Bank Taxes and Buybacks

European politicians are engaged in frantic negotiations to deal with both the Greek debt problem and the wider question of the EU’s approach to the problems of peripheral countries.

On the approach to the Greece, I’m not encouraged by the reporting from the financial press which has focused on a bank tax and debt buybacks.

First, we’re being told that the idea of a tax on European banks to raise about €30 billion is emerging as a “popular consensus” approach to getting private creditors to “help pay for the estimated €115bn bail-out”.  As reported, it’s pretty unclear what happens with the €30 billion. Is it loaned to Greece and then later paid back to the banks that paid the tax? If so, it’s not really a tax in the usual sense of the word.  Anyone who understands this is welcome to explain it in comments.

However it’s structured, this seems to be the wrong approach to the wrong problem.  The goal seems to be to keep Greece’s debt burden exactly where it is (thus not solving the key problem) but to reduce the headline number for the size of a second EU-IMF loan (which solves a political problem in some countries).  In relation to private sector “burden sharing”, the approach still seems to view a Greek default as unthinkable (despite almost everyone viewing it as inevitable) while adopting a very strange approach to the demand for “private sector involvement”: Why should banks that don’t own any Greek debt have to pay a tax to contribute to a second bailout?

Maybe there’s a good idea hiding under this reporting: If so, I’m happy to have it explained to me.

Then there’s the increased focus on debt buybacks. The idea of debt buybacks is popular with both politicians and holders of debt. The politicians get to claim that there was no coercive default on the outstanding debt, thus saving face. The creditors usually manage to get the debt bought back at a nice premium to the current market value, so many of them make a tidy profit.

Academics that have looked at this issue generally don’t like debt buybacks. Here‘s a short article from VoxEU by some IMF staff. And here and here are two classic older articles written in the context of the 1980s Latin American debt crisis.

To briefly explain why buybacks are not as great an idea as they appear, consider the case of a country with debt and GDP of €100 billion, so the debt ratio is 100%. The market doubts this debt burden is sustainable and so prices the debt at 60 percent of its face value.

Now a programme is announced whereby funds are provided to allow the country to buy back all its debt. Those behind the plan imagine they can go into the market and start purchasing debt at 60c and get the debt ratio down to 60%.  However, because the debt ratio would be sustainable at 60% and at that point the government would be able to pay back all of its debts, there would be no need in such a situation for there to be a market discount on the price of the debt.

So, as the programme is announced and the government intervenes to start repurchasing its debt, the price of the debt would jump above 60c.  The final price of the debt would depend upon a number of factors including the terms on the money being provided externally to fund the programme. But the end result would probably be significantly less debt relief than obtained, for example, by a straight swap of new for old bonds involving a forty percent reduction in net present value.

In relation to the wider Euro area problems, I’m somewhat optimistic that Thursday will see a harmonisation and reduction of EU programme interest rates, extension of maturities, as well approval of EFSF loans for debt buybacks. Personally, I would like to see the remit of EFSF extended to allow it to lend directly to banks, replacing excessive ECB funding as well as Emergency Liquidity Assistance. Of course, I doubt if this is even being considered.

We’ll see what happens but my prediction is that political face saving will take precedence over economically efficient solutions.

Update: The FT has an answer to my question about the bank tax which mixes it together with the buyback plan: “According to officials, it would amount to a 0.0025 per cent levy on all assets held by eurozone banks and would raise €10bn per year for five years. The cash would go to the bail-out fund, which would then use the money to conduct a Greek bond buy-back.”

115 thoughts on “Bank Taxes and Buybacks”

  1. The bank tax idea is absurd not because taxing the banks is a bad idea but because it taxes everyone to pay for the foolishness of those who bought the debt. The thing which the ECB is most trying to avoid is the thing which is most needed to bring both fairness and efficiency into the market.
    Those who make bad decisions should take much of the cost of those decisions if they go wrong.
    I am less convinced that buybacks won’t work because for holders of this debt it may well make sense to take the offer of 60 (more likely 65) cents even though that might produce a debt/gdp ratio which is sustainable. That is because if others decide not to take it, perhaps on the grounds which you cite, they would end up having missed a great opportunity to get out of positions which a a constant problem.

  2. How will Greece’s projected 172% debt:GDP be affected by reducing its interest rate (again) and extending the maturity of its bailout repayment. Does it make a blind bit of difference if Greece pays 3.8% interest instead of 4.8% on its bailout? That the repayment of the €110bn first bailout be deferred from 2018 to 2030 but the country still has to repay the best part of €300bn non-bailout debt?

    Debt buyback is interesting but in addition to Karl’s observation, there is also the fact that if the market knows there is a special buyer and substantial new buyer demand then chances are, even on a supply:demand basis the savings will not be as expected.

    It seems anything but default is the first reaction, which is probably not terrific news for us.

  3. From the FT article:

    “The [tax] plan, which advocates believe could raise €30bn ($42.5bn) over three years, could help satisfy German and Dutch demands that private holders of Greek bonds contribute to a new €115bn bail-out.”

    And later:

    “The British Bankers Association added: “A bank levy doesn’t seem to be an appropriate way to deal with sovereign debt issues.””

    The article also discusses the points raised by Karl.

    In this case the word ‘levy’ seems more appriate than ‘tax’, although you could call it a hypothecated tax: it’s the sort of thing, once introduced, might not go away. It would also be a precedent for implicit tax harmonisation.

    I support some sort of additional tax for banks, nationally and internationally, but really rather straightforwardly to put bank profit back into state spending.

    Even the Telegraph is reporting 14 billion in UK bonus payments looks a bit much.

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8649088/City-bonus-row-over-sheer-greed-of-14bn-pay-windfall.html

    The scheme feels wrong.

    http://en.wikipedia.org/wiki/Hypothecation_(taxation)

  4. “political face saving will take precedence over economically efficient solutions.”

    Maybe this time around but the can is very close to a brick wall and won’t be kicked very far . The EU has to face the music in the next few weeks.

    Perhaps Germany’s Bild Zeitung could run a few features on what a much sought after “pure” currency free of PIGS has done to Switzerland’s exporters and will do to its jobs market.

  5. What the Greeks want…
    “Papandreou and Venizelos have refrained from stating publicly what they would consider to be a successful outcome from the talks but government sources suggested to Kathimerini yesterday that packages which include the issuing of Eurobonds or the introduction of a levy on banks that would raise money for Greece, both of which have been discussed, are viewed particularly favorably in Athens.

    Publicly, the government says that it has three “red lines” for the negotiations. It wants an extension to the maturity of Greek debt, which stands at about 350 billion euros, a reduction of the interest rate that Greece is paying for its borrowing and a guarantee of liquidity for the country’s banks.”

    Solution…
    “Venizelos said that the worst outcome for Greece would be for eurozone leaders not to reach an agreement. “The worst scenario is for there to be no solution at all,” he said. “Even the worst solution will be a solution.”

  6. Why can’t you understand this?

    There is a principle here. Rubbish bankers cannot be allowed to become unemployed to make room in the market for bankers who have demonstrated reasonably good judgement.

    In this way we can ensure that capital will continue to be allocated for use in the economy, by people who are demonstrably crap at it. They may be crap banks, but they’re our crap banks.

    Your problem Karl, is that you just don’t get capitalism.

