McCarthy: Brussels Plan A is Junk and that’s Great News for Us

Colm is at his best in this Sindo column. Best bits:

Plan A has failed to create circumstances in which the three ‘rescued’ countries can return to the markets, the over-riding objective of any programme of official support. Their traded debt has collapsed in price and all three are rated junk by at least one of the bond-rating agencies. They will not be graduating from the programmes of official support anytime soon and the verdict of the markets, the only verdict that matters, is that Plan A is also junk.

The essence of Europe’s Plan A, as first applied to Greece, is to pretend that the problem is less serious than is actually the case, avoid any element of debt relief and insist that budgetary stringency alone will do the trick.

Persistence with Plan A and blaming the markets and ratings agencies is not a viable option should Spain and Italy go under. The game is up. Plan A is being quietly abandoned. In this sense, this has been a good week for Ireland.

..
Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.

ECB officials come and go but sovereign states need sovereign credit forever. It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

75 thoughts on “McCarthy: Brussels Plan A is Junk and that’s Great News for Us”

  1. Surely the problem is that Irish Bank bonds became sovereign bonds when, ahem, our sovereign government guaranteed them back on that famous night? If we renege on those bonds the ‘unmitigated disaster’ will have happened as the markets see no difference between what were bank bonds and are now effectively government ones.

    Would not a Euro bond replacing some of the Irish bonds (with, erm, the proverbial German taxpayer footing some of the bill to save their banks) be a ‘European solution to a European problem’

  2. @ Danny Haskins

    +1 excellent editorial in yesterday’s IT calling for fiscal union

    Really surprised that McCarthy regards guaranteed bank debt as fair game and different from other sovereign obligations.

  3. I agree entirely with the remarks of Danny Haskins and Brian Woods II.

    It is also a mystery to me how the following comment can be reconciled with what one can read in the European press any day of the week (and in the Sunday Business Post this morning in the article by the European Commissioner responsible).

    “The November ‘rescue’ deal for Ireland has failed, not because the Irish authorities have strayed from its terms but because it was badly designed, clearly at the insistence of the EU Commission and the ECB and equally clearly against the advice of the IMF”.

    Plan A was designed and launched by one country and one country only, Germany, with other AAA rated countries tagging along, the role of France being reduced to that of confused accomplice, and the European Council this next week will be devoted to making Merkel and Schaeuble agree to change it. The coverage in the German press, including the popular press, suggests that the penny has dropped i.e. continuation of the policy will cause the collapse of the euro and with it Germany’s economic prospects.

    The chances of a successful outcome, therefore, look good. The difficulty will be that Merkel will have to return to her parliament with the proposed changes to the EFSF and, in the meantime, the ECB will have to continue to hold the fort.

  4. Colm McCarthy is always ready to defend the ratings agencies. He seems to think that they are infallible. He never argues the merits of the arguments that the ECB and others put forward. Often, his only argument is that, because the ratings agencies say the opposite, even though they may have a financial stake in saying the opposite, then they must be correct. I agree that banning the ratings agencies is absurd. It could not be enforced. However, attributing infallibility to them, as he does, is equally absurd. They are simply scumbags and chancers on the make. They are as crooked as the day as long. They care nothing about what damage they cause to the global economy. They are ‘messengers’, as Colm McCarthy calls them, only in the sense that someone who screams ‘fire, fire’ in a crowded disco is a messenger. They are becoming increasingly reviled, despised and hated throughout most of the world, particularily Ireland, southern Europe, and now even in the USA. Their bias is obvious. Their crookedness is obvious. Through their crookedness, they were largely responsible for the financial collapse in the USA in 2008. Now they are trying to ‘redeem’ themselves by being equally crooked in the opposite direction. I wouldn’t be the least surprised if one or other of the ratings agencies goes the way of the Baltic Exchange in the next year or two. Naturally, I would deplore this. If this was 1981, frankly I wouldn’t be hanging around too close to the ratings agencies’ offices in London right now. Fortunately, because of the peace process in Ireland, the threat from this source is greatly diminished now, although regrettably not entirely gone. However, southern Europe has always been rather volatile, with lots of left-wing and anarchist organisations. It wouldn’t surprise me if ratings agencies’ offices down there took a severe hit in the near future. And, if they carry out their threat to downgrade the USA rating, and cause a second recession there, frankly anything could happen, what with the ready availability of all sorts of weaponry there. Let me repeat. I would totally condemn anything of this nature. But, being realistic, I think it is an increasingly likely eventuality.

