EU Council Statement: July 21

Here‘s the official statement of the heads of state of the Euro area governments from today’s meeting.

87 replies on “EU Council Statement: July 21”

Krugman notes about the text that :

“it’s even worse on close reading:

All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.

So everyone will cut; but also, everyone will “improve competitiveness”. So as the Spaniards reduce their labor costs relative to Germany, the Germans will also reduce their labor costs relative to Spain. Progress all around!

Not impressed at all.

Views on this ‘willingness’ by Ireland?

“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 the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework.”

For the future, the leaders said they would “commit to introduce legally binding national fiscal frameworks as foreseen in the fiscal frameworks directive by the end of 2012”. They will also press ahead with a single European credit rating agency.

“legally binding national fiscal frameworks” Now what does this mean?

As for the new credit rating agency.. I am sure the big 3 are unconcerned and it might make them inclined to take a harsh view of the impending Greek default.

As they say in Ballyheige beggars cannot be choosers. The kindness and generosity of the previous government to the banks has left the country in a severely weakened position. The subsequent unwillingness to balance the budget has weakened us even more. The icing on the cake is the governments inability to envision that an internal deflation is a prerequisite to turning the economy around.

When Germany and France complain about low wages and high productivity in Ireland, causing their major companies to relocate production to Ireland, we will know we are on the right track. As it stands now we are on the road to hell with CCCTB in a hand basket.

It’s always easier to lob rocks or grenades from the sidelines as economists in government generally find.

An opposite to Krugman on the ideological divide, John Taylor of Stanford, on Thursday in the Wall Street Journal blamed government intervention/regulation for America’s crash and slow recovery. He could have been Fed chairman.

The two biggest developed economies, which also have the biggest fiscal problems in the G-20, the US and Japan, have the lowest taxes; US taxes are at a 60-year low and Japan’s are not too far behind.

On Greece, Merkel deserves some credit on the burden sharing issue, and the FT says estimates from the IIF, the bank industry body, are that the private sector contribution will be much higher than the €37bn estimated by the Eurozone leaders for the 2011-14 period, and €106bn for the whole of 2011-19. When they include a further €12.6bn to come from bond buy-backs, they put the contribution for the next three years at almost €50bn.

Josef Ackermann of Deutsche Bank also showed leadership in getting an expected 90% participation from big investors in Greek bonds. It helps of course that DB has a low exposure to the peripherals.

The Irish advocates of universal default without any big consequences, will not be convinced. However, having no lender of last resort is not a good place to be for a country that would be Albania without FDI.

If Ireland will need debt haircuts in time, it will get them; in the meantime the challenges remain.

The Irish Times has a headline today, ‘Foreign direct investment rose 20% in first half of year,’ which seems positive but FDI may well have fallen!

The IDA had its mid-term review announcement yesterday; I contacted the agency and based on its hunch rather than a survey of companies, its estimated 10,000 to 11,000 jobs that will be created in 2011, will be offset by 67% of the target in job losses.

Has anyone done a forensic analysis of what the PSI ‘menu of options’ are? What does it boil down to in €’s and how it will come about? I’m running late this morning and haven’t had chance to dig for it.

In the final press release, I thought I picked up an ominous note of an expectation of even more stringent control/oversight/interference on periphery countries from the centre (and/or Germany).

Has anyone read President Von Rompuy’s press release? It is just awful (apart from the crap translation). It sounds like the bullied schoolkid getting cocky when the bully has moved to another town. Interesting that he mentions inviting Madame Christine IMF but doesn’t mention the three leading bankers he also invited.

Philip Stephens writes in the FT today: Behind the paralysis in Washington and prevarication in Berlin lies a troubling thought. Political systems in thrall to 24-hour rolling news have lost the capacity to make difficult choices. Globalisation imposes wrenching change and simultaneously saps the ability of governments to adapt. Politicians find it easier to argue about taxing the rich or cutting Medicare and about central bank bond purchases versus default than to confront the consequences for western societies of the profound upheaval in the global economy.

He concludes: Political leaders hold it within their power to fix things.

@ PR Guy

The new plan seems a solid, sensible package which is a big step in a good direction. It might form the basis for a sustainable trajectory to fix up the current mess in the Eurozone. Papandreou in particular spoke well; whether he can bring the Greek elites and populace with him on the path he proposes is a difficult question.

Details of the private sector participation can be found here

(One thing to note is that when a banker uses the term “contribute” it doesn’t mean the same thing as if you or I “contributed” some money to a charity.)

Basically there will be a debt swap where current Greek bonds are converted to new bonds at low interest rates and 15 or 30 year maturities, with the principal guaranteed by the EFSF. EFSF funds will be used to buy zero-coupon AAA securities to provide the guarantee. Thus private investors will thus have no risk on the principal only on the coupons. (The collateral arrangements for the 15 year option are a bit different).

There are 4 options: 2 Par Bond ones and 2 Discount Bond ones. The Discount Bonds will have a 20% haircut (but higher coupon rates). The expected reduction in Greece’s debt level from these Discount Bonds is €13.5bn.

The NPV loss to the banks will be 21%. A total of €135bn is expected to be swapped in this manner over 10 years, so I guess the true private sector “contribution” (i.e. loss) is approx €28bn.

Separately there will a Buy-Back program funded by the ‘official side’. This is not part of the PSI and is not described in the document. Reports say this will be worth €12.6bn. The total reduction in Greece’s debt level would thus be €26.1bn or only about 7.5% of the outstanding debt.