  7. In the vox article …

    “Buybacks may also appeal to governments that want to support their domestic creditors. Unlike for most Latin American countries in the late 1980s, in the current cases a significant share of sovereign debt is often held by residents (both banks and the non-financial private sector). Then, how the benefits from debt reduction are split between creditor and debtors becomes less relevant. In particular, for debt held by (possibly troubled) domestic banks, any transfer from the government may help reduce future recapitalisation expenses linked to public guarantees.”

    It may help reduce future future recap expenses – but you don’t get any equity in the banks in return – I suppose there may be no equity left in any event and all other obligations are guaranteed…

    Also, from above

    “In relation to the wider Euro area problems… Personally, I would like to see the remit of EFSF extended to allow it to lend directly to banks, replacing excessive ECB funding as well as Emergency Liquidity Assistance. Of course, I doubt if this is even being considered.”

    Would it be a better/ another idea to let the EFSF take equity stakes in the banks that suffer losses as a result of a write down of sovereign debt?

    Giving these banks more secure long term funding will probably not be as effective as re capitalizing them.

    If 50% of Greek debt is written off – (leaving the EFSF with some of the losses) – and then the EFSF recapitalizes Greek banks at the same time – by replacing losses on Greek sovereign debt with EFSF bonds that can be repo’ed at the ECB – then the ECB’s concerns are addressed and the Greek bank situation is addressed

    In the long run the EFSF might get more back from the funds that they re cap the banks with then it would from piling more debt on Greece and allowing private sector creditors to continue to escape.

  8. It was only a couple of weeks ago that the EZ leaders announced the ESM would not have preferred creditor status. Now there’s talk of bond buybacks. Not exactly a coherent strategy.

  9. @ Christy

    “Would it be a better/ another idea to let the EFSF take equity stakes in the banks that suffer losses as a result of a write down of sovereign debt?”

    Yes it would but one step at a time my friend!

  10. @ Karl

    re debt buybacks:

    1. the alternative in your mind, a straight swap into a lower NPV vehicle, i assume you suggesting this be done without bondholder consent? Won’t this lead to bondholder revulsion and a long and lengthy legal standoff, ala Argentina?

    2. If a bond buyback is structured like the recent bank LME’s, where they tender for all/a large amount of outstanding bonds, this won’t have the same impact on bidding up the underlying bonds. They risk of an ESM-style haircut enforcement (however vaguely that is explained) would encourage a large level of take up.

  11. Its starting to look like Powerful People, the type that sit around stroking ugly cats, are telling Investment funds including Pimco and even China according to Brendan Keenan in last weeks Indo to buy PIIGS Bonds.
    One wonders how they were persuaded?

  12. @Eoin Bond
    “2. If a bond buyback is structured like the recent bank LME’s, where they tender for all/a large amount of outstanding bonds, this won’t have the same impact on bidding up the underlying bonds. They risk of an ESM-style haircut enforcement (however vaguely that is explained) would encourage a large level of take up.”
    Agree but the rating agencies will class it as some form of event/default.

  13. A country as small as Ireland would have to position itself carefully prior to initiating the buyback. The threat of default would have to be imminent, credible, and publicised. Riots would have to be occurring in at least six cities simultaneously. A few changes of Gov’t within 3 months would be a big help. Political, societal and financial instability running amok.

    Then voila! the last great hope Gov’t would announce the limited time offer.
    Could we, would we, are we capable of pulling it off? I would not bet on it.

  14. @ CP

    well, it was the coercive sweeper clause which caused it to become a default in those situations. Having the ESM operate seperately but at the same time may avoid that.

  15. @Ceteris

    “Agree but the rating agencies will class it as some form of event/default.”

    I would incline towards making no specific threat – like ESM seniority. If the market is left to discount a whole wide range of things – including a default and even Euro exit – on its own, then a low-ball offer is made (and the ECB arranges for Lozza BS to be locked up in a dark room with no phone or email for a month or so) then where is the compulsion?

    Everybody would be allowed to keep their bonds if the wanted. The buyout would be just another market player chancing their arm with a bid for stock 😉

  16. @ All

    Off topic. I was reading about JM Barroso’s speech. What’s this all about?

    “Mr Barroso also announced the Commission was sending a technical team to Greece to help the country absorb billions of euros of extra infrastructure funding to help the country get back on its feet.

    “The money was announced last week in an effort to boost growth. ”

    Extra billions of infrastructure funding? What now?

    http://www.independent.ie/world-news/europe/barroso-calls-for-decisive-euro-action-on-eve-of-summit-2826552.html

  17. @ Gavin

    its been suggested previously that the EU would be willing to frontload the EU structural funds into the near term, ie the entire 2011-2020 amount into 2011-2014, to help restart the economy.

  18. @Gavin
    I had noticed the offer by Barroso about a week ago.
    The Greek negotiation position looks strong…
    “Publicly, the government says that it has three “red lines” for the negotiations. It wants an extension to the maturity of Greek debt, which stands at about 350 billion euros, a reduction of the interest rate that Greece is paying for its borrowing and a guarantee of liquidity for the country’s banks.”
    + billions in structural funds to kick start the economy.

    What are we looking for…a small cut in interest rates? MN may get bamboozled by Madam Legarde again.

    @Grumpy

    “…then where is the compulsion?”

    It might have something to do with ‘mental reservation”.
    (cant do the smiley thingee)

  19. Maybe there’s a good idea hiding under this reporting: If so, I’m happy to have it explained to me.

    Here’s my understanding of this measure.

    Over the last 20 years, banks and the finance industry have enjoyed low interest rates, rapid communication and transfer of funds, and little oversight and regulation. They responded, as all banks to in good times, by creating a credit bubble, bursting it, and then expecting everyone to pay back their debts in a recession. The big issue this time around is that many EU Governments are also debtors.

    The EU, like all governments, needs a way to get back the money and credit which has been sucked into the financial sector over this period. Ordinarily, this would be done via, say, an income tax increase, capital gains tax, DIRT tax, etc. But the EU is a) ideologically opposed to tax increases, and b) the financial industry has become too slippery for such taxes to really be effective any more.

    But the bottom line is that in order to return the economy to a balanced state, to reverse the natural “soak up” effect of more funds flowing into fewer hands (an anti-trickle down effect), governments must impose taxes on those with excess money, and route them to those without. Government and its taxes act as an economic Robin Hood, correcting the imbalances which develop in an unregulated economy, forcing King Market to obey the laws of the land.

    My view is that, regardless of governments or economists philosophies, strategies, or positions, this correct must eventually be made. The government’s and societies hand will eventually be forced to correct these imbalances, regardless of its original wishes or intentions. Some examples might be, the responses across the world to the Great Depression in the 1930s, the response in the US to the Gilded Age excesses, and the French Revolution.

    This tax is an inevitable result of too much money in too few hands in the financial sector. It is a response, conscious or unconscious to this imbalance and is societies way of correcting the problem before it gets further out of hand.

  20. @OMF

    Wasn’t there was a Larry Summers paper years ago about, I think, market noise. Started out with the proposition that :

    “There are idiots…..”

    I concur, there are, and society has ended up with a lot of them getting a turn running things.

    Now they have been proved to be idiots, society is determined to find a way of keeping them in charge of as much as possible.

    The smart-arses or “hippies” if you like to start the process of dismissing them, cannot be allowed to have a turn because nobody likes a smart-arse.

    Capitalism has many flaws, but one common sense advantage is that incompetence resulting in failure allows incompetent individuals and institutions to be replaced by more competent ones. If you put up with the flaws of capitalism, surely it is reasonable to expect the to get the benefit of this fundamental characteristic.

    Lots of bankers need to be told they have failed and society requires them to find something else, perhaps more useful in any case, to do.

