Not so stupid

This post was written by John McHale

While perhaps it is just an August effect, the broad quality of the analysis of European crisis-resolution efforts has been disappointingly poor, with a message the often does not go much beyond self-satisfying statements about the stupidity of European policy makers.   

To make sense of more recent developments, I think it is critical to go back to the previous Franco-German summit at Deauville in October.    The Deauville accord put in place plans for the permanent bailout mechanism to replace the EFSF in 2013.    Understandably, debt restructuring was envisioned for countries needing new programmes under the ESM to limit both contingent liabilities and moral hazard.   Unfortunately, however, this attempted strengthening of market discipline proved devastating for the creditworthiness of countries where any doubts existed about their ability to stabilise debt levels.   Ireland can be seen as the first casualty, first getting sucked in and then actually seeing its bond yields rise steadily as the extent of default risk under the new arrangements became more evident.   The ambivalence about default among key Irish opinion makers did not help.   We then saw Portugal get sucked in as doubts emerged that it too might get sucked into the “black hole” of an EU/IMF programme given the limited nature of the exit options.    The realisation that the structures that had been put in place were effectively a machine for self-fulfilling debt crises really came home as the creditworthiness of Italy and Spain began to ebb away.  

The July 21 summit was a welcome attempt to move away from this “market discipline” regime.   Although you would hardly know it from the commentary, and recognising there is a long way to go, the summit has been highly successful from an Irish perspective.    The combination of the interest rate reduction, lengthened maturities and a more open-ended commitment to countries without imposing debt restructuring has led to a dramatic fall in Irish bond yields.   10-year yields have fallen from over 14 percent to under 9.5 percent.   Even more dramatically, 2-year yields have fallen from 23 percent to under 9 percent.    Clearly, the measures taken at the summit were not enough to stem the doubts about the creditworthiness of Italy and Spain, and their yields continued to drift upwards in the days following.   Subsequent intervention by the ECB – really the only entity with the firepower to make a credible commitment to a sufficient backstop – has been quite successful in shifting from a bad equilibrium where expectations of default change the fundamentals and risk becoming self-fulfilling.   

None of this is to say we are anywhere near out of the woods.    More bad luck has come with increasing signs of a significant global slowdown, which jeopardises debt sustainability for many countries.   There are also lingering doubts that the ECB and other major central banks have the stomach and political support to do what is necessary to act as backstop for financial systems, though I believe these doubts will prove unfounded.   

Having this strengthened backstop is effectively to move decisively towards what Peter Boone and Simon Johnson label a “moral hazard regime.”   It is no surprise that the governments of countries taking on more risk to backstop the system want strengthened fiscal discipline to replace market discipline as far as possible, not least because of the constraints of domestic politics.   This is what the Paris summit was all about, although the efforts may have been a bit clumsy and there is a long way to go to workable institutions.   Commentators here might ask themselves how they would react if Ireland was in the stronger group and taking on a large contingent liability relating to weaker countries.    European crisis-resolution mechanisms are moving in the right direction as the nature of the trade-offs is better understood.    We could have a more constructive and informative debate if we spent less time harping on about the stupidity of others. 

85 Responses to “Not so stupid”

  1. Gavin Kostick Says:

    @ John McHale

    “More bad luck has come with increasing signs of a significant global slowdown.”

    Bad luck or the result of austerity packages all round?

    Heather Stewart in the Observer

    “Panicky investors surely can’t be expecting a quick cure for this malaise”

    “And markets don’t really know what they want – or rather, they want inconsistent things. Anxious bond investors demand austerity, austerity, austerity: Ireland, Greece, Portugal, Italy and now even France have lined up to offer civil servants’ scalps and taxpayers’ hard-earned cash to convince their creditors they’re back on the straight and narrow. The poor Italians have even had to promise to cut back on their cherished public holidays.

    “But when the austerity measures bite, they eat away at confidence and sap demand. Economic growth slows; and the markets, which demanded the fiscal self-flagellation in the first place, are driven into a fresh panic.”

    http://www.guardian.co.uk/business/2011/aug/21/panicky-investors-surely-cant-be-expecting-a-quick-cure

    Any offers on how to boost growth whilst closing a deficit? I think the Structural Funds have a role to play - Hoganmahew seems to have thought further down this line.

  2. Brian Woods II Says:

    @ John

    Sheer common sense, as usual.

    The fact is we are all in this together, we will do what it takes. If ever there was a chink of reasoning which suggested it was in any particular country’s interest to jump ship, I’m afraid the pressure would be so immense that it would so jump. But no matter which country you consider from its own self interest point of view, it just has to make this work. The whole thing is too entwined.

    Interesting that Paddy Power are laying 5/1 against no country leaving the Euro by 2014. If it wasn’t such a long wait I’d put my house on that.

  3. colm brazel Says:

    The Irish bond yields are at unsustainable levels. Unsustainable means unsustainable whether yields are 9.5%, or multiples of this. Rating agencies are not mentioned in the post, they see junk. Merkel has correctly in my view set Germany against euro bonds. Without Euro bonds project euro is finished. It appears to me Merkel is taking on board this realisation. So the greater unity she has in mind is perhaps a strengthening of the EU, which I would support, in preparation for euro collapse of the EMU. RE

    More bad luck has come with increasing signs of a significant global slowdown

    I have to strongly disagree with you there. Many of us opposed to NAMA on then basis NAMA needed a positive economic growth index saw clearly the coming global growth slowdown post 2008, this is no surprise. Re

    The Deauville accord put in place plans for the permanent bailout mechanism to replace the EFSF in 2013

    This is seen by the markets as a mere pipe dream. A more permanent bailout mechanism will not occur through the above or through euro bonds issued through expanded EFSF, simply because the governments funding this are already under grave doubt, many of those countries are already needing bailout, so who is going to pay for it?

    Simply, the EMU project has failed. The euro as we have known it is no more.

    We need an orderly breakup of the EMU, greater political cooperation between EU states and a deep reform of the global financial system that has been allowed to go out of control over the past decade.

  4. desmond brennan Says:

    The problem with the various European solutions is that they do not reduce uncertainty, rather instead carry forward toxic risk. Note for example the differing views between UK and French banks on how much of a write down to do for Greek debt.

    Also there are clearly fundamental monetary/banking problems. ECB policy has been pro-cyclical for the peripheries, and banks are highly regionally concentrated. Calls for a new fiscal disicipline are grand, but large chunks of the problem were not fiscal, and also it is only when the tide went out that some fiscal problems became evident. Monetary problems (capital flows), were evident all along.

    The crisis has exposed serious political shortcomings, and lack of a clear institutional framework in Europe - in particular no one appears to be in charge of financial stability. This all adds to the uncertainty.

    The real economy and the markets, rely on a foundation of low risk bank and sovereigns. As Europe Inc remains toxic due to fudges and denial, recession wil follow. That said, some of the European solutions are welcome, and barring global catastrophe, the recession will be short.

  5. Jagdip Singh Says:

    “Commentators here might ask themselves how they would react if Ireland was in the stronger group and taking on a large contingent liability relating to weaker countries.”

    Given our size, we would probably react like the Finns or Austrians and demand collateral from the Greeks in particular for any more assistance. Not some promise of reform or deficit reduction, but bricks and mortar collateral.

    Would we demand more intervention in domestic tax-and-spend decisions in prodigal countries, in return for us guaranteeing their debts? Yes I think we would along the lines of the IMF/EU intervention in Ireland, that is, there is agreement to an overall fiscal strategy and a top level plan of actions, and if the debtor nation wants to deviate from the plan, then they need demonstrate the changes are fiscally neutral.