So I think the answer to the question “Who pays” is now pretty clear. The national governments in question will pay, and if they cannot pay, the EFSF (i.e. EU taxpayer) will pay. The PSI involvement has been capped at €28bn (which is of the order of 1% to 1.5% of EU bank equity) so you can see why bank shares went up quite a bit.

The EFSF is now on the hook for
– lending as much as needed to Greece, Ireland and Portugal until they regain market access
– buying the collateral to guarantee the bonds used in the PSI debt-swap
– €35bn in credit enhancements for Greek collateral at the ECB (though this is likely to just be used for a short time)
– lending up to €20bn to cover bank recap costs (including in non-program countries). This €20bn is not to recap the ECB as I had written in previous posts – the ECB won’t need to be recapped since all the Greek debt it has will be paid back at par – i.e. it should make a nice profit on this).

The size of the EFSF/ESM needed has not been mentioned anywhere, but with my reading of things there is now no hard limit on this – it will just be expanded as necessary.

So this does mark a definitive change in direction – it is not just another can-kicking exercise the manner of last 10 or so summits. The private sector appear to have had their “contribution” for the entire EZ crisis capped at a low level i.e. €28bn. National and EU taxpayers will pick up the rest of the tab as needed.

Readers may be amused by the title the scribd author gave to the Van Rompuy statement that he posted. When I saw the photo on the front page of the (online edition) of the Irish Times, the phrase “toothless simpleton” came to mind (quickly followed by images of horses running through council estates and men in platform shoes…)

@ All

One more bang on a drum I’ve spotted lying about. From item 4 on the statement:

“We call for a comprehensive strategy for growth and investment in Greece. We welcome the Commission’s decision to create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training.”

This makes perfect sense to me. Use EU structural funds to stimulate the local economy in useful ways whilst struggling to get the deficit down. It makes just as much sense for Ireland and Portugal.

Item 7:

“All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.”

This is really solemn now, I mean aboslutely serious. There wasn’t any giggling, no poking each other with pens when no one was looking, no snickering – no one quipping, ‘You can have the Acropolis if I get Ithaca’. No, this time. I mean it was like King Arthur and he Knights of the Round Table in there, when the Holy Grail was floating through, Ahh – Ahh – Ahh! Absolute inflexibility: that’s the ticket. Complete and utter inflexible, lip quivering determination. I mean it’s a question of honour dammit. So there. I mean. we really, really mean it this time.

Fans of The Simpsons will have noticed the similarities between Van Rompuy and Mr Burns.

Why is it that the most complex Grande Ecole double-speak that takes weeks to forge gets shattered in hours.

I took great confidence from the EU’s ability to come together and come up with solid plans decisively over the last week. To an extent, it ain’t what you do it’s the way that you do it. There is still an implicit risk that we will have to default. It also appears that the issue of unguaranteed debt is up in the air.

However, we have a better chance of avoiding default with lower rates and longer maturities. Also, the willingness to enforce debts on private parties holding Greek debt and the Eu’s efforts to enforce an orderly default for Greece means it is less likely that Greece will be force to leave the Euro which could have had rapid devastating consequences for us. It also makes it less likely that we will be forced into a disorderly default or be forced to leave the euro over a weekend.

Yesterday’s actions involved more than kicking the can down the road. The markets appetite (which the Eu has been building over the last year or so) for a form of default is finally being tested. This is to be welcomed.

@Karl Whelan

BTW – thanks for interesting link in post re immediate zero deficit.

@ All

Brian G’s summary of the outcome could hardly be improved upon (although he seems not to be too impressed by it).

By any measure, the agreement reached represents a watershed in German attitudes to the crisis. Merkel has now agreed to what she should probably have agreed to from the start but for which she would probably not have received political backing at the time. Having reached the edge of the abyss, she should now have no further difficulty, especially that she has been offered effectively ‘grand coalition’ support by the main opposition party, the SPD.

The outcome had little or nothing to do with Ireland although, from the inevitable spinning now going on, one would imagine that it was about nothing else. But that’s politics!

There is also now the interesting question of what the UK will agree to in relation to its bilateral loan. European solidarity anyone!

@ All

its a good, realistic and workable deal, about the absolute best that Ireland could have hoped for, and with no shortage (finally) of political bravery shown by Merkel (not so Sarkozy in that it won’t cost him much).

It gives Greece 10yrs or so to get its house in order, and it gives Ireland and Portugal a platform to start growing again. The real challenge from both countries is to grow again and create jobs at the same time as reining in the budget deficit. The roadblocks are now gone, and the victim mentality, much of it real, much of it not, has to be sidelined going forward. The hurdles we have are now very much domestic, and no longer external.

The EFSF is only 17.7bn in size (as the other loans are bilateral and so won’t be subject to this rate cut).

So how does 2% of 17.7bn = 354m lead Kenny to say this saving will be worth 600-800m per year?

I mean he has already said himself that negotiations still have to take place with Britain, Sweden and Denamr.

@Mr. Bond,

Well put. It’s time to put this ‘big picture’ moithering to bed and to focus on the long overdue internal structural reforms. But what are the chances that we will see a switch from this obsession with things macro to a more balanced focus on things micro on this board?

@ Rob

havent seen anything ‘official’ on it yet either, but EFSM changes are a much more straight forward issue, don’t require any parliamentary ratification or anything like that, just a simple EU Commission vote i think.