    Stop bailing out existing failed institutions thereby perpetuating the excesses and status quo. Get rid of the tax subsidies for debt financing of business that has taken power away from equity and placed it in the hands of stupid bankers whose only metric needed to be “is this business such a bad idea it will go bust – thereby risking NPL write-offs” – and they couldn’t even do that.

  21. @ OMF
    Excuse me for picking on only one point from your post, but the idea of our government as an economic Robin Hood is funny.

    I’ve read the fairly tales and watched the movies too. The government is King John, make no mistake about it. Banks, big PS unions, and some big business may also be King John, but the govt is the primo King John.

  22. On the point of the original post, a post bailout bank tax is a daft idea, taxing sensible banks, new equity in reformed banks and new entrants to the banking market to pay for the sins and errors of the dumb banks that got themselves into trouble before the crash.

    It’ll discourage competition in the markets where there isn’t enough (like Ireland) and discourages sensibly equity from keeping that equity in the banking industry. The only way it works is politically, and superficially at that. It’s similar in many ways to the impact of NAMA on foreign banks, as was commented on in 2009. http://goo.gl/JIcGz

    As for a buyback, surely it could only work either as a mandatory option after a tender was accepted by some majority of holders, or as an absolutely “in-extremis” offer when default was imminent anyway. Otherwise the presence of a new buyer will drive prices up and make the whole exercise essentially pointless.

  23. @Hugh

    “As for a buyback, surely it could only work either as a mandatory option after a tender was accepted by some majority of holders, or as an absolutely “in-extremis” offer when default was imminent anyway. Otherwise the presence of a new buyer will drive prices up and make the whole exercise essentially pointless.”

    Depends how you buy. If you say you will buy so much every so often then you push up the price. If you say you will buy stock at such and such a price and will not do so again then you needn’t push up the price. How it is arranged will determine whether it is a bailout of the banks of of the sovereign, or how much of each.

  24. @Grumpy
    I see RBS are offering to buy/ sell Greek 2 year at yields about 47%/31%.
    Massive spread.

  25. So the idea is to bail in all banks, to bail out the banks who (foolishly) bought PIIGS debt , hello moral hazard ?

  26. I’ve read the fairly tales and watched the movies too. The government is King John, make no mistake about it. Banks, big PS unions, and some big business may also be King John, but the govt is the primo King John.

    I’m more inclined to see the current Government as King Louis.

  27. So the problem of government debt which threatens the stability of EU banking system will apparently be resolved by reducing capital of banks. Well done EU!

  28. @Bond. Eoin Bond

    1. the alternative in your mind, a straight swap into a lower NPV vehicle, i assume you suggesting this be done without bondholder consent? Won’t this lead to bondholder revulsion and a long and lengthy legal standoff, ala Argentina?

    Well a coercive restructuring with 35%-40% haircuts was the starting point for Brady Bonds, widely viewed as a successful program. Argentina’s case involved a unilateral take-it or leave-it approach, whereas Brady Bonds involved a negotiated settlement with key roles played by the IMF, World Bank, US government etc. The context of a Greek restructuring should be more like the latter than the former. It appears that Schauble’s debt exchange proposals would have been along these lines (i.e. with a significant upfront haircut) but that proposal looks unlikely to ever be adopted.

    @grumpy

    Depends how you buy. If you say you will buy so much every so often then you push up the price. If you say you will buy stock at such and such a price and will not do so again then you needn’t push up the price.

    As I understand the theory, even a one-time offer to buy could raise the price significantly, though there would still be gains for the sovereign. Since a buyback will raise the probability that holders that don’t sell will be paid back in full (due to a more sustainable debt burden) then the price will rise to take this into account, such that selling and not-selling will have an equivalent financial impact. I’ve no idea how to quantify this however – i.e. whether such a rise would be 5% or 50% of the current market price.

    It is hard for the EU authorities to issue a convincing “this is your last chance” threat, since the ECB’s arguments on contagion (no haircuts – taxpayer pays for everything – else we stop funding the banks) are likely to be exactly the same in 2012, 2013, 2014 etc. Introducing a buy-back scheme, and at the same time trumpeting a position that there won’t be any haircuts or selective default is bizarre, but quite likely.

    @all

    B.E.B’s estimates of the benefits of an Irish debt buyback on the other thread were very instructive – and which I figure to be an approx 5% reduction in debt stock, and approx 5% reduction in annual debt servicing load. This is more along the lines of “nice to have” rather than “game changer”. Similar to burning the unguaranteed seniors. Since the coupons of the outstanding Irish debt are lower (3.9% to 5.9% I think) than the interest rate on EFSF loans (now >6%) we would effectively be replacing a larger amount of cheaper debt with a smaller amount of more expensive debt, though still for a net gain. It would be interesting to calculate the benefits with cheaper EFSF funding (e.g. at 5%, 4%, 3%), to see how far things would move towards “game changer” status.

  29. @ Bryan

    weighted average coupon on outstanding stock of Irish debt is 4.6% i think.

  30. @ ceterisparibus

    The DT is not the best guide to events in Brussels. In fact, the Commission is playing its classic institutional role as go-between, unfortunately in areas where the member states have refused to formally concede to it that role.

    Cf. the FT just now for, in my opinion, the real low-down. As Karl Whelan underlines, neither the bank levy nor the buyback is a good idea. For my money, there will be a fudge on both topics. The real action is elsewhere in relation to the “flexibility” to be given to the EFSF in other areas, notably credit lines.

    http://www.ft.com/intl/cms/s/0/f7d69900-b2ee-11e0-86b8-00144feabdc0.html

  31. This is how I read it:
    1: A fudge for now to get the private bond holders off the hook for Greece
    2: Spain needing bailout in 2012 (or sooner)
    3: The Germans going balistic
    4: No money for our next bailout in 2013 and
    5: Irish default in 2013 – all this hard work will have been for nothing!

  32. A bailout bank tax is being mooted alright. Legions of PR guys (and guyettes) and hacks-in-pockets-of-banks are being readied and primed as we speak. It reminds me of that Star Wars film where all the ranks upon ranks of robot soldiers get off the machines, being sent out to do battle for the masters of the universe or whatever they were. Get enough people to say the same thing lots of times and etc. etc.

    Fessing up, I took the shilling from one of them today. I’ve never produced so many slides and words in one day in my life as I have ahead of tomorrow. My Father describes what I do as ‘defending the indefensible.’ He would have a fit if he saw some of the lies I’ve been peddling today.

    I don’t think the politicos will get it to stick globally though and it will never get off the ground. Might make a nice sound bite for Merkel tomorrow night (or more likely, Friday morning by the time they finish) after the summit though… trying to look like they’re really doing something about it as some guy in Lederhosen behind the scenes gives that can another kick down the road. Sorry to report that these politico guys are too short-termist and/or dumb to realise they could be playing with fire this time.

    I was talking to a ‘pillar’ bank yesterday. They tell me they are giving out mortgages left, right and centre. Thought that was interesting so dug a bit… never spoof a spoofer. Turns out on questioning a bit more closely, it was the branch in the IFSC that was handing out all this money to people working close by. No worries there then 😉

  33. @Karl Whelan
    “If so, it’s not really a tax in the usual sense of the word. Anyone who understands this is welcome to explain it in comments.”

    Imagine you do a freelance gig (sorry, I mean some paid ‘consultancy’) and send out an invoice to the client and you then write a cheque to yourself to pay that invoice instead of the client paying it. The banks really don’t like the thought of this.