    But doesn’t the Franco-German summit go beyond this in terms of interference in tax rates and industrial strategy?

    As for the positive progress, John we’re in the middle of a 15-day ban on short selling, most EuroZone bourses are at their lowest levels in 12 months, there is talk about a freezing of interbank credit, the ECB has spent €22bn on PIIGS bonds in one seven-day period alone, Germany’s economy grew by a paltry 0.1% in Q2, 2011, France and Germany are refusing to increase the firepower of the EFSF from €250/440bn and the ECB seems all at sea with its interest rate policy. Spain’s property market continues to tank and cutting VAT on new homes so that prices reduce by 3% in a market where prices are expected to fall 5%+ this year seems almost comical.

    What has been truly amazing in the past two weeks is that €22bn, plus whatever was spent by the ECB last week has been sufficient to lop 150 basis points off Italian and Spanish 10-year bonds. Was the speculative element of the elevated price of Italian and Spanish bonds so much?

    As for the positives domestically, yes IBEC was positive this week though historically it tends to be amongst the most optimistic of forecasters, Vines and Watson were positive about Ireland in their contribution to the FT and of course S&P were positive also. George Soros thinks Greece and Portugal should exit the euro, but he implicitly thinks Ireland can weather the storm. Our 10-year bond closed at 9.5% on Friday which is the same as the level at the start of March 2011. And Minister Noonan is reported to be about to set out three years worth of fiscal detail in a statement in October 2011 which most on here will welcome.

    Against that, we’ll still have €3.6bn+ to find in the Dec 2011 budget and without low-hanging fruit we have an ordeal ahead of us. Downside risk to European (esp UK) growth threatens our lone-star export sector. Has the interest rate reduction promised in July happened yet? And we are set to repay a €1.5bn senior unsecured bond at AIB in September and a €700m bond in Anglo at the start of November.

  6. Brian Woods II Says:

    @ Colm Brazel

    “We need an orderly breakup of the EMU”.

    Givuz a clue? Germany first or Greece first? If the Deauville summit had announced an orderly breakup of the EMU, can you even begin to imagine the disorder that would have unleashed.

  7. hoganmahew Says:

    “bad luck” = no foresight. The stock markets have now failed to predict three of the last three recessions.

    I agree with Colm McCarthy. Better not to have these summits than have them with no agenda and no agreement.

  8. Gavin Kostick Says:

    @ Jagdip & John

    “Commentators here might ask themselves how they would react if Ireland was in the stronger group and taking on a large contingent liability relating to weaker countries.”

    Well, I could take a pragmatic view and recognise the advantages I have for being the group, such as a lower euro, helping my exports: I could look at the alternative, the break-up of the euro, go ‘ugh’ and hold my nose.

    Or I could say, yes, just as within Ireland where more economically productive sectors and regions support other sectors and regions, if I was a member of one of the currently strong countries (and nothing lasts forever), I’d like to think I’d act for the gneral good of all.

  9. grumpy Says:

    ” Commentators here might ask themselves how they would react if Ireland was in the stronger group and taking on a large contingent liability relating to weaker countries.”

    Indeed, was it not obvious that the credit line to bail out bank bondholders and beneficiaries of the blanket guarantee of banking and Croke Park obligations would come with a price tag = significant loss of economic sovereignty / march toward fiscal union?

    “To make sense of more recent developments, I think it is critical to go back to the previous Franco-German summit at Deauville in October. The Deauville accord put in place plans for the permanent bailout mechanism to replace the EFSF in 2013. Unfortunately, however, this attempted strengthening of market discipline proved devastating for the creditworthiness of countries where any doubts existed about their ability to stabilise debt levels. Ireland can be seen as the first casualty”

    Yes, but too much is made of this in the case of Ireland. It had fantastic PR (literally) in the predominantly right of centre world of many investors going into the recession (Boston not Berlin etc), then the first budget that announced the public sector pay cuts played brilliantly on the international scene. People didn’t get the details - the amazing run-up in PS payroll leading up to it, the fact it was done early, voluntarily etc. Ireland was thought to be the exemplar at that time of “doing all the right things” by investors vaguely familiar with it.

    Croke Park rang alarm bells. It was a one-off only, a gamble on what looked to many like debt deflation / deleveraging / property bust, not being any of that, and a “V” was assumed by the government. Croke Park was a sign in flashing neon lights that cemented that as their strategy and all room for manoeuvre gone.

    Over the following months as the government’s assumptions about the banks publicly unravelled everyone began to wake up to the fact that Irish gilts were not what they were thought to be a few months before.

    In spite of the banks being probably bust the blanket guarantee was renewed - bank resolution was beneath the state. In spite of the country possibly being bust, and an obvious “budgetary deterioration” the blanket guarantee to state employees was decreed untouchable while the capital’s Taxi drivers chatted to tourists and foreign businessmen about whether 20010 or 2011 would herald the arrival of the IMF.

    The perception completely changed - it was not all the fault of ESM failing to reassure holders of Irish gilts that any bailout would have them paid back in full that was responsible. That just focused investors attention - affected the timing.

    ” Clearly, the measures taken at the summit were not enough to stem the doubts about the creditworthiness of Italy and Spain, and their yields continued to drift upwards in the days following. Subsequent intervention by the ECB – really the only entity with the firepower to make a credible commitment to a sufficient backstop – has been quite successful in shifting from a bad equilibrium where expectations of default change the fundamentals and risk becoming self-fulfilling.”

    What the summit failed to do was confirm the previously agreed intention to increase the size of the EFSF. Even the first, July, mention of this was only slightly effective because of the practical - political - difficulties. What the latest one did was to focus market suspicion about this - leaving the ECB exposed and with no political cover to provide a big exit bid for Italian and Spanish bonds should it really be needed. It wasn’t clever anyway.

    I have been following news announcements affecting the financial markets for quite a while and the doozy of them all was the Irish government’s 2008 blanket bank guarantee. Apart from that, what came out of the Franco-German summit recently was really “up there” in the bizzaro category. It looked inept - and remember Irish yields are a bit-part player in the game they are playing now.

    “None of this is to say we are anywhere near out of the woods. More bad luck has come with increasing signs of a significant global slowdown, which jeopardises debt sustainability for many countries.”

    A substantial minority of market observers has been fully expecting said slow down for many months. As you rightly point out it alters the calculus - particularly it brings Italy more and more into the frame. The trouble with “political leaders” if you can call those two that, is that they spend so much effort selling a supposed reality that they can easily loose touch with the real reality. They, like the Irish government a while ago, shouldn’t have been surprised or unprepared for an economic slowdown.

  10. Philip II Says:

    So, mor gansai glas time. Where is prguy? “new head of fiscal council says markets wrong, commentators nasty, sure wouldn’t we do the same, and anyhow if we wish very hard the bad man might go away”
    Hardly inspires confidence in a rigerous, cold, a objective eagle eye on the government does it?

  11. Overseas commentator Says:

    @colm brazel
    There is little doubt that the new currency of any country leaving the EMU would fall in value by a substantial amount (why leave the Euro if this was not to be expected?) .What happen then of the private debt towards foreign creditors expressed in Euros (e.g. bank debts) and to the sovereign debts? Expressed in purchasing power of the exiting country they will jump by a proportional amount. What happen then? Please explain.

  12. hari naidu Says:

    Slowly but surely the crisis is finally crstallizing around the balance sheets of European Banks and what they’re hiding from socalled stress tests. If there is a weakest link in the chain of events - debt/GDP ratios and whatnots - the fundamentals seem to rest with the nature of collatralized debts on balance sheets of the banking system, since CDOs and CDS became the norms of global mortgage fraudulent markets, including Ireland.