The Irish Tiger has to finally wake up and recognize its recent financial profligy and remedy its own sovereign household management, first, before crying *wolf* about remedy agreed by EU-17 to not only reduce interest rates but also exceptionally facilitate the rehabilitation of Greece under a Marshall Plan – un der EIB regie.

May be some of you should start learning a few majour European langues, istad of simply relying FTs eurosceptic opinion, including Krugman’s scepticism.



@ All

Item 12:

“We will implement the recommendations adopted in June for reforms that will enhance our growth. We invite the Commission and the EIB [European Investment Bank] to enhance the synergies between loan programmes and EU funds in all countries under EU/IMF assistance [Ireland, Greece, Portugal]. We support all efforts to improve their capacity to absorb EU funds in order to stimulate growth and employment, including through a temporary increase in co-financing rates.”

That’s very good isn’t it? We should be after that like a whippet. I don’t undertand the last phrase. Would anyone know how the increased involvement of the EIB would be of practical benefit?

If this is such a great deal why are 10 year Italian and Spanish bonds not falling precipitously.
ESFS money is not fairytale money – where does it actually come from – can somebody tell me that please?

10 “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 the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework.”

Wait until the next budget!

We’re – contrary to propaganda – much worse than Greece. Greeks are the bad boys hiding their money from government, we’re the ‘good boys’ who have no money. With a bit of work, the Greeks can be put on their feet ‘possibly’. Or, to avoid sexism, we’re ‘the fur coats and no knickers brigade.’

How can we buy this ‘we’re not Greece’ and give the nod to a better deal for Greece the full terms of which are not extended to us. You can’t have your cake and eat it, ie guarantee the banks and argue at the same time our economy is sound apart from the banks! The banks have scuppered our economy.

So, fair dues, no thanks to FG/ILP, Sarkozy/Merkel et al embarrassingly extended a few crumbs to Ireland compared to what was on offer to Greece. Extension of loans would have occurred anyway and this won’t avaoid default.

Stupidly FG/ILP said there would be no private sector involvement for Ireland and we would even negotiate giving up right to set our own CT!

To understand ILP/FG Tweety negotiators

We are in a far worse state than Greece. But ILP/FG have swallowed the propaganda they pass onto us, that we’re not.

In fact, we’ll plunge the economy into recession to grow our economy out of recession….Hah. hah

Sovereignty at this point is history! Great deal for Ireland, you must be joking! Its guaranteed default for us.


If it applies to the EFSM like Eoin says then yeah:

17.7 (EFSF) + 22.5 (EFSM)……..ALL FUNDS, drawndown or not.

2% of 40.2bn = 804m.

@ Colm

level headed as always….

@ Gavin

EIB will be used to funnel even more funding, on top of the EFSF/IMF loans, into Greece for specific infrastructure projects (environmental, roads, railways, some buildings, even SME support), essentially a massive stimulus plan. EIB loans are usually only granted alongside domestic ‘equity’ or financing, so i assume they’re asking the EIB to work with the EFSF (which will supply the domestic element) on getting more projects off the ground.


Re “Can anyone show a calculation which results in a €600-800m annual saving?”

More propaganda there, the true figure is approx €300 – €350 , the rest from total of €600-800m has yet to be negotiated and has yet to be agreed, if agreed it can come from bilateral loans and other funding sources EFSF? funds the details of which we should be given.

@Colm Brazil

Would have to agree. Although, as Eoin pointed out, the European Commission are in charge of the the EFSM and given their support for an interest rate cut over the last few months it would seem perverse if they continued to charge us close to 6 (or above 6 in some cases as it turns out).

However, it does not seem to have officially happened yet as you say.

A 2% cut:

On the EFSF (17.7bn) = 354m

On the EFSM (22.5bn) = 450m

The bilateral loans (4.8) = 96m

So if all come to pass it would be a 900m cut, hard to imagine Kenny would be naive enough to include a EFSM cut in his calculations unless he was pretty damn certain it was officially incoming.

@ Bond. Eoin Bond

I’m amused at the deal Greece has got compared to the torching of our position.

Greeks and Papandreou, of whom I’m a great fan, compared to what our titanic slitherers came home with, is nothing short of embarrassing:)

@ Colm

Greece got a 20% haircut on 160% debt/GDP. You’re right, they’re moonwalking around Athens right now high-fiving with their new 140% metric thinking how great the world is.

The “600mio-800mio” figure is not propoganda. You are unequivacally wrong. EFSF and EFSM are both included per Howlin this morning, and EFSM requires a simple vote change.

The CT rate is not, by virtue of this agreement, under threat, we’ve simply agreed that some sort of CCCTB discussion needs to start taking place, which it does. Where that ends is up to ourself.

The Society of Whingers will never be convinced.

We demand our entitlements and welfare.

@ colm brazel

Your vitriol wasn’t missed in recent months.

Greece is on its second bailout – – and you’re such a genius to foresee that getting banks and other financial firms to agree to haircuts for Portugal and Ireland also, would be a slam dunk.

@ Rob S

Even if the cut rises to €900 annually, the total is off approx €10 bn annual current repayment obligations? Has anyone done the total given on extending some loans out to 15yrs/30 yrs how this annual charge will change for the exchequer? Word is this is a process and negotiations are ongoing. This to me is a mess without clarity for the markets or for the public? But we will maintain our fidelity to the programme of deficit reduction already agrees. For 2012 this will be taking €3.6 bn out of the economy irrespective of any agreed reductions above. This will simply cripple the economy, destroy any growth, we’re turkeys for Christmas.