  5. ‘It is possible that Ireland can still avoid sovereign default, but only if several necessary steps are taken. These are the cessation of payments of either interest or principal to holders of bonds issued by insolvent Irish banks; the reduction of interest charged by the EU rescue fund to a long-term sustainable level; the provision of medium-term liquidity support to the Irish banks; and the elimination, ahead of schedule, of the budget deficit’

    Earlier elimination of the budget deficit can only accelerate the death spiral of the domestic economy. Public expenditure savings will be sucked remorselessly into insolvent banks, with no prospect of return of credit or investor confidence.

    Politics is the key. Absent major internal reforms, a policy of austerity will drive us into debt deflation, pauperisation of the middle class and an epidemic of crime. I suppose we need to consider how much sovereignty/autonomy we ought reasonably to expect, as the game is going to be very rough by the standards of recent decades.

    This recent presentation from Richard Koo is worth a listen.

  6. For all TARGET2-Aficionados
    ************************************
    Prof. Sinn (translated: Professor Sense) explains in a CESifo Video (in english)
    the content of his lengthy paper (with Timo Wollmershäuser):
    “Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility”
    LINK to the CESifo Mediathek: http://mediathek.cesifo-group.de/player/macros/_v_f_750_de_512_288/_s_ifo/_x_s-764870657/ifo/index.html
    New chance for the english speaking world to understand his arguments, if they haven’t already.

  7. Two pertinent examples from Der Spiegel of the press coverage to which I refer above.

    http://www.spiegel.de/international/europe/0,1518,774407,00.html

    http://www.spiegel.de/international/world/0,1518,774666,00.html

    The question of who is holding whom hostage in the game of internationl financial brinkmanship now being played depends, of course, on the point of view one takes. There is very considerable justification in the position adopted by Germany. Other countries must get their houses in order and means must be found of ensuring that they do while, at the same time, not going so far as to make these means counterproductive.

    The general thrust of the article by Colm McCarthy is, in my view misplaced, but there are many elements which are spot on, notably the following.

    “The vituperations about ratings agencies from EU Commission leaders during the week should be seen not just as fatuous shoot-the-messenger blame-diversion but also as a convenient smokescreen for the inevitable policy shift. When a failed policy has to be abandoned, it is expedient to pretend that the new and different policy is just a seamless transition from the old”.

  8. One last link to a recent paper by Deutsche Bank which is a skewed but very representative view from Germany. Bankers, like economists, with few exceptions, have a totally tin ear for politics. An example in the paper is the claim that the euro was introduced in return for the reunification of Germany, a claim that has been vehemently denied by the Germany ministers direcly involved.

    http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000275211.pdf

  9. @ Paul Quigley

    There is no shortage of doctors and quacks of various kinds at the sick bed of the euro and, to be honest, I find it impossible to sort the wheat from the chaff, not to mind read it all. I simply try to stick to the question: what is likely to happen next? I have just heard Leo Varadkar point out that, of the 18 billion deficit, onlu

  10. @ Paul Quigley

    There is no shortage of doctors and quacks of various kinds at the sick bed of the euro and, to be honest, I find it impossible to sort the wheat from the chaff, not to mind read it all. I simply try to stick to the question: what is likely to happen next?

    As Merkel seems to have run out of options, and a failure next week would be catastrophic, it seems to me to be a meeting doomed to succeed. There has, however, to be a deal beforehand on the details of the Greek second bailout. And Germany – and other AAA countries – will actually have to cough up some cash a fate which so far they have succeeded in avoiding.

    But any suggestion of a get out of jail card for Ireland is as misplaced as blaming the institutions of the EU for the failures of its governments.

  11. @ Paul Quigley

    Oops! Varadkar was pointing out the relatively small element that the banking crisis constituted of the current budget deficit.

  12. @ DOCM

    ‘Bankers, like economists, with few exceptions, have a totally tin ear for politics’

    Yes, if you mean politics in the ordinary lay sense. The successful ones have, as a precondition for success, a terrific ear for internal institutional politics. The ECB is a space for competition/co-operation within banking, and for the interfacing of bankers’ corporate interests with other powerful social structures. ‘Frenemies’ is probably the appropriate term of art.

    ‘Tin ear’ or ‘learned ignorance’ is a socially necessary effect of professional formation. Here is Pierre Bourdieu on professional philosphers, but the model could just as well be applied to any specialist group.

    ‘The imposition of form which keeps the lay person at a respectful distance protects the text from ‘trivialisation’, by reserving it for an internal reading, in both senses; that of a reading confined within the limits of the text itself, and concomitantly, that of a reading reserved for a closed group of professional readers who accept as self-evident an ‘internalist’ definition of reading”

    Language and symbolic power Polity Press 1992

  13. @DCOM RE Varadkar
    At the moment it is not a large part of the deficit but wait until 2014 when we have closed the deficit(ha ha ha) and then have to start to pay somewhere in the region of 20 Bn a year in interest and principle payments.
    How wll we close that deficit, Mr Varadkar?