    What we need to focus upon is the health and credit-worthiness of European banking system - ie. ways and means of restructuring and adjusting them to the demands of the current debt contagion.

    It’s the banking system that not only holds sovereign debt but also deals in them; that’s why we need experts with real knowledge in banking and finance to dig deeper into the failure of our banking system.

  13. The Dork of Cork Says:

    Another strangely bland article - look they whoever they are (and by the way who is this we thingy jagdip ? ) made the choice to destroy the currency to save bank “assets” - the divorce of money from chiefly non productive rentier vehicles should have been done 4 years ago but it was not.

    The Euro is a extreme bankers currency with no real input from state executives - they will explode the price of Gold to keep all of the debt contracts intact rather then defaulting on unwise deposits.
    Austerity is a retarded concept - how can you save debt ? - its a contract not a intrinsic good.
    You peserve & grow debt by investing more wisely , you cannot save it if you don’t invest - I am shocked at the lack of knowledge of this most basic of economic tenets.

  14. colm brazel Says:

    @ Overseas commentator

    Good question and the only answer that made sense to me was the historical precedents for default in Latin American countries in the ’80’s

    http://en.wikipedia.org/wiki/Brady_Bonds

    The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks.

    Instead of the daft notion of euro bonds that effectively means the whole EMU carries the unsustainable weight of all debt of all the sovereigns, meaning the whole of the EMU ends up in the same state as the peripherals, there needs to be agreement on a similar mechanism as the BB to allow for regulated and ordered breakup of the EMU.

    Solutions to the EMU crisis are politically unsustainable for sovereigns at home and abroad. I certainly won’t vote for anyone of them as I’ve no confidence in any of those who managed the EMU project.

    Orderly return to fiscal consolidation from the ground up alongside global financial reform, a new Glass Steagal, curtailment of OTC derivative speculation would be a beginning of the hard road to a solution, rather than the easy road to perdition….but that’s another debate

    We’ve a strong country with plenty of talent and good prospects for the future.

    We shouldn’t fear standing on our own two feet. Time to stand up and stop sacrificing our young talented people we invested college education in to export. The alternative is a country divested of its young with silver hairs protecting their personal slice of Croke Park.

    So far from the Troika we have a bill that cannot be paid. It’s made up of moral hazard in that ECB through negligence or deception or whatever label you like to use, never policed its lending through The Stability Pact, so EMU itself through the ECB and the ICB’s never practiced proper governance of its lending.

    So, there is a good case to be made by a country such as Ireland, to default and enter into negotiations on a proper Brady Bond bailout, on the basis of what can be paid back.

    Not what can never be paid back.

  15. Philip II Says:

    Dork
    Am I the only one that finds your posts repetitive, confusing, monotenous and conspiratorial, as well as ubiquitous on every thread regardless of it’s topic? Give it a rest man…

  16. Frank Galton Says:

    It’s a bit strange to refer to an “August effect” and then argue that Ireland was dragged down by Deauville. We were dragged down because the ECB was phoning Dublin frantically last August but everyone was down in Schull. Simply by making some announcements in August, as Noonan will do this week, will be a big change in government modus operandi.

    As for July 21, right after the summit to end all summits, the market analysts said fine, but there is implementation risk. They were right. The one thing that Merkozy could have done to alleviate this was to summon the legislators from the Riviera, the Alps, and the Tuscan villas to demand that the EFSF reforms be enacted immediately. But even in secular Europe, some things are sacred.

  17. The Dork of Cork Says:

    @Phillip II
    I am sure many do - but I believe I am first on record here stating how the eurosystem considers credit / bond deposits superior to state debt.
    Many old sov money economists such as Colm McCarthy seem confused by these new arrangements.
    Bland statements such a “backstopping financial systems” and ” fiscal discipline ” is retarded at best.
    What is fiscal discipline in a freefloating currency regeime ?
    Also John displays a basic ignorance of where wealth comes from - banks are a utility that services a economy - in Johns strange upside down world the economy is a utility that services the needs of the banks.
    As long as John and others make basic repetitive mistakes I will continue to make repetitive but perhaps confusing statements to some who have been propagandised by a yes conspiratorial media & education system

  18. Brian Woods II Says:

    @ Philip II

    I have always regarded the Dork as a genius with whom I wouldn’t dare engage - I understand none of his posts. Now with yourself and Karl Whelan calling the Dork to account I might reassess that opinion.

  19. desmond brennan Says:

    I mentioned problems above, here’s solutions:

    1) Monetary (a) - Endogenous to Euro area
    One size fits all interest rate is old world. Pro cyclical variants need to target economics regions, and asset concentrations. So if boomy/bubbly: a surcharge, if recessiony: a reduction. This will create an overall fund, whose balance should tend towards zero over long periods.

    2) Banking
    Publish proper stress tests, with open econometric models. Introduce a common resolution scheme for cancelling sub debt / converting equity to sub debt. Liase closely with. Monetary above to tackle capital flows. Improve micro prudential supervision, chiefly around information quality. Create new banking reports, to augment the existing financial info.

    3) Financial Stability
    Create a Euro area head of Financial Stability. The ECB and regulators should report to this new body.

    4) Markets
    Create new market venues for debt instruments and their derivatives. These trading and clearing platform(s) should massively increase transparency, and aid counterparty risk analysis

    5) Fiscal Rules
    Top level fiscal rules may need strengthening, but most importantly, serious mid-bottom level analysis is needed per country. Establish a Fiscal monitoring authority, with thousands of staff.

    6) Economic reform
    The Italian labour market is nuts , ditto Spanish business regulation, Portugese criminal law, Greek everything…make reforms here contingent on the below:

    7) Current sovereign debt
    Crystalize the existing losses by 1 of 2 methods
    a: partial market defaults
    b: solvent Euro countries pay, and are issued with 15 yr super junior bonds, and if appropriate, take collateral

    8) Monetary (b) Exogenous to Euro Area
    Need to better understand trade patterns, and query the USD status as global reserve currency, suggest co-operate with China, US et al to seek improvement here.

  20. Philip II Says:

    Brian Woods II:
    Iv always had great respect for karl. You, jury out.

  21. The Dork of Cork Says:

    @Philip
    This is not about respect - this is about the truth.
    I have always considered myself a Dork but that still does not explain away the strange nature of the Eurosystem.
    Karl is a much more capable man in the economics sphere but perhaps because of his knowledge he is not asking the most basic of questions.

    Austerity leads to a destruction in debt contracts - why are the euro masters engaging in this folly ?
    I would contend that they want to drive fiat into the arms of Gold and crush the dollar reserve currency.

  22. anonym Says:

    @colm brazel

    I have to strongly disagree with you [about 'bad luck']. Many of us opposed to NAMA on then basis NAMA needed a positive economic growth index saw clearly the coming global growth slowdown post 2008, this is no surprise.

    Indeed. In John McHale’s post “Plan A*” from last February he said

    [...] Four major sources of (diminishing) uncertainty stand out:

    1. Growth. It is still an open question as to whether we are finally “turning the corner” or will “bounce along the bottom” for some time. Even if the austerity measures hold back the rate of nominal growth, observers are looking hard for indications of the underlying potential growth rate once the fiscal adjustment is complete.

    In the comments I specifically asked him about global growth

    There is a fifth uncertainty which is not specifically addressed above, though I suppose it’s tucked into uncertainty #1, Growth. It is the possibility of a big external economic shock in the next several years. My uneducated guess is that it is likely - perhaps probable - that such a shock will happen, and that it could turn a more-or-less manageable fiscal path for Ireland into a clearly unmanageable one. I think it is time for qualified economists who make predictions and recommend policies for the Irish economy to go on the record with their judgement of uncertainty #5. No-one is demanding a prophecy of the next five years of world economic history (well, certainly I’m not). But what will not wash is to keep mum about the subject now, then turn around in (let’s say) 2013 and talk about how nobody could have foreseen the hard landing in China.