@ Jagdip

based off current swap rates, if we were to draw down everything today under the old rules, for 5 years, it would be at a rate (per Karls previous calcs) of rougly, 2.68 (swap) +0.10 (EFSF’s spread) +3.00 (EFSF’s margin), so 5.78%.

I think the rate suggested will be “between 3.5-4.00%”, so 5.78-3.75 (mid) = 203bps. 203bps x 40bn = 806mn.

I think, to be fair, the “600-800mn” was, like some previous NTMA statements on costs of funding, just for ‘indicative purposes’ and will ultimaltey depend on exactly when and for how long we draw down each tranche and how exactly the yield on that is calculated.

@Bryan G

“The size of the EFSF/ESM needed has not been mentioned anywhere, but with my reading of things there is now no hard limit on this – it will just be expanded as necessary.”

Not so fast! Don’t think the word “just” should be used here. Lots of dust settling at the mo but then you start to think about what? potentially 1.5 trln – then what does that do to say bund cds?

There could be political problems in the core over the next few weeks if the market compresses spreads from both ends.

If so then you have consider what might happen if Ireland and Portugal drift into expecting a similar deal down the line – or if in a few moths the focus turns back to Italian GDP paths or Spanish property really unravels. Would core electorates then accept full dilution of credit risk to their sovereigns? If so it would probably make CCCTB look small beer.

@ colm

you seem to think government debt is like a mortgage. It’s not. In nominal terms, almost no government has ever managed to meaningfully reduce down their debt. They have simply held it steady, rolled over debt and let inflation and economic growth increase the denominator in the debt/GDP equation. Basically we’re getting the option to take ultra long term funding at under 4%. You’d have to have a strange logic to think thats either a bad thing or expensive.

For those that care, top of my head maths reckons total Irish govt debt with a coupon of 4.7% (4.6% pre-crisis) on it will eventually become total Irish govt + EU + IMF funding at 4.45% on the back of this deal.


Many thanks. Yes have been looking at Karl’s note this morning which of course was his presentation to the Oireachtas at the start of this year.

If 10-year EFSM money cost us 6.48% in May, will that really come down to 3.5-4%?

But overall if both the EFSM and EFSF are included and the rates apply to previous drawdowns as well as future drawdowns then yes, it looks like that sort of range – €800m.

Those blasted moths and their Italian GDP obsessoin again! Remember when they were only interested in eating your clothes?

That was months ago though.


Regardless of what it ends up costing us – it would still be a 2% saving at the least. Your point regarding he fact the EFSF and especially EFSM funds have gone on to cost more than originally envisaged (but as predicted by Karl) are valid but a 2% cut (from 5.8% OR 6.48%) is still a 2% cut and doesn’t really seem (to me) to change the 800m figure.

Again assuming the EFSM does follow suit.

@ Jadpig

Sorry, I think I understand where you are coming from now.

You reckon the 600-800m should be much bigger if we don’t caluclate on the basis of the media reported “2% cut” but rather on the fact the statement says the new cost will be 3.5%.

@ Eoin Bond

Re “I think the rate suggested will be “between 3.5-4.00%”, so 5.78-3.75 (mid) = 203bps. 203bps x 40bn = 806mn.”

Fair point, but it hasn’t been fully agreed between all parties and has only been agreed on a small portion of the debt.

Re “you seem to think government debt is like a mortgage. It’s not. In nominal terms, almost no government has ever managed to meaningfully reduce down their debt.”

I do not. ‘Almost’ is the decisive word you use there.

Senior bondholder government debt, was not dealt with except insofar as we allowed for private sector involvement for Greece, but unbelievably we excluded ourselves from the options opened up by Noonan to burn unsecured senior bondholders, statement made following his meeting with Geithner some weeks ago. So we even drew back from that position!

We needed a full, comprehensive solution, using something like the new terms of the Stability Pact which will come on stream in 2013 to deal with banks like Anglo before they burn out of control. This will provide for the winding down of such banks before the public sector takes a hit through eg our guarantee. In fact, ‘the guarantee’ has been used as a stick to batter us with, the view from negotiators that it prevents EFSF and other instruments helping us. So it would appear it is strictly our own unilateral decision that we must burn taxpayers rather than banks!

We need something similar to the Brady plan, instead we came away with another fine mess…

I’m no genius and you don’t have to be one to figure out what I and the markets have been saying is correct re our junk bond status in the past:)

I figure my own position following this deal is mostly unchanged due to the tiny changes the deal offers to us.

I am interested in posters’ views on the significance of the words after ‘In this context’ in the Council Statement –

“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 the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework.”


Exactly the same way you interpret them!

As we gave them this – they’ve agreed to talk about Y.

@ Michael Hennigan

‘We demand our entitlememts & welfare’

Seems to me the ‘entitlements & welfare’ have been going to the financial sector to make good their gambling losses.

A significant sector of Irish society are paying for this ‘entitlement’ thru’ their loss of jobs & vital services such as healthcare, and thru’ no fault of their own. Many in work will be continuing to pay thru’ mortgages with steadily rising interest rates.

In case you hadn’t noticed, it was the massive austerity – fantasy ‘growth’ plan – for Greece that failed to deliver & precipitated the present crisis.

With only a minor modification in what was originally an obscene (could we say ‘entitlement’ ?) interest rate, Ireland is going down the same road. The fantasy, already miniscule, forecast for growth in the (non) ‘recovery plan’ (Nov 2010) has already been downgraded 3 times. Noonan & co. have already started softening everybody up for budget 2012 cuts needing to be greater than previously thought. (Surprise) There is no credible plan whatsover to reduce the unemployment back to even 10%, never mind 5%, looking 5 years ahead, 10 years, 15 years – nada, nothing.