    “The goal seems to be to keep Greece’s debt burden exactly where it is (thus not solving the key problem) but to reduce the headline number for the size of a second EU-IMF loan (which solves a political problem in some countries). ”

    Hole in one Karl. Smoke and mirrors.

    Though frankly, whether it’s €115bn or €85bn is neither here nor there to your average German taxpayer.

  34. Parthian arrow (I really must get to bed): earlier this evening, a very nattily dressed spokesman for Merkel said something along the lines of private sector participation is a key requirement for Germany, etc.

    Some wag English journalist at the back shouted out: “Does that mean getting the French banks to pay for it then?”

  35. @DOCM et al.

    It is interesting that the buy-back scheme is not one of the 4 options, and only seems to be part of the bank tax plan.

    I view the baseline as “EFSF pays for everything” i.e. lends as much as necessary to swap out all private creditors at par, and takes on long-term debt itself, guaranteed by EU taxpayers.

    The question is then what PSI will be involved on top of this. From the numbers given in the FT article the bank tax is just a fig leaf. A 50% haircut, for example, on only €10bn a year allocated for buybacks is insignificant given a debt stock of €350bn. This also fits with what PR Guy says above. The French rollover plan has already been discredited.

    This leaves the debt-exchange. This is where there is a huge difference in approach between what would have happened had this problem occurred in the Americas rather than Europe. It would be unthinkable for the Fed or US Treasury to go for a “taxpayer pays for everything” approach. In my view the ECB needs to be put back in its box so that its role is to handle monetary policy and liquidity but not to determine how taxpayer money is spent. This could be done by indemnifying the ECB against losses (there are multiple ways this could be done) and as a result removing the veto that the ECB have over PSI, i.e. use EFSF-backed collateral so that the ECB can no longer threaten to pull the plug on bank funding.

    This would allow an organized PSI to occur, with the EFSF recapping banks as needed, however the key point is that some of the €1.8trn in EU bank equity would used up. It is the fact that the ECB are trying to prevent any of this €1.8tr pool of money to be used, protecting bank creditors at the expense of the EU taxpayer, that is so profoundly undemocratic, and goes way beyond their remit. The ECB is like a rogue state threatening a nuclear strike – they need to be disarmed. But will it happen? – unlikely I’d say. I think it more likely there’s a whole new era of Euro-style capitalism about to unfold that would make the average American banker blush, and that takes some doing.

  36. Barroso has now joined the IMF and others in asserting the urgency of a proper, realisitic deal. Also he goes further, being explicitly critical of Germany/ECB. http://www.telegraph.co.uk/finance/financialcrisis/8650929/Euro-reaches-eleventh-hour-as-Angela-Merkel-and-Nicolas-Sarkozy-hold-crisis-talks.html

    At this stage, I seriously hope that Irish officials have been well briefed on the menu of options, and I’m concerned that there hasn’t been wider political debate on the ramifications of the various options.

  37. EU Commission joining Germany and others in proposing a compulsory debt exchange? Maybe there’s some hope left after all.

    Reading between the lines in the most recent IMF report I think a compulsory debt exchange is favoured by the IMF, and they want the problem sorted, not fudged, to prevent spillovers to economies outside the EU. There is a serious need, however, for IMF staffers to attend a few “How to say what you really mean and avoid speaking in riddles” seminars.

  38. While it is easy to dislike the ECB for saying that a bond from a country in default can no longer be accepted as collateral it is very difficult to argue against their logic that it should no longer be accepted as collateral.

    In my opinion the ECB does not have anything close to a metaphorical nuclear weapon.

    A default would damage the balance sheet of the ECB, however, the ECB is backed by the euro-zone countries so while the ECB might be temporarily insolvent it is still likely that the ‘market’ would have confidence that the euro-zone countries would sooner or later top it up so the value of the euro would recover.

  39. The North American consensus is gravitating toward blaming the thrifty, productive, and conservative.

    globaleconomicanalysis.blogspot.com/2011/07/hugo-salinas-price-and-michael-pettis.html

  40. (Reuters) – Germany and France have reached a common position on a second bailout of Greece in their effort to prevent the country’s debt crisis from spreading through Europe, officials said on Thursday.

    The accord came after seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, sources in both governments said.

    Details of the common position were not revealed, but the French delegation said it would include a contribution to the Greek bailout by Europe’s banking sector. European Central Bank President Jean-Claude Trichet joined Merkel and Sarkozy for part of their talks.

    We did not get a look in…Trichet, Merkel and Sarkozy decided everything.
    This would make you wonder……

  41. This deal is a ridiculous piece of purely political legerdemain. As I said above, it bails in all banks, to bailout the banks who bought Greek debt. The politicians have decided to hit the banks for funding as such is easier to fool the public with than:
    – 1) Having the private sector banks take the hit
    – 2) Printing money (i.e. in effect a partial Euro devaluation), but a very ‘smoothly distributed’ option
    – 3) Doing a proper fiscal transfer

    The targetting of non involved banks is irrational and unfair, and as such sets a very dangerous precedent for the Eurozone : what right minded investor or funder will touch a healthy European bank ?

    The only reason for making all banks pay is that the politicians figure : it won’t hurt any one bank too much ; and that the banks aren’t popular. That is not a remedy…it is an excuse.

    As such this ridiculous ‘solution’ will only work for small change countries (Greece or Ireland), something as preposterous as this won’t scale to Italy/Spain. An overall solution framework needs to be realistic, and work for any/all of the PIIGS. Merkel and Sarko are playing with fire here, and the markets will likely recognise this.

  42. If you think about the tax on banks, say after reading this line from the Telegraph:

    “While Germany wants private bondholders to take a “haircut”, France and the ECB are determined to avoid any credit event that could be seen as a default. The possible compromises, contained in a leaked document, include imposing a tax on eurozone banks”

    …it makes you wonder whether some of the other nations that will be allowed in to the rubber stamping meeting should attempt to argue it would be more appropriate to go the whole hog – and try to find a way to apply a European witholding tax to Pig bonds.

    In this way you charge the banks who have as the Germans like to put it “speculated” on them.

    Maybe they could then try to persuade Moodys there was no default by the issuer – just an arbitrary tax applied on those who received payments from them.

    @Hugh S

    “As I understand the theory, even a one-time offer to buy could raise the price significantly, though there would still be gains for the sovereign. Since a buyback will raise the probability that holders that don’t sell will be paid back in full (due to a more sustainable debt burden) then the price will rise to take this into account, such that selling and not-selling will have an equivalent financial impact.”

    First you have to realise the current market price reflects both the possibility of no meaningful bailout and default, and also the possibility of a route out via fiscal transfers from the core. Say if you do something to convincingly rule out the second of those – then the price goes down even further. It is therefore possible to offset one effect against the other.

    It is a bit like the only realistic bidder for a company – much stale speculation in the market price already – finally making the expected bid, but under the current share price. If there is no sensible alternative, the bid gets accepted.

    @Karl

    “Likewise, don’t assume everyone who disagrees with you is a traitor to the nation who assumes others are thick.”

    Think you misread my point. I was trying to point out that your characterisation of people who have suggested a zero deficit option was unfair – as unfair as the alternative examples I gave you. I can’t believe you don’t accept that the apparent availability of a zero deficit option to a government would have, or would have had, zero utility in negotiations with EZ parties who themselves were pursuing unreasonable objectives. Without that option Ireland’s negotiators couldn’t negotiate and everybody at the table knew it.