    There was no reply from John McHale. Come August 2011 and already we are hearing about ‘bad luck’.

  23. Robert Browne Says:

    Irelands government will in a heart beat sell us even further into debt slavery and push us forever into the abyss of financial autocracy.

    There is going to be a “Lisbon III”. This will be the governments political manifesto; “Irish people, as you know or at least, will be informed, we have already conceded your private property rights to NAMA, and conceded the right to moderate salaries to SPV Unions, under Croke Park. On sept 29th 2008 we conceded, on your behalf, the right to refuse to pay off foreign bondholders. In November 2010 had to take this a step further, we signed an MOU on your behalf, as the state had run out of money to pay these foreign bondholders and itself. The ECB wanted to reduce its 160bn exposure to Irelands disaster. Therefore, we have no choice as a people other than to agree to every syllable of the document drawn up by Frau Miekel and monsieur Sarkozy. Otherwise the ATM’s will not work, dole will not be paid, and our government pensions, which is the reason we are here to serve the Irish people would not be paid. You must vote “Yes”!

    It is obvious, that democracy will be saved not by craven morally decrepit Irish people who depend on the EU for dole, public sector salaries and quango money, the Irish will follow the cabal of government capitulation to the letter, just as they have done to date.

    Democracy in the EU will be saved by the Germans themselves who are going to simply say, Nein danke, Frau Merkel.

  24. Overseas commentator Says:

    @ Colm Brazel

    The idea is not knew :in 2009 “Business World ” wrote:
    “There is a significant risk that the Irish crisis will spread to Portugal and Spain and, if so, then a “Brady Bonds” scheme may be our only way out, according to Marie Diron, an economist with Ernst and Young in Dublin.”……
    “To work well, such a scheme would almost certainly have to include some mix of maturity extensions, reduced interest rates and writedowns of principal, which would mean large investor losses and some global financial contagion. But if such a scheme were quickly and effectively implemented it might at least bring rapid closure to the problem. In this process, the European Central Bank would need to help a smooth restructuring process by keeping unlimited liquidity offers and intervening in strained markets where required. Without swift and forward-looking action from EU governments and the ECB, debt restructuring would likely lead to turmoil in financial markets that would engulf other economies and eventually the Eurozone as a whole.”

    In my opinion,there is absolutely no chances that those conditions will be met ,this is a dead end.

  25. Kevin Donoghue Says:

    @Overseas commentator: “There is little doubt that the new currency of any country leaving the EMU would fall in value by a substantial amount (why leave the Euro if this was not to be expected?).”

    I suspect you’ve overlooked one rather significant country. Far from falling in value, the new D-mark would very likely attract massive inflows into Germany. Fortunately, it’s really quite easy to curb inflows if the Bundesbank wishes to do so. At times in the 1970s, foreign deposits with German banks earned negative interest rates.

    As to why Germans would leave the Euro, just ask them: which would you prefer, the introduction of Eurobonds for the debtor countries, or your lovely old D-mark back? Some decisions are easy.

  26. Stringer Bell Says:

    History will show that Irish economists failed to both predict and offer solutions to the crisis because they live in a deductive world of market and accounting categories that are not applicable to the empirical world of business, politics and finance power. If we lived in a perfect technocratic market with economists acting as Platonic engineer kings everything would be just fine and dandy. But we don’t. We live in a world where the national democratic state and European institutions have lost all ability to hold those with financial-capital power to account. Bad luck my eye.

  27. Ceterisparibus Says:

    I have to agree with John McHale that the quality of analysis on the latest crisis is dismal.
    It is now clear that the situation in Greece has gone beyond breaking point. Even their Finance Minister has admitted the agreed targets will not be met and that growth will be -5% this year. Another Greek minister has called for delay in the privatization programme because prices are too low. The IMF have not signed off on the second bailout and as I understand it are precluded from lending if targets as agreed are not met.
    It seems increasingly likely that Greece will have to leave the Eurozone because the only way out of their predicament is to devalue. This is what I believe the pact bu Angela and Nicky is really about. They know the numbers and also know the game is up for Greece. The major question is who will go out with them.

  28. Georg Baumann Says:

    JMcH….
    While perhaps it is just an August effect, the broad quality of the analysis of European crisis-resolution efforts has been disappointingly poor
    ….

    Right. Poor analysis by…?

    JMcH….
    We could have a more constructive and informative debate if we spent less time harping on about the stupidity of others.
    ….

    Right. Language is a funny thing at times.

  29. Ceterisparibus Says:

    I left out the main indicator for the view expressed above… That is, it appear that the ECB have left the Greeks to sink with their 2 yr yields out to 36% and 10 yr out to 16.5% whilst defending Spanish and Italian and indeed Irish bonds. Now why would they do that.

    @Kevin Donoghue
    Inward flows can create big problems as the Swiss have discovered.

  30. Kevin Donoghue Says:

    Inward flows can create big problems as the Swiss have discovered.

    Cry me a river. Lots of us would happily swap problems with the Swiss.

  31. Ceterisparibus Says:

    @Kevin
    It won’t apply to us anyway so it’s merely academic. Angela said today that she will not allow markets to dictate to her. It seems she is committed to the Euro but not to the problem children of Euroland.
    “German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.
    Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said today. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”
    “At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television from the chancellery in Berlin. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”

  32. Tullmcadoo Says:

    Cet par,
    These comment effectively imply that the pols have deserted & left the ECB to man the gap…until the Teutonic minority cries uncle. The crises now moves quickly to the dénouement which is either the underwriting of the debts of the periphery or the default of the periphery and a global banking crisis/depression.

  33. John Foody Says:

    We could have a more constructive and informative debate if we spent less time harping on about the stupidity of others.

    Isn’t it that case that the reality being peddled by Merkel/Sarkozy is that this is a FISCAL crisis, brought about by fiscal sinners and now we need fiscal penance.

    I think it’s this that sits so uneasy with Irish commentators/people, we had our house in order (though built on quik sand) but through the combination of poorly priced risk, consequental cheap credit and pretty shitty regulation/politics let Seany and the boys run riot. Finally to top it all off we let Dave McWilliams convince Brian Lenihan to guarantee his debts :), to the joy of German and French banks. That’s a totally different story to the one Merkel is telling her voters. I don’t know about you but I’d find it difficult to have a ‘constructive and informative debate’ with someone who has a different take on reality than me.

    @ All

    I’d like to know the answer to questions:
    1) What is to stop us having 2 currencies, paying our dole in say punts 2.0, accepting it back at a fixed exchange with the euro? Sure 50% with be exchanged back straight away but eventually people would get used to it.

    2) Why is the Merkel/Sarkozy machine only about blue bonds why not the Blue/Red bonds idea. i.e. One can borrow up to the 60% debt limit in blue bonds but everything else in their own/red bonds. Seems like a workable solution to me. It brings the debt break and euro bonds idea together it a nice marriage.

  34. John Foody Says:

    We could have a more constructive and informative debate if we spent less time harping on about the stupidity of others.

    Isn’t it that case that the reality being peddled by Merkel/Sarkozy is that this is a FISCAL crisis, brought about by fiscal sinners and now we need fiscal penance.