The haircuts being talked about are tiny compared to the damage inflicted on many ordinary citizens so that the wealthy gamblers can continue to demand their ‘entitlements’ of yields far excedding the growth rate of the real economy. (Last time I checked that was called a pyramid scheme.)

Couldn’t agree more, Michael, demand for ‘entitlements & welfare’ is shocking isn’t it? But I think we disagree on whose demands exactly, & whose are being met.

This is good news. I can’t say I’ve figured it out yet – lots of pokey bits. There are significant steps (private investor participation, interest rates etc), but most importantly; it drags Germany deeper into the resolution process (as the bauld MacBeth noted:“I am in blood, Stepp’d in so far, that, should I wade no more, Returning were as tedious as go o’er”).

Perhaps these new measures will work and that is enough for now. Let’s face it nothing else will happen until the next crisis. If/when bond markets demand higher yields from guarantor states or they fear sov debt write-off now that it has happened in Greese, this deal may prove inadequate. Also a question mark hangs over the ability of the PIGS to recover.

For the time being Ireland should focus on problems it can solve. And there are many serious problems to work on. The reduction in the budget deficit should be accelerated. Longer term issues such as future pension commitments should be tackled now. Politicians claiming that we’re back in the gravy are not helpful.

There is a small hope that we could appeal to Germany on the issue of snr bank bonds burning. They were insistent on private sector involvement in Greek sov debt. Sovereign ranks higher than bank debt, so there is a certain logic we could use to make a case.


“sovereign signature” implies the existance of a document.

Bank bonds outside of ELG are repaid by choice and “calculation” by the Irish state. Hands up if you think there is a side letter that adresses these.

@ Mike Hall

‘There is no credible plan whatsover to reduce the unemployment back to even 10%, never mind 5%, looking 5 years ahead, 10 years, 15 years – nada, nothing’

Yes. As Michael H never tires of pointing out:
* we are not going to get any net job addition from FDI and
* our SMEs are generally tiny and lacking in export orientation

So if fiscal consolidation involves killing capital projects, and reducing the spend in the pockets of SW recipients and ordinary workers, then debt deflation and domestic sector insolvencies must worsen. It is magical thinking to imagine that some native economic Phoenix will rise from the ashes. Emigration has always been the default adjustment mechanism.

But then employment or migration not really fashionable economic topics since the Washington Consensus became entrenched.

Anyone signing up for the Greek deal will have to have strong belief on the ECBs ability to keep inflation under control. Currently the 2% target seems to be adhered to, is there any uncertainty in what a future ECB-board might consider to be a good inflation-target? The rather long time to maturity could possibly introduce some uncertainty…

…..and Italian 10 year yields are up….!
The real question that people forget is that this money has to come from somewhere. Where????

@ Grumpy,

My understanding of ‘sovereign signature’ is that it relates to debt the sovereign has issued – i.e. an i.o.u. signed by a government. It probably covers any guarantor commitments. In the context of the pdf, I read it as this rather than a private letter.

Unsecured bonds and especially Anglo & INBS could be in play, though you’re right to suspect the ECB may have sought to close this off.

It should be mandatory that any such sovereign commitments be presented to the Dail prior to signing. It’s alarming that Brian Lenihan could guarantee billions of bank assets to the CB without a public airing.


I did a lot of research to establish that a “formal comfort” was a type of shoe. It is indeed alarming to discover this was not what Patrick H received.

I doubt there is any sovereign signature in relation to non-ELG bonds.

It really is remarkable that for all the huffing and puffing over this, nobody has established who “the people” who decided what there was “political room” for. It is, flippancy apart, high time questions are asked and answers given.

@Bond Eoin Bond
“The CT rate is not, by virtue of this agreement, under threat, we’ve simply agreed that some sort of CCCTB discussion needs to start taking place, which it does. Where that ends is up to ourself.”
I wouldn’t be so quick to assume that we will not have to concede a lot of ground on the common tax base.
As Jagdip calculated this could cost us 2 billion a year in lost CT. And it looks like the thin edge of the……

@ CP

i thought i posted this earlier, but cant see it now – agreement to discuss constructively the issue of CCCTB was actually previously agreed by Kenny in March, so it looks like its a bone being thrown for Sarko on this agreement.

Taking a step back, and looking at the longer term prescription:

There is acknowledgement that mere monetary union didn’t work, so we are heading towards a (partial ?) fiscal union

However such leaves aside the ‘real economies’. Yes, perhaps again the hope is if (mon + fisc union) then (real econ converge). However has there been a study done of the heterogenous nature of the real economies ?

Greece and Ireland are very different…let alone say Greece and Germany.

We seem to be starting down a route again that may not be empirically viable…nor have we had adequate discussions of the (enormous) political implications.

And oddly…the solution chosen…really doesn’t address the issue that triggered this local crisis peak, viz concerns over Spain and Italy. Indeed, this solution wouldn’t likely scale to the debt of Italy (which has hopeless demographics).