  14. @DOCM
    Why ? its 100% of the crisis.
    If banks cannot produce credit the goverment must produce money.
    Without deficits there would be no economic activity withen this country.
    Its just that the monetory system is not designed to function without credit giving banks but it can easily when we have a medium of exchange.
    The argument is retarded.
    Personally I think we would have a far more efficient commerce without credit giving banks – what we are now witnessing is the economy trying to heal but its being prevented from doing so by charging interest on the tokens we use as money.
    The FED under QE 2 is recycling interest income back to the treasuary , the only problem with this in my opinion is that it is a petrocurrency.
    If the ECB produces more money Gold will rise in value.
    Whats the problem ? – its a inert accounting metal

  15. The primary objective is to protect the currency and I for one am all for that. Plan A has succeeded admirably in that objective, any other Plan would probably have put the currency at great risk, so it is an oversimplification to say that Plan A has failed. To be sure it has not succeeded in allowing fiscally imprudent countries get access to market funding. This latter objective can only ultimately be achieved by the said countries eliminating their fiscal imprudence, that still must be the goal.

    Colm has got the priorities wrong. He sees return to markets as the primary goal and wants a Plan B which sees AAA handouts to junk countries and some sort of default on legacy debts to sort of wipe the slate clean. Such a Plan B, which removes the need for fiscal rectitude, poses great risks for the currency. Let us hope Germany resists.

  16. Well Done, Colm McCarthy.
    Well argued, logical and the timing is just about right.

    ECB officials come and go but sovereign states need sovereign credit forever. It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.

    That says it all. Frame it.

  17. “It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.”

    So its Europe’s faultAt a time like this real scientists would stop the ideological propagandaising and stick with the facts.

    Actually it’s FF’s fault.

    Those people lionising Mr. NcCarthy here seem to forget that he was Fianna Fail’s favourite economist for 20 years.

    He was perhaps the best known economist in the country and could have used his influence to cry halt when property prices were exploding. Did he? No, he just went on with his manta against State spending and not a word about the bubble.

  18. @ JTO

    You sound more like Salome looking for the heads of the ratings agencies on a plate. You are not the reincarnation of JTB by any chance? Love to know your real identity.

    Is it not patently obvious to you that the ratings agencies have done more for Ireland than Michael Noonan and his merry men combined.

    The ratings agencies have precipitated the demise and ditching of Plan A as Colm call’s it, soon politicians will be doing what they always do ‘claim that the new deal was due to their wonderful negotiating skills’ or in this case lack of them.

  19. @ BW 2
    ‘This latter objective can only ultimately be achieved by the said countries eliminating their fiscal imprudence, that still must be the goal’

    Don’t you think that any programme for the elimination of fiscal imprudence ought itself to be undertaken prudently ? Ireland didn’t to get its current state by accident, nor can it be righted by fiscal consolidation per se.

    The domestic economy is very heavily dependent on continued state deficits. By all means, call it economically inefficient, but that’s the reality we have to address.

    While internal reform is badly needed, heroic surgery will simply kill the patient. As Gurdgiev has shown, the savings made in capex programmes are gobbled up in social protection. Take that away, and we are looking at state withdrawal from chunks of the society, increased costs of protecting private property, loss of public amenities such as the freedom to walk about in peace, and many other stinking problems.

    http://trueeconomics.blogspot.com/2011/07/05072011-irish-excheauer-expenditure-h1.html

  20. “These are the cessation of payments of either interest or principal to holders of bonds issued by insolvent Irish banks”

    If Minister Noonan goes ahead and shovels €20bn into the Irish banking system in July 2011, it might no longer be insolvent. The ECB has guaranteed its non-standard liquidity programme to October 2011. The Troika won’t be back until October to review Q3.

    So why not defer the recapitalisation for another couple of months and observe how the Euro crisis unfolds. €20bn of recapitalisation will not restore confidence in our banks.

    Also since the March 2011 stress tests, the adverse scenarios for sovereign bond losses, commercial and residential property declines in Ireland have considerably worsened, to the extent that another €10bn + may be needed in the banks.

    What’s Minister Noonan’s rush in such circumstances?

  21. The Sindo does a nice job with the photo selected to accompany McCarthy’s piece. The image does not inspire confidence in our European masters.

  22. Jagdip,

    There is a lot of merit in what you are saying. Recapping & deleveraging the banks to the extent prescibed by the plan was supposed to inspire confidence on the part of depositors and providers of medium term funing to the point that funds flows would reverse and the ECB would get taken out of its trade. This clearly has not worked and will not work as long as the sovereign is deemed to be insolvent.