    I think it’s this that sits so uneasy with Irish commentators/people, we had our house in order (though built on quik sand) but through the combination of poorly priced risk, consequental cheap credit and pretty shitty regulation/politics let Seany and the boys run riot. Finally to top it all off we let Dave McWilliams convince Brian Lenihan to guarantee his debts :), to the joy of German and French banks. That’s a totally different story to the one Merkel is telling her voters. I don’t know about you but I’d find it difficult to have a ‘constructive and informative debate’ with someone who has a different take on reality than me.

    @ All

    I’d like to know the answer to questions:
    1) What is to stop us having 2 currencies, paying our dole in say punts 2.0, accepting it back at a fixed exchange with the euro? Sure 50% with be exchanged back straight away but eventually people would get used to it.

    2) Why is the Merkel/Sarkozy machine only about blue bonds why not the Blue/Red bonds idea. i.e. One can borrow up to the 60% debt limit in blue bonds but everything else in their own/red bonds. Seems like a workable solution to me. It brings the debt break and euro bonds idea together it a nice marriage.

  35. paul quigley Says:

    @ Philp 1
    I don’t understand a lot of what the Dork bangs on about either, but I know this much. He is no fool.

    Firstly, he is a follower of Keynes, in that he understands money matters are central to that macroeconomics. I would say he’s reasonably comfortable with MMT and post Keynesians like Steve Keen and his Debtwatch blog.
    http://www.debtdeflation.com/blogs/

    Secondly, Dork is a chartalist. He believes that money cannot be appropriately studied in isolation from the powers of the state. Hence his ability to perceive the priestly functions of the central bankers, and his general sensitivity to power issues.

    ‘Chartalism posits that that money is a unity of account, designated by a public authority for the codification of social debt obligations’
    hartalism and the tax-driven approach to money: PR Tcherneva in A Handbook of Alternative Monetary Economics ed Arestis and Sawyer pub Edward Elgar 2006.

    Thirdly, Dork is a bit of a goldbug and a fan of the FOFOA blog. I’ll leave that terrain to him, but here’s an interesting take from Steve Randy Waldman.
    http://www.interfluidity.com/

    The Dork is absolutely correct, IMHO, in his perception of the destructive trajectory on which Western society is embarked, with a failure to renew infrastructural investments, and a catastrophic series of credit bubbles.

    What I hear him saying is that the way forward for governments is to stop trying to make speculators whole, treat that debt as dead money, and invest in infrastructure which will reduce dependence on oil.

    BTW, Dork is also very sharp with the old youtube links. We need more of that sort of flair up front, as economics can be off-putting to many folk.

  36. John Foody Says:

    http://ftalphaville.ft.com/blog/2011/08/17/655571/e-bonds-can-work/

    From the point at which eurobonds can come into existence, all euro area governments should issue 100% of their debt in the form of eurobonds, until the stock of eurobond debt reaches 60% of their respective GDP. After that point, governments will have to issue debt on an individual, subordinated, basis.

    In the time over which governments would amass eurobond debt equivalent to 60% of their respective GDP, most governments should be easily able to make the necessary adjustments to their deficits and structural changes to their economies. For those that will not likely be able to do so, most obviously Greece, a restructuring of existing debt would have to accompany the move to eurobonds. But for those issuers whose sovereign debt markets are currently suffering more as a result of liquidity worries than solvency concerns, most notably Italy and Spain, the grace period before they would need to return to the markets by themselves could amount to a significant number of years.

  37. Ceterisparibus Says:

    @Tull
    I believe it is the latter of your scenarios if you believe her statement … “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”

    In other words …you are on your own lads.

  38. Tullmcadoo Says:

    Well if that is the case a new range of options is open- default, exit from euro etc, insant budget balance etc. Debt restructuring via inflation and cam down can also be considered.

  39. Gavin Kostick Says:

    @ paul quigley

    Very good insighst into the Dork. I have him down as sympathetic to L Randall Wray too - entirely possibly because he linked to him once.

    Meanwile I note your lad Bourdieu got a mention in a review of a new book by Catherine Hakim of the LSE here:

    http://www.guardian.co.uk/books/2011/aug/19/honey-money-catherine-hakim-review

  40. Ceterisparibus Says:

    @Tull
    Ambrose over at the telegraph thinks it all might be ok if central banks act together but he is not so sure about the ECB…
    “The eurozone obviously needs looser money. M3 broad money is stagnant and real M1 deposits have turned negative, even in Germany and Holland. Real M1 is contracting at an alarming pace in Italy. EMU growth has wilted, five countries are spinning towards default, and the banking system is seizing up. This cries out for a change of course, yet the European Central Bank is still tightening.”

  41. Joe Says:

    I agree with the opening statement of this thread.It’s about time we all matured and realised the free market system exposed our faulty and error prone approach to business,by irish borrowers, irish bankers ,irish regulators and Irish politicians.In fairness a lot of people around the world also got it wrong but we are in a very special league.We backed off letting the harsh rules of business rersolve our problem and we have used the resources of the EU to protect us from collapse.

    Let’s approach this with a little humility and a lot of perspective.

    We are and were a big part of the problem, let’s not assume everybody is playing games . We are not the centre of the finacial world.We have a dilemna and finding the right solution takes time and patience.There are some very serious decisions to be taken . Alternatively we can go back to the old ways of all action and no thinking……shoot first, aim later .
    Enough of the slagging let’s get down to the serious work

  42. grumpy Says:

    @foody

    “I’d like to know the answer to questions:
    1) What is to stop us having 2 currencies, paying our dole in say punts 2.0, accepting it back at a fixed exchange with the euro? Sure 50% with be exchanged back straight away but eventually people would get used to it.”

    Hogan and I have, been pushing this for some time - why borrow proper euros at the cost of economic and political sovereignty to over-pay people to provide domestic services? First 30,000 in Euros, the rest in Ieros, Punts, whatever.

    Meshes nicely with any Mortgage Forgiveness scheme.

    Lots and Lots of vested interests determined to ignore this idea rather than try to make it work.

  43. The Dork of Cork Says:

    @Paul
    Thanks for that Paul , the reason I am a gold bug is MMTs weakness in settling foregin trade imbalances.
    Gold was the currency of kings for that very reason.
    Even in a full deposit greenback banking world 2 equally powerful nations would expect payment in something other then paper obligations.
    Gold is wrapped up in the fractional system for so long now but the money value of the stuff was epitomised by Gaddafi’s ability to fund mercenaries while remaining outside the BIS system.

  44. Mike Hall Says:

    @ Gavin Costick & Paul Quigley

    Excellent posting! +1

    @ John McHale

    I’m sorry John but I just find your statement about the ‘global downturn’ being down to ‘bad luck’ as absolutely extraordinary. That is the result of your carefully considered view as a highly qualified & experienced economist? Various & substantial contractionary policies over 3 years of failed ’solutions’ & a euro design inherently incapable of dealing with a downturn have played no significant part? Extraordinary.

    Richard Douthwaite predicted the worsening crisis nearly 12 months ago & offered, frankly the only solution short of euro break up (& the disaster that entails) - ‘Deficit Easing’

    http://www.feasta.org/wp-content/uploads/2011/07/Deficit_easing_RD.pdf

    Also, in essence, Warren Mosler’s solution.

    Once out of the mire, Europe can then decide if it wishes to really co-operate for the good of all its citizens or remain ruled by banks as funders of their casino’s losses. If the latter, I suggest Ireland makes an orderly exit.

  45. DOCM Says:

    @ All

    The letter from Merkozy to Van Rompuy is worth reading in detail.

    http://media.ft.com/cms/1e93f294-c8df-11e0-a2c8-00144feabdc0.pdf

    It confirms the inadequacy of the July deal but has many positive features, not least the fact that it anchors any changes in the existing treaties and adverts specifically to the possible use of the existing Article 136 TFEU which deals with the provisions specific to the members states whose currency is the euro (hitherto ruled out by Germany).