Perhaps it is good that this is only a partial, time buying solution – as a lot of debate, and further analysis is needed


When I observe that Irish taxpayers have lost more money in response to dealing with a single failed Irish bank than the entire EU banking sector has lost in response to dealing with the entire Euro crisis (assuming my sums are right and that the solemn-inflexible-honourable line holds) then it is fair to say that I’m less than impressed with the size of the PSI contribution. In fact the €28bn is likely overstating it a bit. It appears from some analyst calculations that the value of the private debt-exchange offer is significantly above the current market price, so banks will make a profit on exchanges from bonds held in their trading books. Similarly the public buy-back offer will result in a profit on trading-book bonds. So the net loss is going to be somewhat less than €28bn.

It is really no more than a slap on the wrists for the banking sector. In fact I’m sure that because the actual amount of debt reduction due to the private offer was so low, that this triggered the need for the public buy-back offer (i.e. EFSF funds needed to secure a €12.6bn reduction in debt level via buy backs) in order to get this reduction up to some level that was not regarded as somewhat ridiculous. The PSI part of the deal is high on optics but low on substance, though that is no surprise.

By any measure, the agreement reached represents a watershed in German attitudes to the crisis.

I do have to agree with this. I think in the same way that the Irish government made a blunder from which it was impossible to recover, with the State assuming massive amounts of private debt, the German government made a blunder from which it was impossible to recover with its initial approach to PSI. Instead of an IMF-like plan to hit the current bond holders and to provide incentives for possible future bond holders (e.g. Brady Bonds), they came up with a plan that wanted to protect current bond-holders and to hit possible future bond holders. This was incoherent and unworkable, and incoherent and unworkable plans will always fail in the medium term when reality intrudes.

Having said all that there are clearly very real and significant benefits to Ireland as a result of the deal, though I think Mr. Noonan perhaps got a bit carried away with his statement

“If we’re not back in the markets, the European authorities will give us money until we’re back in the markets.”

I presume he meant “will lend us money”…

The apparently open-ended EFSF support, along with reports that the IMF will reduce its own exposure means that the “European solution to the European problem” is becoming clear. I’m sure the IMF will still hang around on the basis that some adult supervision is needed, and will retain enough exposure to ensure that its threatened withdrawal can be used to force an issue as occurred over the last two weeks.

The “economic governance” part of the agreement means that the “Eurozone bus” will be stepping up a gear. Ireland is sitting in the back seat of the bus enviously looking out at the UK, Sweden and Denmark who have their own cars and have more freedom to go where they want, rather than go where the bus driver is being told to go. I fear that getting on the bus in the first place is also a blunder from which it will not be possible to recover.


Yes the big structural imbalances, possibility of debt-deflation spirals in some countries, and shaky foundations in Spain and Italy all remain, so it is likely that the EFSF is going to need to get bigger and bigger. I think the Germans are just going to have to get used to backstopping the weaker parts of the EU, in the same way that the West Germans had to get used to supporting the East Germans. It is early days yet in this new phase – and it will take some time to see how things pan out. The trajectory for deeper fiscal integration has been set. I’d agree that in a crunch some extra-tough conditionality could be imposed, though I don’t think I’d go as far as this Irish Examiner report:

The hardline Finnish government also won concessions that bailed-out countries will have to mortgage key assets in order to receive loans in future. This means that if Ireland fails to return to the markets and needs a second round of emergency finance when the current arrangement ends at the end of 2013, buildings like Leinster House may end up effectively in hock.

I’m not sure I see Leinster House being converted to a large health resort & sauna complex for the benefit of busy Finnish executives wanting a relaxing weekend break.

@Bryan G.
re extent of PSI involvement (your IIF Link + other comments).

“The NPV loss to the banks will be 21%. A total of €135bn is expected to be swapped in this manner over 10 years, so I guess the true private sector “contribution” (i.e. loss) is approx €28bn.”

What is the significance of the use of 9% discount in the IIF calculation?

“All instruments will be priced to produce a 21% Net Present Value (NPV) loss based onan assumed discount rate of 9%.”

The IIF claiim below does seems very ‘disingeneous’ in light of your figures.

“Based on a target participation rate of 90%, the private sector investors through this program will contribute €54 billion from mid-2011 through mid-2014 and a total of €135 billion to the financing of Greece from mid-2011 to end-2020.”

Ah!, Now I get your reference to the word ‘contribute’.

Fantastic deal for the big European banks.
The debt crisis is resolved. The PSI is backstopped at €28 billion. European taxpayers get the rest of the bank and State losses. Not quite a Sept 28th Irish guarantee but not far from it at all.

@Joseph Ryan

“What is the significance of the use of 9% discount in the IIF calculation?”

I would leave it to others more familiar with bond YTM and time-value-of-money calculations to give a definitive answer, but my understanding is that the 9% discount rate means that in the view of the banks they are lending at a rate that is 9% less than what they would lend at in normal market conditions, to a country with the same risk profile as Greece. So instead of actually lending at 4% say, under the PSI deal, they would be lending at 13% in the absence of the deal. As a result this determines the size of the hit they are taking.

Fantastic deal for the big European banks.
The debt crisis is resolved. The PSI is backstopped at €28 billion. European taxpayers get the rest of the bank and State losses. Not quite a Sept 28th Irish guarantee but not far from it at all.

Completely agree.

@ Eoin Bond

“It gives Greece 10yrs or so to get its house in order….”

I admire your optimism but struggle to see any basis for it. Nothing has changed in the way the Greeks conduct their business in decades. They cooked books to get into Euro. Why on earth would they do any different in the future?

Interest rate relief is welcome and we are grateful. The focus is almost totally on the Gov’t, banks and debt.

It is long past time that we came to realise that there is a lot of unemployment, underemployment resulting in real hardship to real families.

