private debt contracts – you cannot have both.
@ Dork, Karl, Michael
I think the attacks on Michael are unwarranted. He speaks eminent sense.
@Brian
Ok I admit I like using colourful language as I am a Dork – sorry about that but it wasn’t that colourful – there’s simply a fundamental problem with the Euro – its the stability & growth pact thingy , it does not foster stability nor does it create the conditions for long term growth.
Its a ticking leverage time bomb thats about to go off unless they flood the system with cash to prevent a credit nuclear reaction.
well done colm very good peice as usual
i must say i thought grumpy hit the nail on its head with irish goverment policy seems to be badly thought out and consists of doing what we are told to do even against our own interests such as bank bond holder hair cuts versus soverigne default
if we are being threatened by the ECB let the people know it will strenghten our position as regards bank bond holder restructuring it will also open european eyes to the shenaigans that the ECB is up to at the behest of the french and germans
btw here`s a quote from Stefan Homburg a german economist in an article from Der Speigel
“Many politicians have also come to the realization that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU”.
The Germans are not without blame either.
They ran down domestic consumption and created false markets for their goods with cheap credit. They don’t have a minimum wage. They were one of the last countries in Europe to open up to Eastern European workers. They consistently score low on satisfaction with life surveys.
It’s simple. Helmut has some money that he doesn’t want to spend. He gives it to the banker. The banker must give him a guaranteed return. So the banker invests in what were seen as risk free options – the sovereign debt market (and a really risky dumb option – peripheral banks)
It all began because Helmut wanted interest on the money he wouldn’t spend. Would have been much better if he had gone on holiday to Greece or bought a nice Irish steak.
Now we’ve reached a stage where the Minister for Health has to check babies in prams for loose change on his way to open up hospitals ……I tell you….
@ Dork
“Its a ticking leverage time bomb thats about to go off unless they flood the system with cash to prevent a credit nuclear reaction.”
John McHale note, this is surely the Metaphor of the year.
The Germans went through a rough spell in the 90s when their wages became uncompetitive. The evidence was clear to see with second hand stores on every corner and shops boarded up. The Germans addressed the problem by reducing Gov’t expenditures and pressuring wages down. In Ireland we address a similar problem by increasing Gov’t expenditures and propping wages up. Our present problems are not new as we have consistently since 1922 made every endeavour to keep wages uncompetitive even when immigration was running at 50,000 per year. The I am all right Jack mentality is firmly entrenched and extends into the heart of Gov’t where the idea that they are there for the greater good not to foster cronyism, favouritism and nepotism has yet to permeate.
The Germans do the right thing, they work efficiently, they are aware that there is a concept known as the “greater good”, they save, they are honest, they punish shady politicians at the ballot box, and of course they recognise that balancing budgets is a good thing.
As to the Germans not letting in Eastern European immigrants, this was done because they had 16% unemployment in East Germany. It was pointed out to me in Germany that Ireland overbuilt because skilled Eastern European workers facilitated the orgy of overbuilding that ended badly. The Germans also recognised that the ECB policy of low interest rates allowed the German banks to lend to banks on the periphery who in turn fanned the flames of speculation by lending recklessly to anyone driving a Mercedes and having a van with builder, contractor or developer written on it. I might add that only a couple of weeks ago it was pointed out to me that the workers on a now completed and NAMA administered project was built by Poles without benefit of a single Irish supervisor. The Germans I meet are not happy about the lack of due diligence exhibited by their banks and would be opposed to bailing out failed banks in Germany.
We are very quick to spread blame and it is high time that we looked around us to see who did the right things and followed their example
@ Eureka and Mickey Hickey
I respectfully suggest that the real point is not what Germany has done but what other member countries of the EU allowed it to do. There should, for example, have been no agreement on enlargement other than on the basis of ALL countries of the EU applying the same rules on free labour from the outset. Arguing high levels of unemployment is not credible as the same argument could be used by most countries.
It is also demonstrably inaccurate to argue that Germany has achieved a level of competitivenes that has to be emulated by the othe countries of the EU because this is a logical impossibility. Germany runs a near 6% surplus on its trade in goods and services and this has to be matched by equivalent deficits in the countries to which it is selling. The overall level of growth in the German economy has been anaemic because of the weakness of internal demand, a problem which the government has done nothing to remedy.
After all, what is the purpose of exports other than to pay for imports?
As to honesty, German business practice is as peppered with scandals as any other major exporting state and, indeed, and I stand to be corrected on this, the country’s standing in the corruption league is not that high.
But the bottom line is that the continuation of major economic imbalances in the EU can only lead to one thing: its destruction. The Euro Plus Pact is a very timid recognition of the need to try and avoid this outcome which would be unfortunate for all concerned, Germany included.
We live in a world where competition is global and there is no place to run, hide and be safe. Each country in the EU has a lot of latitude to arrange its internal affairs as it sees fit. The most important aspects of the EU is that it provides small countries like Ireland with unfettered access to a large market and a level playing field. Within this framework we were very successful largely because we had to observe EU practices as did every member of the EU. The Euro Zone protected us from currency fluctuations and gave all of us access to low cost loans which could be used prudently or irresponsibly. The overwhelming majority of the population used low cost loans prudently. However, due to irresponsible Gov’t, an absence of Bank regulation, and bankers who would have been grossly overpaid at minimum wage we went off the cliff in 2007 and immediately started to dig the hole deeper with each passing month.
The imbalances in the Euro Zone are in descending order Greece, Ireland, Portugal, Spain, Slovenia, Italy, Belgium and not in Germany, France or the other nine members.
I am not one to cry over spilt milk. What infuriates me is that month after month and now year after year we continue to dig the hole deeper. The world is looking at us and wonders what happened to the Irish who at one
time in the not so distant past were looked upon as being intelligent and businesslike.
What happened to us was, in large part, the Euro. There is no country in the world that wouldn’t have an asset bubble if real interest rates were negative.