    P.S. I do not think that the participants on this blog are alone in viewing with a jaundiced eye the hitherto failed efforts of Merkel to bring the crisis to an end. Only 23% of the Germans interviewed in a recent opinion poll are of the view that she is capable of doing so. As to which side is to be viewed as stupid, I do not know.

    http://www.spiegel.de/international/germany/0,1518,781261,00.html

  46. DOCM Says:

    @ All

    Correction 22%

    To be clear on the treaty aspects.

    “in line with the existing treaties” (page 2)

    and last paragraph at page 4 to be implemented in such a way “as to serve the cohesion of the European Union as a whole” (i.e. including the UK although this would not, of course, apply to the use of Article 136).

    The price for the SPD agreeing to see the July package through parliament included the commitment on the FTT. The head of the SPD, Merkel’s foreign minister in an earlier life, Steinmeier, in the Grand Coalition, has confirmed that there will be no repeat of this arrangement. If Merkel cannot get togther her own majority, the government should fall.

  47. Mike Hall Says:

    @ Dork

    MMT sees no problem with ‘foreign trade imbalances’. For example US/China. What really matters is the real goods and services provided for use of $/US citizens by China vs what future goods US citizens will be deprived of when China spends its dollars. US getting by far the best of that bargain. If China wants a better deal it can unpeg its currency.

    MMT requires its own currency to be flexible. For many related reasons it must also have a fiat currency, thus cannot be pegged to Gold or any other constrained resource.

    Prof Bill Mitchell has the best & most extensive explanations on his blog (imo)

    http://bilbo.economicoutlook.net/blog/

  48. Paul M Says:

    @John McHale

    You assess comment on the Euro crisis as ‘dismal’ - is that because it does not agree with your own views ? BTW I get very suspicious when people start bringing luck into their analysis.

    I have been a keen reader of this blog and had formed the opinion that you were a very ‘pro-establishment’ figure. I was not a bit surprised to see you named on the fiscal council. (To me) the most obvious figure for this council was Karl: does anyone know if he was he even asked ?

  49. PRGuy Says:

    Here’s some quality analysis for you:

    Greece is toast.

    Germany will probably end up picking up their football and telling the rest of us they need to go home for their tea and we can go play with ourselves.

    Everything I’ve read this weekend - from the FT to the Irish Times - all I hear/see in comments from those employed by global banking (and my clients) is, “if governments give us more taxpayer money/enable us to profit from current crisis, perhaps that will give us more confidence and make the current crisis go away and peace will reign for a short while until we start the next crisis to see how we can profit from that and take even more money from them.” Just read the words. I work with these people every day and they think weak political leadership is the biggest gravy train (some would call it ‘transfer of wealth’) in history. These guys are hunter-killers and most politicians are just amateurs, especially round a poker table.

    We are heading for either a two-tier Europe of some being exited.

    What else can I comment on… oh yes… the idea of debt forgiveness by NAMA to developers OK, the idea of debt forgiveness for struggling mortgage holders… well, you’re having a larf aintcha?

  50. Al Says:

    @ Paul M

    Are you honestly expecting an answer?
    Take the handbags somewhere else!

  51. grumpy Says:

    stupid link :

    Leopard, spots, etc, etc……

    http://www.telegraph.co.uk/comment/8714615/Its-the-corruption-stupid.html

  52. The Dork of Cork Says:

    @Mike
    I would have to disagree.
    The partial external gold standard under Bretton woods was perhaps the most successful economic period of all time.
    The Americans could print 4 dollars for every dollar created for the miners I think (open to correction)
    Yet they still blew it.
    The location of all the factories on one side of the Pacific now and all the consumers on the other is not very efficient.
    Remember Japan developed much like China as the dollar bubble grew in the 70s & 80s yet their currency was freely floating against the dollar so China’s exchange rate policey is not the entire story.
    The dollar bubble is the central tale.
    Think of all that marine diesel wasted so that banks can make money from wage arbitrage……
    To remain on the gold standard as America reached peak domestic oil production they would have had to slowly raise tariffs on external oil - yet they did not do this as it was politically unsustainable due to the American Graffiti culture of that time.

    Anyhow the Euros relationship with gold is the very opposite of a gold standard - the gold floats against debt , it is not fixed against debt.
    In some respects this policey is very MMTish but in a Gold context.

  53. paul quigley Says:

    @ Gavin
    Don’t be talking about sex on this board. It might catch on :)

  54. Shay Begorrah Says:

    @Georg Baumann at August 21st, 2011 at 7:50 pm

    Right. Language is a funny thing at times.

    Nicely observed. I hate angry people so much!

    I think John McHale has written better posts than this but I also worry his economic world view is exactly the same as it was before the world economy changed. At least he is balanced on the fiscal advisory council by some Keynesian firebrands. Right?

    Relatedly, in fact very closely relatedly, I think criticising the on the Dork of Cork for continually pushing the same line in many postings is unwise. He seems to have a coherent world view in which explaining the unfolding disaster of the European component of the Global Financial Crisis does not require the invocation of “bad luck”.

    Of course the authors of the blog have the right to ask people to tone down the rhetoric or reduce the frequency of postings, and I do not think anyone begrudges Karl Whelan the right to try and improve the quality of the conversation in what remains a interesting and vital forum.

  55. grumpy Says:

    Proton with negative spin?

    “Faced with the dire prospect of a run on the country’s fragile banking system, Greece’s four major banks had little choice but to agree to participate in a €50 million recapitalisation of the small lender, Proton Bank.”

    Proton with negative spin?

    Would you expect there to be Euros in Proton bank?

    Not so, stupid.

    Just protons - but how can that be negative?

    Maybe I should just get my coat…

    http://www.businessspectator.com.au/bs.nsf/Article/markets-European-debt-crisis-banks-Greece-bailout–pd20110822-KXTLH?opendocument&src=rss

  56. The Dork of Cork Says:

    @Paul
    Constantin Gurdgiev has already been seen engaging in morally dubious activities………………… shocking truely shocking.

    http://www.youtube.com/watch?v=Wa0CS6I48e4

  57. aiman Says:

    @Jagdip Singh - small point re ECB buying, and how it’s reported by them. They announce the settled amounts for the preceding week’s purchases, not the amount bought. As normal settlement is 3 working days, the amount reported on last Monday as having been bought the preceding week, i.e. €22bn, most likely refers only to purchases on the first Monday and Tuesday of their intervention.

    There’ll be another large-ish number to be closely watched tomorrow afternoon, which will comprise the remainder of Week 1 plus the first two days of last week.

    In short, €22bn is only a portion of the first week’s intervention.

  58. Mike Hall Says:

    @ PRGuy

    Well, reading Matt Taibi:

    http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?print=true

    I think your ‘analysis’ is likely spot on. Merkel & Sarko seem as clueless as all the rest of the politicians (and all their economics ‘advisers’).

  59. Ceterisparibus Says:

    @ PR Guy

    We are heading for a two tier Europe or some being exited.
    Agreed. The latter most likely…but whom?

    @Grumpy

    “The scale of delusion was such that its cost now threatens to sink the entire euro project. Greece is sucking up emergency funds faster than the European Central Bank can produce them. A brace of €100 billion-plus “rescue packages” has failed to deliver salvation. Yanis Varoufakis, professor of political economy at Athens University, explains: “Greece was not bailed out, it was given an expensive credit card with which to pay off the mortgage, having lost its job.”