To get the economy moving there has to be a significant internal deflation. Intelligent opinion makers, knowledgeable people on this blog and politicians should be promoting short term pain for medium to long term gain. That is balance the budget, thereby stopping the slide into abject poverty in its tracks. Let property values find their natural level, there is no need to have NAMA it is simply prolonging the problem. Eliminate the minimum wage immediately and address public service wages so as to bring them into line with EU norms.

The country has to produce jobs it can only do that with FDI. FDI will be attracted if we are competitive on three fronts, namely wages, property, corporate taxes. We did this already since 1972, it is not that we do not know what has to be done. On the issue of corporate taxes it is a moot point unless a company is making a healthy profit.

Has anyone calculated the average rate of economic growth required over the next 10 years to bring the national debt back below 100 percent let alone 60 percent. Given the constraints on government spending and the projected debt service costs, what does this require of the private sector? Further, given reasonable expectations for FDI, what does this imply for required domestic private sector growth? Lastly, will the pillar banks be capable of financing this?

@ Colm

debt/GDP is set to peak around 115% in 2013 i think, and even then we’ll be running a small deficit, so unless we start going for balanced budget or actual surplus, we’ll be looking at a couple of decades at least to get it back below 100%, though a bit of inflation in the 3% area would undoubtedly help that cause.

@ Dom K

i didn’t say it’d necessarily happen, just that that was the opportunity they’d now be given! To be honest, if they can’t fundamentally change the way their economy works, or at least show progress to that end, in that timeframe, with all the help they are being given, then they probably don’t deserve too much help from the rest of the Eurozone. They have 10 years to show they actually want to be part of the Eurozone.

The only ways I can see any private sector losses on the deal for Greece is if Greece defaults and for the ones that agree to debt buybacks?

Even if Greece were to default, the private sector loses out only on the rolled up interest?

It would be interesting to know why the investors in Greek debt benefits so greatly from this ‘exceptional and unique solution’. It is said that this solution was ‘required’. Why?

@ Bryan G

I posted this link some weeks ago but do so again as both you and Joseph Ryan will find that the paper in question comforts the thesis that you are defending.

I am not a fan of the decision by Ireland to join the euro. The implications were not adequately weighed. But, to coin a phrase, we are where we are.

The paper by Scharpf reminds me of an elaborate calculation in which there is a fatal error. There are several in the paper, the most notable being the idea that there exists an “optimal currency area”. I am no economist but I know enough from my life experience that such an animal cannot conceivably exist. The period when the Irish pound enjoyed parity with Sterling is an example. The Belgian-Luxembourg currency union is another.

Trichet dealt with this very issue in a recent speech.

He is, of course, ignoring the existence of a federal budget in the US and, more significantly, the contrast between the US and the EU as a full internal market. The latter exists in the US but not in the EU, one of the major brakes on it being the attitude adopted by Germany to liberalising so called sensitive areas of the German economy from Sunday opening to the rules governing the activities of chimney sweeps. However, in the context of the general point that he was making – that the US is as heterogeneous as the EU – this omission is acceptable.

The west has lost its vision thing – in fact it lost it over 40 years ago.

When America experienced its first oil shock it cut capital & technological expenditure to sustain unsustainable consumption.
Continental Europe was about 10 years behind and died when France finally replaced its mechanical enginners with financial ones.

Maybe its time to accept the wheel has turned – the population is simply too delusional and juvenile to change the present course , momentum has built up as the working generation pre 1960s has died.
Its over , all empires collapse – we are just unfortunate enough to be living through one of these phases.
Protecting interest income by destroying capital spending is the hallmark of decline – entropy is now baked into the cake.

@Mickey Hickey
“The country has to produce jobs it can only do that with FDI”
Why? Is Ireland the only western country unable to create its indigenous businesses?
If you go from an economy based on a construction bubble to one based on foreign decision makers you go from an addiction to another one and you will be at the mercy of events you have no control of.

@ Overseas commentator

The Irish banking system is bust, because of its involvement in property speculation. Our banks are obliged to rebuild shattered balance sheets. Deleveraging entails, among other things, withdrawing credit from existing Irish businesses and denying credit applications from new ones.

Some business credit is of course extended by non-Irish banks, but they have had their fingers burned in our property bust too. People are very relucant to lend into an economy that is seen to be in deep trouble.

All in all, that’s a pretty unique, and miserable state of affairs, and there is no obvious or quick way to fix it 🙁

As to the larger issue of why business in Ireland has always had problems, you could take a look at Joe Lee’s Ireland 1912-85.


Many thanks for the ref to the Scharpf paper. Although he is not that familiar with the Irish story, the general thrust is very enlightening.

‘….the intended practice of the Excessive Imbalance Procedure would become another instrument for promoting market liberalism in the European Union. This tendency has characterized European legislation and decisions of the European Court of Justice since the early 1980s − and it is in the process of transforming the “social market economies” of some EU member states into “liberal market economies’

That fits with the logic of globalisation and international competitiveness.
If Scharpf is correct, then informalisation and casualisation of our domestic economy will accelerate, as public spending is reduced and credit is steadily withdrawn from our state agencies and existing domestic businesses. In other words, the form which our integration will take is one which will entail the erosion or outright destruction of many national institutions and customs.

The presence of a large pool of immigrant labour is already facilitating that process, which is experienced as positive by employers and consumers.
The longer term prospects for employees and consumers are much more negative.