  43. Well, as the eurozone lurches on to the next can kicking excersise maybe we’re one step closer to the realisation of some fundamentals. First among those must be the immorality & intellectual bankruptcy of theo-classical economics & it’s monetary & banking system. As operated by people like Mr ‘Unit Labour Cost’ Smaghi & his fellow ideologues. The creation of an exponential debt bubble, most of it to finance asset pyramids or other speculative ventures of little productive value to the real economy, and then to impose more debt and an austerity death spiral by way of a ‘solution’? Going to fail isn’t it? Only question is when & under what precise circumstances.

    Sure, we can kick the can again. Maybe Barroso’s idea of chucking in some ‘front loaded’ EU funds stimulus will push the can further. But if that is effectively just throwing more debt (& debt service) at the problem, the end result is still the same. The longer we kick, the weaker the real economy will become. The more wealth will aggregate in fewer unproductive hands.

    The banks must no longer be gifted the right to play fast & loose with debt/money creation to enrich themselves & pass the bill to the rest.

    Notwithstanding the difficulties of transition, solutions exist. Time for the economics ‘profession’ to cop on & step up?

  44. @Jesper

    Before I get to my main point I’ll just point out that all the ECB talk about how critical it is that a default rating by one of the rating agencies be avoided, is purely tactical. It is not so long ago that our friend LBS said this:

    On Monday 3 May (2010) the European Central Bank decided to no longer follow the rating agencies when assessing the sovereign debt of a country that has an adjustment programme with the IMF and the European Union – a programme which the ECB has judged positively. It was a logical decision for several reasons.

    [ some rating agency bashing…]

    Given that these behaviours are not always clear, it would have been a mistake for the ECB to continue to depend on the judgements of rating agencies. Having helped to draft the programme, the ECB – along with the IMF and the European Commission – is better able to assess the risk posed by Greece than the rating agencies.

    Seems pretty clear – the ECB is a big boy now and can make its own decisions. So why all the hysteria about trying to avoid a downgrade by one of these unreliable agencies that have “lost their credibility” in his view? A CCC rating is fine and dandy, but one notch lower is not? Also note that the Fed accepted defaulted collateral during the crisis, and the sky didn’t fall down. These were “recourse” transactions, whereby the Fed could have gone after other assets, though this was not necessary – all these loans were repaid with interest. This shows that the situation need not be portrayed as black and white.

    My main point is that the the ECB should be limited to a role of providing liquidity, and not take on a role as a decider of loss allocation for insolvent banks/countries. That should be left to the principals involved – i.e. the bank/sovereign creditors and the governments who will be spending taxpayer money. I would even go along with saying that the ECB should not be forced to take junk collateral – hence what I said above about the ECB being indemnified against losses. However this does not mean that the private sector should not be involved – i.e. that the €1.8trn is off limits. On the contrary a coercive restructuring is needed. Greece will never grow out of a 172% debt/GDP ratio.

    Thus if the principle that the ECB should not be involved in loss allocation were respected, there are many ways in practice that government backstops/indemnification could be provided – e.g. greater use of ELA, recourse loans, recapitalization of ECB etc. and to contain any second order contagion effects. Then governments would have a free hand to negotiate with creditors, instead of having options closed off to them by an unelected agency not accountable to taxpayers (don’t mention the European Parliament). The constituencies to which the ECB has loyalty are the EU banking system/creditors/moneyed-classes and EU federalists.

    Anyway it seems that the Three Important People have decided everything. I guess the great unwashed will be informed in due course.

  45. @grumpy

    …it makes you wonder whether some of the other nations that will be allowed in to the rubber stamping meeting should attempt to argue it would be more appropriate to go the whole hog – and try to find a way to apply a European witholding tax to Pig bonds.

    I thought of that too – perhaps it could be called a “service charge” or “convenience fee” to make it more palatable.

  46. @ All, Mr Bond & Ceterisparibus

    It’s been a great thread – back to one thing.

    “Mr Barroso also announced the Commission was sending a technical team to Greece to help the country absorb billions of euros of extra infrastructure funding to help the country get back on its feet.

    “The money was announced last week in an effort to boost growth. ” – Ind.

    “its been suggested previously that the EU would be willing to frontload the EU structural funds into the near term, ie the entire 2011-2020 amount into 2011-2014, to help restart the economy.” – Bond

    “I had noticed the offer by Barroso about a week ago” – CP

    But, but, cough, splutter – this seems terribly important and I’ve barely heard it discussed. Going back over in a simple-minded sort of way.

    Proposition: This side of the revolution, it would be good if Ireland could access the bond markets.

    At the moment this looks like a non-runner because, in spite of sticking to ‘the programme’, as noted by Moody’s:
    (1) There is confusion over the plan for international sovereign and bank bond markets.
    (2) Weak growth.

    Item (1) is the main topic here and more will happen today.

    On item (2), weak growth is likely to continue in as far as Ireland pursues deflationary policies – auterity budgets and bank deleveraging.

    What the country needs is a big fat stimulus of free money for constructive projects (let’s build Metro North! Let’s annoy R Tol, by investing in renewables, Let’s get R Fedigan in! Let’s ask JM Barroso how we can spend our pocket money, etc), whilst smoothly closing the fiscal gap.

    A good chunk from the structural funds over the next three – four years looks to me exactly what the country needs, and handily would increase the popularity of the EU project, and get the country back off the sick lists, reducing anxieties all round, and proiding a useful legacy for all.

    Structural Funds ahoy. Hope the government is on this. Could do with it being part of the conversation.

    @ PR Guy

    Great post at 10.16 – really interestin in the way the world works.

  47. We’re now hearing the bank levy has been taken off the table. Rumour only, but all very confusing. Real danger this ends in a mess tonight.

    By the way, next bailout country? Cyprus. You heard it hear first.

  48. @ All

    getting confusing and messy now, now sounds more like a forced debt exchange rather than a voluntary rollover

    *JUNCKER SAYS SELECTIVE DEFAULT FOR GREECE IS A POSSIBILITY

    *EU SAID TO WEIGH GREEK BOND PLEDGE TO EASE ECB DEFAULT CONCERN

  49. The reports of leaked papers seemed to indicate that all options except for the bank tax would result in a partial or selective default. The bank tax and the buy back have now been discarded. This leaves the French rollover plan, which had huge credit incentives, and the German debt-exchange, which had no credit incentives. I would guess that the compromise is to take the German debt-exchange plan and add some credit incentives. This will still result in a selective default, and no doubt that’s what was being explained to M. Trichet last night. I guess the EU will now be looking at how to ‘guarantee’ all the Greek collateral held by the ECB and/or some way to indemnify the ECB against losses.

  50. @ All

    Although not in any way an expert in these matters, it seems to me that the key phrase in the WSJ article is the reference to “30 year bonds bearing low interest and credit enhancement”.

    What remains to be seen is (i) how the rating agencies and the ECB react
    (ii) who picks up the bill for the “credit enhancement”.

    As regards the ECB, talk about giving a dog a bad name! There is nothing that the ECB would like more than to get back into its kennel i.e. sticking to its core functions and ceasing to be a stop-gap for the inadequacies of politicians. If the latter want to organise a “voluntary” bond exchange, it the responsibility of their treasuries to deal with the consequences, not that of the ECB.

    Unfortunately, whatever deal emerges, the incompetent politicians involved will have to go back to their parliaments and the ECB will have to continue to hold the fort.