    Good article… He does not mention the raids last week when they sent in the financial swat team from Athens to the islands (which had their own guys)
    methinks that says it all.
    It’s a lost cause…the timing is the only concern now.

  60. ObsessiveMathsFreak Says:

    Having this strengthened backstop is effectively to move decisively towards what Peter Boone and Simon John label a “moral hazard regime.”

    The moment that the ECB decided that private banks could not be allowed to fail, it entered a moral hazard regime as yet unprecedented in the financial history of the world. We’re already in over our heads in moral hazard, and so is the ECB. This decision is at most a formalisation of a process now three years old.

  61. Ronan Burke Says:

    @ PR Guy

    “if governments give us more taxpayer money/enable us to profit from current crisis, perhaps that will give us more confidence and make the current crisis go away and peace will reign for a short while until we start the next crisis to see how we can profit from that and take even more money from them.”

    To what extent would you say that current governments have been groomed by financial institutions? How much regulatory capture is there?

  62. Bklyn_rntr Says:

    The bad luck comment is, indeed depressing. That growth would disappoint was obvious to a 10 year old, but of course, the numbers wouldn’t work without growth so economists did what they are famous for, they assumed the tin opener. They said, look the debt is manageable if we protect the banking system now and to prove it, we made of of these fiendishly sophisticated models that prove it. Of course, within these models, we assumed that growth can recover to XX% by 2013. The “assumed growth” has no basis in analysis, so it was dismissed as global growth (and who could predict that, eh?)

    Europe’s problems are as complex as they always were, that’s what makes it such a fascinating place. The euro project was adopted in the full knowledge that it was unsustainable, yet the EU has always developed through crises. This is aBIG crisis, but Ireland’s choices are a) stick it out and suffer massive austerity and hope the europeans come up with something or b) leave and suffer hyperinflation, bank failures and massive government cuts.

  63. Bryan G Says:

    Here’s the latest EU 12-point plan:

    1) Pretend it’s a liquidity problem, since a solvency problem is too hard to fix
    2) Respond to any market problems by paraphrasing the July 21 summit resolutions
    3) If more is needed, respond to any market problems by rehashing old and discarded Euro Plus Pact proposals (e.g. constitutional debt limits & tax co-ordination)
    4) Never, ever talk about the fact that money may need to be permanently transferred from AAA countries to weaker ones, or any mechanisms for doing so
    5) Never, ever talk about how big the EFSF needs to be, or how it will be funded, and how the guarantees will be handled
    6) Since the ECB are now buying bonds, never, ever talk about where any losses will ultimately lie, or if any indemnities have been provided
    7) Insist that all bank and sovereign debt will be paid back in full and on time at no cost to AAA countries or the ECB
    8) Insist that all countries are solvent and that they can grow out of their problems if they follow the prescribed austerity measures
    9) Insist that all countries have sound economic fundamentals, and that adverse market moves are “incomprehensible”
    10) Deflect any criticism by blaming irrational markets, evil speculators and corrupt rating agencies
    11) Deflect any criticism by blaming uninformed and self-serving media commentators
    12) Deflect any criticism by blaming Anglo/American values and financial systems

    An EU spokesperson added “We are confident this new 12-point plan takes all the necessary measures to deny any Eurosystem solvency problems, and provides a good framework for shifting blame to others. Nobody should underestimate out commitment
    to repeat the same talking points as often as possible”.

  64. Bryan G Says:

    The EU spokesperson also added that it was supposed to be an “8)” and not an 8) and noted that this auto-correct feature was an Anglo/American invention

  65. PRGuy Says:

    @Ronan Burke

    “To what extent would you say that current governments have been groomed by financial institutions? How much regulatory capture is there?”

    Good question. Probably worth a thread of its own.

    It would take an evening and a couple of pints to discuss! Sadly, I am just about to get into work for the day instead.

    It’s obviously in the interests of the regulated to capture agencies. My very quick analysis is that it’s happened for many years in the USA but only more recently (last 20-30 years) in Europe. Ireland used to be dire (I’ve been in a meeting in which a regulator was told what to do) but if anything, I would say M. Elderfield seems to row his own boat and the situatiuon is improving here.

    There’s also the whole business of the financial services industry having the second best lobby in the world (after oil) and their funding/courting of politicians and parties. Then there’s the dirty tricks section….

  66. Bryan G Says:

    John McHale is not the only one blaming bad luck - President Obama is too:

    Over the last six months, we’ve had a string of bad luck. There have been some things that we could not control. [...] And then you had the situation in Europe, where they’re dealing with all sorts of debt challenges. And that washes up on our shores. [...]

    On the other hand Morgan Stanley say:

    “Recent policy errors - especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting he U.S. debt ceiling - have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.”

    Apparently it is no longer the geansai glas, but the geansai gorm agus oir that must be proudly worn. An inevitable consequence of further fiscal integration and the loss of sovereignty.

  67. Chris Says:

    Certainly Dr Merkel and her other AAA rated Eurozone government colleauges are in a challenging situation.They have to represent their people and business interest that is her number one job description. That is what they are doing. At the same time they have a commitment to their European single market and monetary union partners. Then the rest of the world want them to stand behind the weaker Eurozone governments.

    Dr. Merkel had done well for Germany up to this summer in protecting their banks and to a lesser extent taxpayers by keeping the burden of adjustment in the periphery. Can anyone argue that the Irish bailout with its punitive interest rate from the EU and cornerstone for bailing out bankrupt banks was in any way considerate of Irelands return to growth? Not the IMF, leading economists, academics or Investors.
    With the small recognising of losses in Greece and Italys troubles German bank shares have fallen by 30% in the last few months. The DAX has fallen too.
    The AAA groups led by Germany now have to think about their next steps. The strategy may be the same especially with elections looming in France next year and Germany in 2013. Their countries interests first. The markets a second and their monetary union partners third. They seem to be saying to the periphery countries ‘My way or the Highway’ much to the dismay of the markets. No wonder they are getting critized.
    This is why people like Martin Feildstein and Mohammed El-Erian are predicting a smaller stronger Euro-Area perhaps cutting out the PIGS.
    So its the markets versus the AAA electorates with the periphery countries waiting on the sidelines.

  68. Chris Says:

    I would like to see a Eurozone financial ministry complete with Eurobonds properly and fairly governened (unlike the ECB) including fiscal transfers. Germany can do that - their current transfers are .7% of GDP and would raise to 3.5% of GDP in a United Sates tpye federal transfer system in the Eurozone. It is the next natural step to monetary union.
    I am remimded of the negotiations post WW11 for a new International Monetary System which created the World Bank and IMF. Basically Keynes and others wanted a new global reserve currency. The Americans wanted the US dollar as global reserve. The U.K., Russia and France needed loans from the U.S. to rebuild their countries. So the U.S. came out a clear winner in those negotiations and is still in the advantageous position of controlling the world reserve currency, the world bank and number 2 at the IMF.
    So I can see Germany coming out as a clear winner in negotiations for how a finance ministry would be managed and run in a situation where other countries are depending on loans to ‘rebuild’ their economies.
    Is this preferable to stepping out of the Eurozone? mmm

  69. Chris Says:

    @PR guy/Ronan Burke
    Re:Regulatory capture
    It seems that even the extremely light Basel 111 reforms are faltering and the influence of the banks is showing through again.
    http://www.bloomberg.com/news/2011-08-19/global-bank-capital-regime-at-risk-as-regulators-spar-over-rules.html

  70. Chris Says:

    @PR guy/ Ronan Burke
    It is interesting to hear Mr. Geithners response when pressed on toughening bank regulation on wall street. He said that the banks would simply go to countries like Singapore. You can hear similar noises from Europe.
    I don’t really buy that, sure some business would go not a significant amount.
    Mr. Geither also pointing the finger at the U.K. for starting a regulatory ‘race to the bottom’ in Finance in order to lure business from Frankfurt and New York to London. Although he didnt mention Ireland I think it can be included with the U.K. under this heading. This is one of the reasons for the hardline stance of both Mr. Geither and the Germans to the Irish banking issues.
    Getting the G20 and the whole world on the same page regarding financial regulation is a key point to stopping future crises from happening again.