One thing is for sure. It won’t be a post-industrial wasteland, like so many parts of the UK. We never got handle om the industry thing. I am thinking more like Injun country with agency workers, bunged up public services, defensive, gated estates, and marginal outcasts. Just like when they abolished Speenhamland in the 1800s.

@ Dork

‘Maybe its time to accept the wheel has turned – the population is simply too delusional and juvenile to change the present course , momentum has built up as the working generation pre 1960s has died’

I was thinking the same thing as I walked around Dublin 2 yesterday. Crisis, what crisis ? 🙂

@ Paul Quigley

I have to confess that I had never heard of Speenhamland but, when I looked it up on Wikipedia, the resemblance to the Hartz IV reforms in Germany under Schroeder is striking cf. reference to the increase in social inequality in Germany at page 28 of Scharpf paper. (The level of assessment at the individual, and the associated bureaucracy, that the reform implies is quite extraordinary. It is to be hoped that we will not take the same route although fraud must, of course, be tackled at all levels).

This brings me to my usual point of reference on Sunday mornings, the contribution of Colm McCarthy in the Sindo and, for once, the rest of the paper which I usually do not bother with. The general public have a lot more cop-on than they are generally credited with. They know what the two elephants in the sitting room are: excessive levels of (i) social welfare expenditure and (ii) public service pay and pensions (universities included).

The only quibble that I would have with the article is its title “IMF wins key battle with Europe on debt”. This reflects a common under appreciation among Irish economists of the international political dimension (which is quite puzzling as it is never overlooked in a domestic context).

The IMF is dominated by the same countries as dominate the EZ (with the exception of the US, the UK and Canada) and the Washington retains, of course, a veto voting power. It would be more accurate to have run the article under the title “US wins key battle with Germany on debt”. All Obama has to do now is win a somewhat similar battle in Washington.


You said: “The general public have a lot more cop-on than they are generally credited with. They know what the two elephants in the sitting room are: excessive levels of (i) social welfare expenditure and (ii) public service pay and pensions (universities included).”

I’m not disagreeing with you (that these are two high priorities for Ireland to sort out) but I’m not so sure about the “cop-on” – especially where the general public are concerned.

I would attribute the views of of 80-90% of the population towards (i) and (ii) more to the general feeling of: “I’m suffering so I want others to suffer with me/If I’m going down, they’re going down too/I believe all the propoganda I’m fed about this and don’t care whether it’s true or not.”

You might be surprised at just how lazy most people are: they mostly believe anything they’re told without challenging it and have a natural first discussion topic (apart from the weather) along the lines of, “ain’t it awful.”

Sorry if I sound cynical but those views are underpinned by many years of dealing with the general public. Where economics are concerned, most people don’t have a clue and will happily accept whatever they are spoonfed (you only have to take the ‘n’ out of that word!) by those who shout loudest (i.e. have best access to the media).

Thankfully, there are people on sites like this who don’t accept whatever they are told at face value and they will actively go out of their way to question and challenge. The general public would be in a far sorrier place today if those people weren’t around (and as history has demonstrated, they are often the first people removed from the scene – the disappeared – in less democratic states).

p.s. what does DOCM stand for? Other than a Word Microsoft Office Open XML Format Document (Macros Enabled) file.

I genuinely do not understand the concept of austerity in one sector so that consumption can be increased elsewhere.
Whats the point if you do not expend this new surplus on capital & technological spending ?
Sacrificing ones wages / entitlements so that more can be consumed by a person earning interest income sounds like depletion economics to me.

The wages / entitlements vs interest income pitched battle is such a sad affair – all that noise and smoke and such little invention to show for the effort.


Would tend to agree with you. This blog is streets ahead of the general public in terms of its participants understanding and familiarity with economics – and just imagine what might happen if Henningan and Whelan got trapped in a lift over a bank holiday weekend 🙂

Most people have little clue and either don’t have the skills, energy or time to even begin to educate themselves.

As for DOCM – my theory is “dork of cork manufacturer”

Kenny deserves credit for standing up to TPTB (the powers that bully) at his first Euro meeting. I imagine he was instantly told by the rest of our shocked establishment to stop immediately. From now on he was to adopt their preferred Oliver Twist negotiating strategy that has, er, served us so well in this crisis. Some marks to the government for trying but no more that that given that they had already given up on getting a reduction within – lest we forget – only a handful of months of taking office.

The credit for this deal could instead be given to the following troika:

1. Pressure from the financial markets, which bear so much responsibility for the great recession and will likely cause another within a generation.

2. Greece’s scoundrel politicians, whose attempts to lecture their public on responsibility rightly drove them nuts.

3. Silvio Berlusconi. Enough said.

This is still good news though and if the Euro zone stabilises and then grows we can expect further reductions. The Europeans will squeeze as much from us as they need to. We will be reformed and concessions made. This will be done primarily in their own interest but with some morality and fraternal feeling also, to be fair. It is in their interest due to pressure from the markets, who are not acting due to any morality or fraternity.

Given our establishment’s competence level, courage and bargaining position this was always the most likely way things would happen. On the plus side, diplomatic negotiations are one of their few strengths so they will deserve some credit for future concessions as they do for this one.

I note that Karl Whelan is the subject of what seems to have become an increasingly personalised hostility from some normally reputable commenters (and another commenter). It’s unfair, appears very petty and is having a seriously detrimental effect on the blog discussion. The blog and the country would lose much if he was driven away and if you think differently….you’re wrong and just take my word for it.

Comments are closed.