    Further deplecting the NPRF is also potentially a mistake as that fund could be a useful backstop on the other side of the failure of Plan A.
    If Minister Noonan wants to go ahead with a bank recap he should do ot via a Pro Note. Clearly, if we are going to restructure what is another 15-20bn thrown into the pot.
    Of course JCT and the ECB will go ape and threaten to withdraw liquduty support, burn crops and harm the first born but at this stage these threats are becoming more and more incredible.

  23. “They will not be graduating from the programmes of official support anytime soon and the verdict of the markets, the only verdict that matters, is that Plan A is also junk.”

    So, the market is the only verdict that matters? Then, if Mr McCarthy was truly consistent, he should suggest a full market-oriented solution, namely:
    – No central bank funding of insolvent banks. Bankrupcy of the whole Irish banking sector would follow. Of course, this is totally unproblematic because it is a market-oriented solution.
    – Funding of the sovereign only on the bond market at fair interest rates of about 15%. Immediate end of the bailout. Default of the sovereign would probably follow, but this does not matter because it is a market-oriented solution.

    Regards

  24. Colm is much too kind to the rating agencies.

    In all his contributions he has only made a passing reference to the misjudgments that characterized their role in the sub-prime crisis in the US. Nor did mention their lack of insight into what was going on in Ireland at the start of the present crisis (Ireland enjoyed AAA rating from October 2001 to March 2009).

    For those who wish to pursue the topic, I recommend a recent article in The Journal of Economic Perspectives (Spring 2010) by James Whyte.

    This is a summary of his approach:

    “Favorable ratings from these three credit agencies (Moody’s, S&P, and Fitch) were crucial for the successful sale of the securities based on subprime residential mortgages and other debt obligations. The sales of these bonds, in turn, were an important underpinning for the financing of the self-reinforcing price-rise bubble in the U.S. housing market. When house prices ceased rising in mid 2006 and then began to decline, the default rates on the mortgages underlying these securities rose sharply and those initial ratings proved to be excessively optimistic. The price declines and uncertainty surrounding these widely-held securities then helped to turn a drop in housing prices into a widespread crisis in the U.S. and global financial systems.

    “This paper will explore how the financial regulatory structure propelled these three credit rating agencies to the center of the U.S. bond markets and thereby virtually guaranteed that when these rating agencies did make mistakes, those mistakes would have serious consequences for the financial sector . . . we consider two possible routes for public policy with respect to the credit rating industry: One route would tighten the regulation of the rating agencies, while the other route would reduce the required centrality of the rating agencies, and thereby open up the bond information process in way that has not been possible since the 1930s.”

    http://economics.kenyon.edu/melick/Econ391/D-Rating%20Agencies/WhiteJEP2010.pdf

  25. @Jagdip

    “So why not defer the recapitalisation for another couple of months and observe how the Euro crisis unfolds. €20bn of recapitalisation will not restore confidence in our banks.

    Also since the March 2011 stress tests, the adverse scenarios for sovereign bond losses, commercial and residential property declines in Ireland have considerably worsened, to the extent that another €10bn + may be needed in the banks.

    What’s Minister Noonan’s rush in such circumstances?”

    Isn’t it remarkable how those very expensive bits of analysis in March were trumpeted as “successful” by by the incremental thinking brigade because the 10y Irish bond yield went below pre-publication levels for a couple of days?

    Oddly enough they have all gone quiet, very quiet on this since then. Wonder why?

    At the time of publication – within minutes actually – it was clear the “adverse scenario” wasn’t.

    How is the current outlook for commercial real estate assets in comparison to that bizarre choice of what, -2%. Then there is the scrapping of upward only rent reviews to add the extra 20%.

    Having tried to made decisions about financial assets for some time, I do find it tiresome when politicians, government advisers and central bankers try to tell people in the markets what they should think and what they should believe.

    How is someone who purports to be competent supposed tro advise repatriation of deposits to Irish banks? What was supposed to happen, clients were to have a copy of Patrick’s Blackrock analysis waived at them and be told not to be so skittish?

    The re-cap hasn’t happened. The medium term financing isn’t there. Reform is happening principally in word games. We can tell the strategy is do all the easy stuff and wait for Greece to prompt debt write-offs for the Pigs.

    Where are all the guys who trotted out the line that Irish bank bond haircuts or actually resolving a bank, would put the sovereign’s credit standing at risk? Were they stupid or charlatans? Where are they now? I don’t know, where, promoted because they are in the internal Alice-in-Wonderland logic “a safe pair of hands”?

  26. I must admit to have had issues with some of Colm’s approach previously.

    I dont fault his refusal to engage on the red herring issue that is rating agencies. AAs part of the kick the can strategy the rating’s agencies are being pilloried.

    Thats the EU’s game. I dont see why we should play it and ignore the substantive issue.