  51. Two graphs to ponder:

    As can be seen, taking all debt together, private, public and financial sector, Britain (top orange line) is the most indebted nation in the world, far exceeding the eurozone countries now in so much trouble. Twenty years ago, we were round about average for the major advanced economies. Today we are way out there at the top of the leader board with Japan.

    http://blogs.telegraph.co.uk/finance/files/2011/07/mckinsey-graphic-for-web-395×288.gif

    Spain and Italy, point of no return?
    “The chart below shows the yield moves in the constant maturity 10y paper for the GIIPS countries. These markets traded a range between 6 per cent and 7 per cent but ultimately this proved to be a pause before the move to higher yields then accelerated. There is no consistent yield trigger level inside this range but market talk of point-of-no-return around the 6 ½% is not without foundation either.”

    http://av.r.ftdata.co.uk/files/2011/07/10-year-PIIGS-RBS-e1311062956771.jpg

  52. @ DOCM/Bryan

    11:48 21Jul11 RTRS-GERMAN GOV’T AND BANKING SOURCES SAY ECB WOULD ACCEPT SELECTIVE DEFAULT FOR GREECE
    11:49 21Jul11 RTRS-GERMAN GOV’T AND BANKING SOURCES SAY SELECTIVE DEFAULT COULD OCCUR IF FOR EXAMPLE EFSF WERE USED TO FUND GREEK DEBT BUYBACK

  53. @ All

    I’m just putting this in as a matter of record, as I think it will become more of an issue.

    The EU Regional Development Policy for Greece 2007 – 2013 is here:

    http://ec.europa.eu/regional_policy/country/prordn/search.cfm?gv_pay=EL&gv_reg=ALL&gv_obj=ALL&gv_the=ALL&LAN=EN&gv_per=2

    And the Irish one is here:

    http://ec.europa.eu/regional_policy/country/prordn/search.cfm?gv_pay=IE&gv_reg=ALL&gv_obj=ALL&gv_the=ALL&lan=EN&gv_per=2

    Each programme gives the amount of funds being put in.

    But this appears to be changing, see this Reuters report today:

    http://www.reuters.com/article/2011/07/20/eurozone-greece-taskforce-idUSB5E7IB01Y20110720

    ‘EU’s Barroso appoints body to help boost Greek growth’

    ‘(Reuters) – European Commission President Jose Manuel Barroso appointed a task force on Wednesday to help Greece use European Union structural funds to boost growth and help the country tackle its debt crisis.

    The appointment follows a decision by EU leaders at a summit last month to allow Greece to access billions of euros of structural funds to try to stimulate economic growth.

    “The Commission has decided to appoint Horst Reichenbach, vice-president of the European Bank for Reconstruction and Development and former director general of the Commission, to chair this task force,” Barroso said in a statement.

    “The Commission wants no stone to be left unturned when it comes to using structural funds in the best possible way to assist Greece in enhancing competitiveness, boost growth and tackle unemployment.” ‘

    Okay, so any chance any Irish (or Portugese) TD or MEP reading this, get on the case that in the interests of EU cohesion and growth, structural funds be targeted in these areas for exactly the same reasons so as to: “to boost growth and help the country tackle its debt crisis.”

    Why wait until it is too late to prevent a second bailout?

  54. So Trichet backs down, after painting himself into a corner. Not very clever.

    Also seems there’s quite a range of what “sources” and “officials” expect to happen today, since buybacks are now being talked about again. Anyway no worries – there’s still a couple of hours to go before the main meeting – should be plenty of time to get a new financial architecture for the Euro sorted.

  55. Oh today’s meeting is all so intriguing. Will they throw a bucket of sand or water at the problem.

    These patchwork fixes are making things too complex and are inadequate. Some fixes hamper future options. If anything, they tend to make the ez crisis bigger. Guaranteeing unsustainable debt burdens will weaken the guarantors’ ratings. (Perceived) Unsustainable debt burdens are seeing private funds withdraw to the core. There is a good deal in common with the Irish bank crisis. Eventually someone will have to take the losses. At this point it makes sense that any solution needs to factor in Italy and Spain.

    What type of central bank looks more credible – one that engages in QE or one that accepts defaulted debt as collateral?

  56. So the Efsf buyback will please Greece’s creditors but surely it will spook EFSF creditors.
    Would that plan not lead to decreaesed prices(increased yield) for German Bunds?

  57. @ Karl

    You were right. Totally crackpot idea. It has been dropped.

    Apparently what was being attempted was to tax only those banks which held Greek debt. Yet another desperate attempt to engineer a default which is not a default.

  58. 13:09 21Jul11 RTRS-DRAFT EU SUMMIT CONCLUSIONS SEE EXTENSION OF EFSF LOANS FROM 7.5 YEARS TO AT LEAST 15 YEARS — DOCUMENT

    13:09 21Jul11 RTRS-DRAFT EU SUMMIT CONCLUSIONS SEE RATE OF AROUND 3.5 PERCENT ON NEW EFSF LOANS FOR GREECE – DOCUMENT

    13:10 21Jul11 RTRS-DRAFT EU SUMMIT CONCLUSIONS: EFSF WILL BE ABLE TO INTERVENE ON A PRECAUTIONARY BASIS

    13:11 21Jul11 RTRS-EFSF WILL BE ABLE TO RECAPITALISE FINANCIAL
    INSTITUTIONS THROUGH LOANS TO GOVERNMENTS, INCLUDING NON-PROGRAMME COUNTRIES — DRAFT CONCLUSIONS

    13:11 21Jul11 RTRS – THREE OPTIONS FOR PRIVATE SECTOR ROLE IN SECOND GREEK BAILOUT REMAIN ON THE TABLE: DEBT BUYBACK, ROLLOVER AND SWAP — DRAFT CONCLUSIONS

  59. @EU Summit

    1 Good

    2 Good but what about us?

    3 Does this mean buying gov bonds?

    4 good idea to recapitalize – but why by lending money to states – how is this different in substance to the current situation

    5 fudge

  60. @ Christy

    2. Have to assume similar terms offered to us

    3. That, or by giving a “credit line” rather than an actual cash loan

    4. “non programme countries” probably the key there (Belgium, Spain)

    5. Thats the part that will be most discussed this afternoon i’d assume.

  61. RTRS-DRAFT SUMMIT CONCLUSIONS CALL FOR “MARSHALL PLAN” OF
    INVESTMENT, GROWTH STIMULATION FOR GREEK ECONOMY

  62. @Bond

    Thanks!

    If so, then

    2 good

    3 good

    will they have to extend the size?

    could they go further and let the EFSF buy the existing crap bonds on the ECB’s balance sheet so that it moans less about everything and reduces any threat to its solvency

    (would that shift more of teh burden to creditors nations who fund the EFSF more heavily than the ECB’s capital?)

    4 I suppose limits the downside on Spain – they can get a “bailout lite” just for their banks while they are on a fiscal diet – the state would still need to meet the interest repayments (albeit lower than private debt) and their gross debt would still rise – direct equity injections seem a lot cleaner and better

    also avoids the threat of IMF money coming in/refinancing, senior to everything, at approx 6% and thereby pushing heavier losses on everyone who is still locked in.

    5 I suppose we’ll have to wait and see

  63. @ Christy

    3. Yes, increase in size needed, only question of by how much, but cant see EFSF buying bonds off the ECB.

    (a) at what price? current mtm is loss making for ECB
    (b) its nice n hidden on the ECB’s balance sheet, EFSF is much more ‘real’ and has to be funded so.