  71. colm brazel Says:

    @ Bryan G

    Good synopsis of the EU 12-point plan :-)

    It can all unravel as quickly as Libya unravelled today…secretly I believe EU banks are scrambling behind the scenes preparing for the great unravelling.

  72. david burke Says:

    @jmcHale

    What happens when France looses its AAA+ rating and then can,t fund the ESf whatever fund. Its game up then. the shadow banking is going to bring down the Euro. Wall St is now after France, they know where the dead bodies of the French banking system are as they told them the products.

  73. colm brazel Says:

    Re dual currency debate above:

    http://en.wikipedia.org/wiki/Currency_board

    Pros and cons

    The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country’s terms of trade, irrespective of economic differences between it and its trading partners. Typically, currency boards have advantages for small, open economies which would find independent monetary policy difficult to sustain. They can also form a credible commitment to low inflation.

  74. seafóid Says:

    “European banks remain far more dependent on short term dollar funding from the wholesale markets than their US peers. ”

    http://www.ft.com/cms/s/0/e285f5ce-ca67-11e0-a0dc-00144feabdc0.html

  75. desmond brennan Says:

    Vox EU contributors have updated their articles warning Europe, and Vox has bumped them:
    http://www.voxeu.org/index.php?q=node/6845
    http://www.voxeu.org/index.php?q=node/6846

    The fudgecrats are now wrecking the real economy…whilst Michael Noonan sits on the sidelines idly praising them

  76. Ceterisparibus Says:

    It’s looking like the Greek saga continues with their 2 yr and 10 yr still going south. 2 yr at 38% and 10 yr at 16.95%. Irish doing well today so the ECB must be in there again.
    The Greek finance minister is getting frustrated and was writing letters this weekend……

    In a letter sent to Eurogroup Chairman Jean-Claude Juncker, European Monetary and Economic Affairs Commissioner Olli Rehn and European Central Bank Chairman Jean-Claude Trichet on Saturday, Finance Minister Evangelos Venizelos called for the EU to step in and display a united European front following a flurry of demands by several eurozone states that Athens provide collateral in exchange for their contributions to a multi-billion-euro loan package.

    In his letter to the three EU officials, Venizelos conveyed clear frustration at the demands by Austria, the Netherlands, Slovenia and Slovakia. He noted that Greece had displayed “the greatest possible good will and flexibility in order for the July 21 decisions to be immediately and fully implemented,” referring to the bailout package agreement reached in Brussels last month. The requests by the four member states followed a complex bilateral deal hammered out between Greece and Finland last week.”

  77. Michael Hennigan - Finfacts Says:

    How many believe that we are entitled to:

    1) no strings attached eurobonds;

    2) the end of public spending cuts so to ensure that the €500m annual public payments to lawyers; the €1.5bn add-on to the factory gate cost of publicly-paid drugs; the €2.5bn science budget and the rest of the cornucopia of legacy bubble-time goodies, continue to go to folk with a high propensity to consume.

  78. aiman Says:

    @ceteris paribus - no sign of ECB today, not even a rumour of them.

  79. aiman Says:

    Via Reuters, at 14.30 - ECB announces a further €14.291bn bond purchases settled in last week.

  80. DOCM Says:

    @ All

    Barnier, the Commissioner from France, demonstrates his independence of thought (!) in the attached lengthy article in Le Monde. He lists only five commandments as against the 12 negative commnadments expertly identified by Brian G.

    http://www.lemonde.fr/idees/article/2011/08/20/cinq-cles-pour-une-gestion-europeenne-de-la-crise_1561220_3232.html

    I would, however, be in agreement with the essential point made by John McHale, that we should avoid throwing the baby out with the bath water, if I understood him correctly. Things are on the move! They have to be or the ECB will be bust by the time Trichet leaves.

    cf. the attached interesting paper on the complex new world of EU decision-making published by the Jacque Delors think-tank, Notre Europe.

    http://www.notre-europe.eu/uploads/tx_publication/Bref24-DeSchoutheete-EN.pdf

    The author is undoubtedly correct in his analysis but it would have been helpful if he had been a little less coy in talking about an “institutional mode” (as opposed an “inter-governmental” one) when he should simply have used the term “supranational”. Equally, the problem of reconciling the two is less complex than it is made to appear. The questions to be answered are simply (i) what is the legal base for the proposal and (ii) what is the decision-making procedure that is stipulated? End of discussion!

    Barnier makes some bleating noises about getting agreement with the European Parliament on the remaining issue of the automaticity of sanctions in the context of the SGP “six-pack” of legislative proposals but does not say which side he is on: that of the institutional integrity of the EU or the bilateral deal on the issue struck by Sarkozy and Merkel in Deauville.

  81. Ceterisparibus Says:

    Another nail in the coffin?
    “SPIEGEL: What happens if Greece is not in a position to meet the requirements of the second bailout package — will there be a third one?

    De Jager: Should the Greek government not be in a position to fulfill the terms of the bailout program, then the Netherlands will refuse to provide any further aid. Then we will also block the next installment of the bailout package. The country has no choice but to continue to save and reform.”

    Seems pretty clear that the Dutch Finance Minister is in no mood to give Morris leeway to Greece.

  82. Ceterisparibus Says:

    Should be more leeway…

  83. Ceterisparibus Says:

    More trouble…from Moody’s …

    “The agreement between Greece and Finland, which is small by itself, assumes much greater significance. The pursuit of such agreements could delay the next tranche of financial support for Greece and so precipitate a payment default,” the agency said.

    Greece is set to receive the next 8-billion-euro tranche from its first bailout package in September.

    Moody’s said it expected other euro area members ultimately to block the agreement with Finland.

  84. DOCM Says:

    @ Ceterisparibus

    The deal between Finland and Greece is a compelling demonstration of what happens when intergovernmental rules (i.e. largely none) apply. This situation has arisen because of German insistence that to act in any other way would give rise to constitutional difficulties in Germany, an argument that has been swallowed whole by most commentators, without regard to the inbuilt flexibility in the wording of the so-called no bailout clause in relation to the granting of “mutual financial guarantees”.

    Had the political will existed, the present near chaotic situation would not have arisen.

  85. Ceterisparibus Says:

    @DOCM
    The situation is chaotic all right and it looks like the ECB are leaving them to sink…not helped by S&P….S&P’s Beers warns of a default

    A top official at rating agency Standard & Poor’s warned on Monday that Greece is likely to suffer a default by the end of the year.

    David Beers, the head of global sovereign ratings at S&P, suggested in Beijing that there is likely to be a new restructuring of the Greek debt even after the July 21 agreement for a debt relief and an extension in the maturities of the debt, owing to the deal with Finland on collaterals, with other countries now asking for a similar treatment.

    Last month S&P had warned of a partial default for Greece when the eurozone implements its plan for the restructuring of the Greek debt with the participation of the private sector. “That proposal constitutes default,” he said on Monday, “as it includes relief from debt.”

    Beers had also estimated last month that a Greek default will eventually be inevitable, as will the exit of Greece from the eurozone.

    S&P brought Greece’s credit rating down to CC, from CCC, after the eurozone decision on July 21.

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