  27. @ grumpy

    “Where are all the guys who trotted out the line that Irish bank bond haircuts or actually resolving a bank, would put the sovereign’s credit standing at risk? Were they stupid or charlatans? Where are they now? I don’t know, where, promoted because they are in the internal Alice-in-Wonderland logic “a safe pair of hands”?”

    Working for the government???

  28. @Jagdip (12:59)/ @ Banking Stress Test specialists.
    re
    Additional €20 billion for banks.

    It looks like Ireland is being made a monkey of, by insisting in Ireland having to put this €20 billion into the banks now.

    It seems to me that the Irish bank stress tests did not allow an offset for any profit earned in 2011 or 2012.

    From page 7 of Financial Measures Program document:

    Losses take no account of existing or future provisions or future bank earnings….

    However it seems that the European Bank Stess test do allow profits in 2011 and 2012 to be taken into account in the ‘exam results’ of the European banks.

    For somebody not too au fait with all this area let me try a few figures from the French Banks:

    http://www.banque-france.fr/acp/stress-tests/20110715-Stress-Tests-Press-results-french-banks.pdf

    The Core Tier One Capital of the four French banks at the end of 2010 was €161 Billion(8.4%). At the end of 2012 it will be €168Billion (7.5%).
    But it requires two years of profits (2011 and 2012) of $57Bilion to get the number to €168 billion.

    In other words if the true balance sheet position were reflected at the end of 2010 (as was required of the Irish banks) , the Tier One ratio of the Frenach banks would be €161-€57= €104 billion (5.4%).

    The trick is in kicking the can so that this years and next years profits are used to build up capital to offset the book losses that they know already exist now.

    Ireland was allowed no such can kicking luxury. And the €20 billion stands ready to be transferred from an ailing State to the coffers of the European banks via the conduit of the Irish banks.

  29. JR,
    the French banks will have more equity at the end of 2012 than the end of 2010 because they will be profitable even if Greece defaults. The Irish will lose money over 10-12 so in the absence of any equity injections they would have less.

  30. @Tull
    I find that hard to believe. Borrow money at 1% or so from ECB and still lose money continuing bank operations?
    It must take a very special class of super-remunerated bankers to get that result.
    They are not burning the money are they?

  31. But the premise of the article, that EU ministers believed that fiscal surpluses would be enough, as long as bank bonds are payed in full, is faulty. I thought the core of the problem is that Germany insists that private sector bondholders get burnt before these countries come looking for money from other governments. “markets” have no problem with the possibility that Germany’s taxpayers will end up paying, they are freaking out that private sector investors may lose money.

    It is intriguing that “it’s the ratings agencies” has become a mantra. The idea that anyone senior in government or finance circles would depend upon ratings agencies’ opinion is laughable and if it’s true it is genuinely scary. Ratings agencies are a) a product of the Anglo Saxon system and b) bought and paid for by bond issuers in the US, they were founded to protect the interests of US creditors and, while they failed in that, they still approach bond issues in non US jurisdictions with that mindset. That’s why we read in the US that the newly formed Chinese rating agency is unnecessary blah blah.

    The EU mess is made by the national governments of the EU, not by the EU itself. When Ireland’s leaders stepped up with the famous guarantee, they failed and now they are looking for cover to back off that and when Greece lied to borrow more money, and were subsequently caught out, they lost all credibility. Finally, there is no way out of this mess without german support and it is understandable that germany should be reluctant to lend support to such incompetents. Nothing a ratings agency says changes that.

  32. JR,
    wow , I did not realise the whole balance sheet was funded at 1%. Gee, they must be making a fortune!!! No loan losses either.

  33. Is this the end of the Euro? Most decidedly it is not, think of it as the beginning of the renewed Euro without the irresponsible governments and banks namely EI, EL (GR), PT, ES, and possibly IT. The Belgians will be shocked into political cooperation and good government.

    There was a lot of talk in Ireland about legality particularly as it related to where the depositors lay in the hierarchy of entitlements with respect to bondholders. Our late and not lamented Gov’t decided that in order to save the depositors they were legally compelled to save the bondholders. I see comments above that imply our new Gov’t can now cut the ground out from under the bondholders. There are two questions that must be answered in this country of ours that is deeply steeped in legalistic thinking with legions of homegrown legal professionals. The first is can the bondholders be decimated now that the Gov’t has accepted responsibility for bailing them out and question two is can the depositors be spared while the bondholders perish.

    The legal and political wrangling will go on for decades most of it will take place in foreign cities.

    Whatever the outcome the road is about to get rougher.

  34. @Bklyn

    ““markets” have no problem with the possibility that Germany’s taxpayers will end up paying, they are freaking out that private sector investors may lose money.”

    There is a widespread assumption that “markets” have no problem when yields go down and they only have a “problem” then prices go down. Really that is the description for long institutions which are invested in whatever the asset under discussion is.