  64. Ireland has €14bn yet to draw down from EFSF so if it is 3.5% cf 6% then we will save €350m max per annum in interest payments . Between now and end 2013 save total of about €450m because we will draw down €14b over next 24 mths.

    So far we have drawn down 3.7bn of EFSF which has max agreed 17.7bn bailout to Ireland. Remember we get 22.5bn total from EFSM and have drawn down 11.4bn to date. And we have 5bn of bilaterals without any drawdown yet. But Eoin seems to refer to EFSF only.

  65. @ Jagdip

    EFSF is the more complicated animal that requires parliamentary ratification, as well as changes to its structure. It is also the one that will be increased going forward.

    EFSM is a simpler EU Commission vehicle which will not be increased going forward, so only question is do you change terms on it retroactively.

  66. @Eoin

    I suppose acting the cute hoors and taking the funds received so far, most of which are on deposit in covered banks pending recapitalisation, and handing them back and then asking for them again as “new” lending would be out of the question. Does the government sign an agreement every time we draw down a tranche which forbids early repayment?

    I’m not suggesting the above mechanically but if it is theoretically possible then presumably it will be used by our men and women in Brussels today to secure retrospective lowering of rates.

  67. @ Jagdip

    It’ll be difficult, but it makes no sense to have the 22bn or so thats been drawn down remain at the ~6% rates. If they want this to work, do it properly for Gods sake. It’s chump change in the context of the overall EFSF and Eurozone, so may as well get it all over and done with in one swoop rather than waiting for the crisis to flare up again down the road. The only parts that could not be changed, as i see it, are the current maturity of the EFSF bonds and the cost of funds underlying them. So its a margin change for the current bonds, and then a much longer profile on the new ones.

  68. What is wrong with this country?

    *ALLIED IRISH SAYS EXAMINING IF FRAUD ON SOME ANGLO DEPOSITS

    *AIB STARTED INVESTIGATION INTO FRAUD IN ANGLO IRISH DEPOSIT BK

  69. The NTMA had conducted an investor relations programme in May and June of this year. But the recent downgrade of Ireland’s credit rating means that certain existing investors in Irish debt will no longer be able to purchase Irish bonds.
    ‘The key criteria investors will consider before deciding to invest in Ireland are continuing progress in meeting the fiscal targets agreed with the Troika, completion of bank recapitalisation, progress on bank deleveraging, further sale of NAMA assets, and action at EU level on the wider euro zone crisis,’ said Mr Corrigan.
    The publication of the results of bank stress tests on 31 March drew a line under the Exchequer’s exposure to the banking system, the NTMA said.”
    More waffle. Obviously the key criteria is investment grade rating and it is doubtful if we will achieve that any time soon with debt/GDP going to 120% in 2013.
    The road show was a washout, as he admits. I don’t think he will be doing any more of those for a while.

  70. @Eoin

    “What is wrong with this country?”

    Post-colonial boat-rocking phobia. However crooked or incompetent they are, they’re not British overlords so that’s OK.

  71. This thing gets weirder.

    ECB Seeks EFSF Compensation for Losses on Greek Bonds, DJ Says

    ECB compensation demands a “sticking point in talks”: DJ, citing EU official

  72. @Bond Eoin Bond

    It get weirder alright.

    Telegraph are reporting that the banks love it and that no haircuts for now…whatever that means.

  73. @Bond

    “ECB Seeks EFSF Compensation for Losses on Greek Bonds, DJ Says”

    I think that is a good idea – get the ECB out of the picture by buying their Greek bonds at par

    Clears the way for a restructuring – i don’t often agree with the position taken by the ECB but i think they are right here

  74. @ CP

    not so fast…

    PROPOSAL FOR PSI IN GREEK SOLUTION WOULD LEAD TO AROUND 20 PCT WRITEDOWN ON BANKS’ GREEK BONDS – BANKING AND EURO ZONE SOURCES

    Dunno how the accounting would work, ie upfront hit or accrue it over 25 years

  75. We now have clear proof of why the solutions are so bad.

    It now transpires it was France who was behind the bank tax to pay off Greek debt. Thus extremely narrow self interest (as it is French banks who have the largest exposure).

    If each country acts in narrow self interest….there will result a negotiating mess and sub optimal solution. This crisis is now clearly all about crisis of leadership.

    Ireland as a small country, was always going to have minimal influence. However we were a very honest player, and more willing than any to reform and do austerity. Thus we were in a position to argue that the real right thing should be done.

    However Kenny et al set the economically spurious ‘interest rate reduction’ as the ‘holy grail’. They did so for reasons of domestic politics, pure spoofery….but they set it up so they can claim credit for it….so now they have created a ‘narrow self interest’ myth that they are bound to.

    Thus there’s no chance of true leadership from Ireland. Another fudge is on its way….and the root cause of the fudges, has in fact been strengthened.

  76. @Bond Eoin Bond

    20% cut is not going to achieve much in terms of debt sustainability, especially with the mountain the Greeks have. From what I am reading a realistic cut would be c. 50% to have the desired effect.

    So are we seeing a repeat half-measure with more crisis down the road?

  77. @christie

    Unable to read that link from where I’m sitting. Do the words: “significantly reduce the Greek debt burden” appear in it anywhere?

    If not, is it (‘the crisis’) just being put on an even longer finger? Even more years of pain for Greece?

    Didn’t Carol Vorderman – of Countdown and dodgy financial services advertising on the TV fame – once front an ad for ‘restructuring’ your debts (put all your debts in one basked but don’t reduce them, simply pay a lower interest rate but over a longer period of time and get totally milked until you die). Perhaps she could help out?

  78. Did someone say a 20% cut in debt burden (I can’t turn the volume up, drat!)? That would help but maybe 40-50% would be more like it?

  79. It is so convoluted with so many loose ends that it is difficult to see the woods from the trees.
    For little old Ireland it looks like we will be paying lower interest rates but until 2026 with no haircuts to any bonds (bank or sovereign).
    A lot can happen in 15 years.

  80. @zhou,

    I believe this is precisely what was offered by Nicolas Sarkozy in March and which evinced what was regarded as a pompous response from Enda and which led to the Gallic spat.

    So we are back in March again, and not getting the lower interest rate has presumably cost us €500m (€3.7bn drawn down to date @ 2% reduction @ 7.5 years) or €250m if a 1% redn.

  81. @Christy

    Agreed, if the ECB had been given cover by the politicians to take losses it might not have engaged in the dysfunctional and damaging game of Chicken with the Pigs.

    @Jagpip

    or May 15th:

    “Interestingly for France, Richard Bruton tonight stated that the Irish government might be persuaded to engage in discussions about the CCCTB but any inclusion of the principle of profits being taxed where they arise would be “totally unacceptable”.

    Was it really sensible to publicly close off a face-saving position for France by making it so clear that they can whistle?”

    Do you think they might be able to keep their mouths shut this time 😉 ?

  82. Enda said that the CCTB was CPT changes by the back door. Has this position changed?

  83. @CP

    Believe so.

    At present our Corporation Tax receipts annually total €4bn which is 12.5% of taxable profits of €32bn

    Changes to the base might reduce the €32bn to €16bn.

    So we can keep our rate of 12.5% but our annual receipts might drop to €2bn.

    (The effect of the change to the base above is illustrative)

  84. @Jagdip
    Maybe it will be applied retrospectively like Greece’s reduction. Those reduced savings may have been put out by Noonan in the Dail to show the French we were willing to stick to our guns (at the time).