    Markets per se have their real problem with the act of rigging – whether by crooks as with Guinness or Anglo, or by governing institutions as with the Irish government undermining its gilt holders in favour of holders of slightly shorter maturity senior bank bonds.

    “markets” are so polluted and corrupted (soft or hard) these days that they are not really functioning.

    Institutions that have not been picking up pennies infront of the steamroller by using Greek and Irish bonds for capital purposes are “the market” too. In fact they are the part of the market that is supposed to be rewarded for not having their noses in the trough. By saying no, they refused to join in and make the underpricing of risk and associated boom more destructive.

    Institutions, cultures, banks that have demonstrably failed should be liquidated and the game should be run by the competent. That is what “markets” require to work. Otherwise they are not worthy of the name.

  35. It is so very odd that when the ratings agencies reports were totally at odds with reality during the boom the ECB and European Commission were not concerned but now that the ratings seem to be converging with reality the agencies power has suddenly become something for which the defenders of the Euro will not stand. Whacky.

    Can I be the second to recommend Paul Quigley’s link to the Richard Koo you-tube link?

    It is a long video but the upshot is that if Keynesian counter cyclical spending offends your sensibilities you need better sensibilities. Thee choices are either increased national debt and a slow economic recovery or an economic decline and increased national debt. It is not such a tough choice.

    It is uncomfortable viewing for the ECB enthusiasts burdened as it with historical analysis, I doubt many will stick with it the whole way through – the cognitive dissonance of trying to absorb it could kill them.

    Sadly the ECB may yet have its dream come true, save the financial sector and destroy European social democracy.

  36. What is the fundamental reason for the yield chasing by the banks that raises both commodity & sovergin debt interest rates ?

    Its because Congress / FED increased its base and banks use these new dollars to chase yield in a eurozone that has not increased its base in a year or so.
    Its that simple in many ways.
    Talk of fiscal union is a flag that integrationists wave to pursue their poltical agenda – perhaps this is a goal of the priesthood perhaps not.

    Anyhow there is simply too little money to pay interest on sovergin debt now – the creation of a new Euro bond will not solve the problem of a lack of base money as it may be paying Italian like interest rates or higher with a static monetory base.
    The ECB can create base money without reference to fiscal debt – unlike the dollar increase this will not raise the price of oil – it will raise the price of Gold – a inert accounting metal.

  37. @Shay
    The ECB unlike more tradional CBs cannot buy Goverment debt directly – but it can print a infinite amount of Euros which uniquely is not goverment money.
    Remember we are told that most of Euro debt is internal so how exactly is there a internal loss withen the Eurozone when such a event is sanctioned ?

    PS correction to the above ” this will not raise the DOLLAR price of oil”

  38. @Grumpy

    “Institutions, cultures, banks, that have demonstrably failed should be liquidated and the game should be run by the competent”

    +200bn

    The real heart of the problem is exactly that!! nobody in “power” on either side of whatever aisle they happen to be sitting will accept this simple reality…..

  39. And there really is no such thing as a “market” today in the sense that losers pay what they owe, winners get what they win. At a very very high level, the countries, banks, etc can’t be allowed to default because the crew that were “picking up pennies” in front of the steamroller of Greece and Ireland have NO capacity to pay if they produce losses. The concept that derivatives is a zero sum game and therefore we should only consider net positions is outrageously irresponsible when nobody knows if/whether the parties taking these huge bets can repay in the even of losses. AIG couldn’t and I would be that the vast majority of hedge funds that borrow from banks to buy leveraged CDS bets could never repay in the event of a real loss.

  40. Good to see but he needs an army of the country’s economists to back him up not just the usual veterans.

    The ECB need to be forced to stop being a fantasy based community, the quicker the better.

  41. Ambrose Evans-Pritchard estimates Germany and the other surplus countries will have to pony up 10 trillion Euros to bail out everyone, banks and sovereigns. They are still bailing out out the failed socialist state of East Germany where they have spent 2 trillion Euros. Think the Germans will go for it?

  42. @Robert Browne

    You sound more like Salome looking for the heads of the ratings agencies on a plate. You are not the reincarnation of JTB by any chance? Love to know your real identity.

    JTO:

    I don’t have much of an identity. I am nobody famous. I am a humble peasant from Tyrone, home of the world’s top gaelic footballers, golfers and migration forecasters. I am a household name only in my own household, and even then only occasionally. Feel free to ask the site orgnisers for my email address if it obsesses you that much, then email me, and I will tell you anything you wish to know about me, but you will be disappointed as there is nothing worth knowing about me. Who are you by the way? I have never heard of you outside of this site, but you seem to be borderline famous. I know nothing about you or what you do or where you come fom, but you have Dublin 4 written all over your posts.

    Anyway, no time for debate tonight. Tyrone has just won The British Open. A good omen for Sam Maguire in September. I’m certain that is a double that has never been achieved before. As I always bet on Tyrone in every sport, that’s a nice little earner for me at the expense of Paddy Power. I am just gutted that I didn’t put a large bet on, instead of a measly tenner. I wonder how Moody’s would have rated my bet, if I’d passed it to them for analysis on Wednesday last. I am sure they would have rated it as junk. But, he who laughs last laughs longest, as they said.

  43. @ Bklyn_rntr : “I would bet that the vast majority of hedge funds that borrow from banks to buy leveraged CDS bets could never repay in the event of a real loss.”

    You’d win your bet. There is only one pony in this race and the bookies have laid off on each other – and none have the funds to pay the winnings. The beginning of the end is nigh!

    The situation can, and will only be, resolved politically. However the pols have to test the force and direction of the breeze before they commit to a general debt write-down. Federal elections in D-land should bring the event horizon into focus. This time the taxpayers will not be able to pay-out. So, it has to be a political process.

    Brian Snr.

  44. @Brian
    Or monetize a massive massive amount….makes those nutty gold bugs seem a little less nutty, eh?

  45. Compare and contrast (10 marks)

    Two headlines from Sunday 17 July 2011
    *ECB’S TRICHET SAYS EURO IS NOT IN DANGER, REMAINS CREDIBLE CURRENCY {NSN LOHFVU12PFD0 }
    *ECB’S MERSCH SAYS DEBT CRISIS COULD TURN INTO CURRENCY CRISIS {NSN LOHN6T6TTDS0 }

  46. That Lunchtime Seminar by Hans-Werner Sinn in English, “Target Loans, Current Account Balances and the ECB’s Rescue Facility”, highlighted by jmg above, makes some striking points. But be prepared – lasts 1h15

  47. @ JTO

    Congratulations on Tyrone’s winning the British Open. It is amazing what a motivational psychologist can do for a player. if only the same could be done for a the Irish economy but in truth I feel it is the Germans and ECB that need the psychologist. btw I live in Dublin 7 not 4 very near Parnell Square the home base of ICTU’s but came to Dublin 27 years ago.

  48. @ Ciaran
    Not mutually exclusive.
    Trichet: The Euro will survive because statements from Mersch will panic the Germans into a more market friendly bailout.

    @ JTO
    Moodys don’t do golf but if they did would probably be the crookedest game in the world. They’d back a few and then the cut would not be based on the scorecards but on how they thought the player might perform.
    Agree that they’re chancers but the entire industry is diabolically corrupt.
    As for CMcC – still believes the world is governed by fairness and rules etc. Seemed to completely miss the property bubble. A slightly grumpier version of Patrick Honohan.

  49. @Darren Clarke

    Magic!

    @Colm McCarthy

    Blind Biddy & The Citizen Army await your call! (she notes that the job of quarter-master general remains open)

  50. @All,

    Since the discussion has kind of turned in to a link-fest, I’ve started a new open thread to share links like the ones DOCM and Cet Paribus have shared, and why.

    @Kevin

    Zing!

  51. I wonder who’s in the crosshairs this week… Belgium? Or will Spain come back into fashion?

    It seems to me that all plans are failing and all bets are off.

  52. Gonna be an interesting week.
    ON the one side those who want the Euro to succeed and on the other those who want it to fail.
    And in the middle – Germany. Will they flinch – will they impose burden sharing even when the market blackmails them with Italy? I think that at this point in time they will back down.
    But – then comes the problem – Greece is sorted for a while until Spain comes along.
    I would love to know this – what currency are the bond traders owed in if the Greek bailout goes ahead? If it’s Euro’s then the currency is safe but if it’s anything else it’s a gonner.

  53. ECB officials come and go but sovereign states need sovereign credit forever. It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.

    Unless Colm has contracted Sindonitis, a malady manifested by halitosis of the intellect, he knows that this would not be allowed happen unless we opt for suicide ourselves.

    Noonan can ask but I doubt that there would be interest in unwinding the Nov agreement. However, why would Greece be saved and we would later be given a PFO?

    In the meantime, we might as well get on with reform rather than waiting for the tooth fairy as haircuts would anyway come with a price.

    There are no doubt lots of believers in fairytales but it should be stated again, that Ireland was the only Eurozone member to socialise bank debt; it was contrary to Ecofin principles agreed in 2007, contrary to internal Department of Finance advice given in memoranda in Jan/Feb 2008 and the decision was taken deliberately without consultation with EU officials – – two senior officials at the time Christine Lagarde (head of Ecofin) and Joaquín Almunia (economic/monetary affairs commissioner) recently confirmed this to Irish media.