    @grumpy
    Yes – let’s hope they have learned the basic skill of keeping their mouths shut. Paddy likes to ride the gift horse rather than commenting on the quality of its teeth.

  85. from the Telegraph (who are ahead of the game and being quoted worldwide)….

    16.43 Andrew Lilico, economist with Europe Economics and a member of the Shadow Monetary Policy Committee, has blogged for the Telegraph on the “Eurozone Confederacy”.

    Most of the measures being discussed are variants of “more of the same” – the same stupid, misconceived, economically-ignorant, market-hating, ill-directed folly that has characterised policy-making since mid-2007. Most of it is just “one more heave”, good money thrown after bad.

  86. The assessments are coming in on the draft and are not going down too well despite the markets rallying…
    “Open Europe’s chief economist, Raoul Ruparel, said:

    Ultimately, today’s agreement is just further window dressing. Eurozone leaders have still failed to address the underlying problem of Greek solvency. Without some form of long term debt relief and a sustainable plan to return the Greek economy to growth, taxpayers will continue to be heavily exposed to a Greek default. A second bailout and the expansion of the EFSF may provide a liquidity boost, but will ultimately transfer risk away from the private sector onto the books of taxpayer-backed institutions.

    It looks as if Greece will be forced into some kind of temporary default, but the mechanisms for dealing with this look to be thin on the ground. This plan offers the negatives of a default, albeit a temporary one, without proper backstops or the positives of long term debt relief, which is what Greece, and potentially other struggling eurozone countries, really need.

  87. @ Ceterisparibus

    There is no disguising the fact that the UK is on the sidelines and has placed itself in a position of near total impotence in matters relating to the EU, the recently agreed sovereignty bill being likely to make the situation even worse. The more Open Europe fulminates, the more obviois this fact becomes.

    The EU will not oblige by falling on its collective sword.

    On the CCCTB issue, the proposal tabled by the Commission has to be based on an article in the TFEU that requires unanimity. This will not be forthcoming. The action will then move to adopting the measure as an “enhanced cooperation” between a minimum of nine countries all, it must be assumed, in the EZ.

    The question for Ireland is whether, in the context of deeper economic integration as part of the watershed agreement now in the making, it is wise to put all Ireland’s eggs in the one FDI basket. It comes back to the Berlin versus Boston argument. We cannot expect to run with the hare and hunt with the hounds.

    The wording as it stands in the draft agreement is just about acceptable, having regard to the fact that the deeper economic integration is as yet just a promise, not a reality.

  88. The plan seems to have made provisions for minimising the impact of a Greek default. Now it is up to Greece and its creditors to agree a structured default or end up with a plain default.

    20% reduction if the holders of the Greek debt agree with Greece, plain default (more than 20% reduction) if they don’t?

    As the creditors are likely to be of the ‘dog eat dog’ variety I wouldn’t expect a voluntary agreement to be met so in all likelihood a plain default is to be expected. I wonder when the yields will spike & the cry for a bailout of the failed investors will start again? Before the end of 2011?

  89. Flight to safety already under way in May. Statistics Canada reports, this week, net inflow (foreign purchasers) into Canadian national and sub national (provincial) bonds of C$11 billion in the month of May.
    This was before this weeks announcement by Bank of Canada Governor Mark Carney which changed subtly from “interest rates will rise in the medium term” to “interest rates will rise”. This is being interpreted as an Autumn increase of 0.25 to 0.5% which has led to C$ appreciation against the Euro and US$.
    Reports are that banks are now buying bonds of sub national (Provinces in Australia and Canada)) governments which is a new development. The hunt for returns is heating up.
    There is probably a signal there about how Germany, France, Britain, and Japan are being regarded.

  90. Confirmed, 30yrs at 3.5-4%.

    *EU: PORTUGAL, IRELAND GET SAME RATES, MATURITIES AS GREECE
    *EU SAYS SECONDARY BUYING SUBJECT TO ECB ANALYSIS
    *EU SAYS WILL LET RESCUE FUND BUY BONDS IN SECONDARY MARKETS
    *EUROPE LEADERS SAY EFSF TO BE ALLOWED TO RECAPITALIZE BANKS
    *EURO LEADERS SAY GREEK LOAN REPAYMENTS EXTENDED TO UP 30 YEARS

  91. We’re all saved! Thank you Angel Merkel and Saint Sarkozy.

    Now, let me see where the herd are going… so that I can go somewhere else.

  92. …Are you sure???
    “We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal’s resolve to strictly implement their programmes and reiterate
    our strong commitment to the success of these programmes. The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland’s willingness to participate constructively in the discussions on theCommon Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework.”

    This is a little bit sly. The “in this context” piece seems to link Ireland’s cooperation on the CCCTB to continued funding.
    Now I’ve tried but am unable to figure out the real implications of the CCCTB for Ireland. That’s for better brains than mine but well worthy of further investigation.

  93. The ECB got the indemnification/guarantees/credit enhacements it wanted, to the tune of €20bn for ECB recapitalization and €35bn for collateral. Not bad for a day’s work I guess.

    Also Ireland has agreed that there won’t be any PSI for Ireland, at least for anything guaranteed by the sovereign, which of course is almost everything. So Greece gets the benefit of PSI but Ireland does not.

    It was the ECB that demanded, and received, an undertaking by the Council that PSI would only be used for Greece. By what authority does the ECB have the right to determine which countries receive the benefit of PSI and which do not?

    Also any intervention by the EFSF in the secondary markets is now contingent on approval by the ECB. By what authority does the ECB have the right to executive decision-making about how taxpayer guaranteed funds are disbursed?

    There is a potential “back door PSI” by which the EFSF could purchase Irish bonds on the secondary market and then swap them for newly issued Irish bonds with different principal amounts, maturities and interest rates. However the Irish government has agreed not to seek PSI, and even if it did the ECB could prevent this on the basis of its control over EFSF intervention in the secondary market.

    So the outcome was that Germany got the PSI it wanted for Greece, but in return it was agreed that it would be a one-off and the ECB gets €55bn in credit enhancements.

  94. @Eureka,

    At this point I do not think anything has changed regarding the CCCTB. The only real issue is whether Ireland has agreed to not to use its veto if the CCCTB proposal ever comes before ECOFIN. I would say that almost certainly this is not the case. When Ireland and the UK use their veto then other countries may agree to move ahead with a CCCTB under enhanced cooperation. There is nothing Ireland can do about this, but by remaining outside, the impacts of any such CCCTB should be minimal.

    The issue may arise again in 2013, should Ireland’s baillout need to be extended. At that point the pressure may start to build up to agree to join as part of the conditionality of a new program. However other countries, notably the Netherlands, are also very much against the CCCTB, so my guess is that it will go nowhere, just like it has gone nowhere for the last 10 years.

  95. @ Bryan G
    You’re probably right.
    There was no real need to put it into that section on the national programmes in Ireland and Greece. It would seem to have been a separate issue but is now tied.
    It’s a little nasty. For example, at what stage will Ireland’s contribution to the debate be seen as not being “constructive”? Might that be where the veto issue comes in?
    I dunno – there was a reason for putting it in – and not just politics. It’s potentially a big earner for the bigger markets as that is where most of the sales would be taking place.
    I think Ireland will not be able to use its veto because of this section but accept entirely what you say about countries like The Netherlands

  96. @Eureka,

    I think it is just a face-saving measure for Sarkozy and that it will mean little in practice.

    However if Enda Kenny thought it was a bad idea last March to agree to this, he needs to explain why it is OK now, and what he thinks it means.

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