    When Anglo was nationalised less than 4 months later, we were out of aces.

  54. For those who are throwing mud at the rating agencies and ‘markets’. Its true that rating agencies are not perfect and markets are not efficient as evidenced by the recent housing bubble.
    At the same time speculators and investors only get involved in selling or shorting a countries debt when the economy passes a certain point where its situation becomes unsustainable. Noone has ever heard of a perfectly sustainable economy being destroyed by the markets. So focusing on their role is deflecting from the real issues.
    The Greek government was very vocal blaming fund managers at all stages in the crisis for their problems. Has that helped them at all? Who has been proved right in that case?

  55. Didn’t an Irish government adopt Plan A before it was foisted on Athens?

    Didn’t Colm McCarthy and others here advocate it?

    How’s it working out?

  56. I remember around the time of the bailout more than a few people on the blog expressing relief that adults would now be taking over management of the country’s finances.
    Now the bailout is in ruins and more experts are exposed as clowns.

  57. @all

    Lovely morning on bloomberg – Italy joins the periphery …

    10yr Italy 5.9 Spain 6.25 Ireland 14+

    Might be soon time for the periphery to swallow the core …. might as well try the doughnut solution – before Jean-Paul figures it out …

  58. @Michael Hennigan

    There is no need to unwind the agreement to save €20 billion bank recap.
    The Irish govt could issue a €20 bilion thiirty year bond in exchange for shares in the banks in order to recap the banks.

    That would save the cash for the more immediate requirements of the State.
    The ECB could hardly object. They are already accepting Govt bonds (junk) as collateral.
    In any case the State and banks are now entangled in such a Gordian knot that another twist of the rope would make little difference.

  59. I’ve serious problems with *bean counters* – sovereign default or whatnot.

    The mind-set in Brussels-Berlin-Paris-Athens-Dublin-Madrid-Lisbon tells us a lot about the present crisis and the ensuing cacaphony, since the crisis began more than a year ago, and Merkel and her cabal refused to admit that it was a Euro problem – ie. to rescue or bailout Greece.

    We must remember it’d have cost a fraction of what she finally had to agree to with Trichet’s gun to her head! Now it gets worse….and more expensive.

    I suggest we need to think of a different paradigm in which the Irish Tiger returns …and that it can master the macro crisis and move forward.

    The same applies to rest of the PIGS …

    A EU Marshall Plan is required to imapct the periphery vis-a-vis their current falling GDP/per capita compared to rest of the centre/northern regions. And this must be a long term project strictly under EIB authority.

    Instead of bailing out european banks, it’s time to invest in real economic indicators to make the PIGS competitive. Basta!

  60. @ Joseph Ryan et al

    I think you are mssing the point. Promissory Notes are fine for moribund banks like Anglo. But the point of the Pillar banks is to entice back depositors/funders. Hard cash is needed for that, not government bonds or promises.

    Unfortunately it won’t work, at least not immediately and that is because of the latest irrational fear, that Ireland will leave the Euro and redenominate all domestic contracts, including bank deposits, in Punts Nua which of course will resemble the Zim Dollar in terms of punter confidence.

    Of course there is no chance of unscrambling the euro egg (IT quote) but it does not stop people like Shane Ross spreading the rumour that the CBI are secretly printing Punts Nua even as we blog.

  61. If the rating agencies are unreliable, incompetent and rigged then what does that make the bond markets? The Irish two year bond has gone from 5% yield to 23% in six, very short months. Today, the Venezuelan bond yield is 12% by comparison. It is not a question of whether Ireland will leave the EC; Ireland, along with Greece and Portugal have already left. They have been effectively chased out by the bond vigilantes. When a countries cost of borrowing reaches the level of absurdity then it is all over. The key question now is when Merkel will be ingloriously pushed out. She has both Kohl and Schmidt on her tail as well the elections in September . My bet is that she will not last past September and that is when the partition of the EC will become “official”.

  62. BW II

    Depositors and funders won’t come back while the Sovereign’s credit rating is where it is. So the Core Tier 1 ratios where they are resemble a lighthouse in a bog. Magnificent but useless.
    JR point is why throw the few bob we have left in a futile attempt to shore up the unshore uppable.

  63. Looks like Zapatero will beat Merkel to the endgame. El Pais printed an editorial today raking him over the coals for running the Spanish economy onto the rocks and calling for his immediate resignation. The markets could make a cup of coffee nervous.

  64. Does anyone remember that the Rating Agencies that now rate our bonds are the same ones that ranked Mortgage Backed Securities as AAA, Investment Grade.

  65. @Adrian Lawler

    So if they thought MBS’s were AAA and we are now rated ZZZ in comparison, things must be even worse than we thought!

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