Greek Referendum

Papandreou says

“We have faith in our citizens, we believe in their judgment and therefore in their decision,” Mr Papandreou said after rejecting a call for early elections by some socialist politicians. “All the country’s political forces should support the [bail-out] agreement. The citizens will do the same once they are fully informed.”

Does he believe this? What are the implications for the euro?


EFSF Scales Back Irish Bond Issue

This is hardly confidence-inspiring news. EFSF is supposed to save the Eurozone and offer Ireland cheap and long-term funding. What if the markets decide not to play ball and decline to offer the facility sufficient funding at low rates or long maturities?

The eurozone rescue fund has scaled back a planned bond issue designed to finance the bail-out of Ireland amid uncertainty over the level of demand.

The offering will provide a key test of investor sentiment after the announcement last week of new plans to tackle the eurozone debt crisis.

The bond from the European Financial Stability Facility will only target €3bn, instead of €5bn, and will be in 10-year bonds rather than a 15-year maturity because of worries over demand. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity …

Already delayed from last week, EFSF officials decided to price this week because market conditions could deteriorate if they held off any longer.

The bond is expected to price at yields of about 3.30 per cent, and about 130 basis points over Germany, the European market benchmark. This is a big mark-up since the middle of September when existing 10-year EFSF bonds were trading around 2.60 per cent and only 70bp over Germany.

Not good.

Update: Eoin points us to an Oct 13 statement indicating they intended a €3 billion issue. Thanks Eoin. It appears the FT over-egged this one. They’re probably right about the delay, the reduced maturity and the higher yield

Economic growth Economic Performance

State Investment Bank

Michael O’Sullivan and I have an article in today’s Irish Times arguing for a state investment bank. Some links to supporting materials are below the fold.


An fliuch mor

Writing in the aftermath of the 2009 floods, I warned that flood and emergency management needed an overhaul lest the waters return. I prefer to be wrong.

The economic damage of the 2011 floods will probably be smaller than in 2009. But this time, two people died. Ciaran Jones was a hero who put himself in harm’s way to help others. Cecilia de Jesus drowned in her home. Why is there no gauge on the Poddle linked to an evacuation alarm?

Flood management is about the prevention of floods. No flood management system is perfect, so emergency management is needed to manage the residual risk. Last Monday, both flood and emergency management failed Dublin.

Ireland is behind schedule to meet its EU obligations to assess flood risks and develop management plans. But why do we need the EU to tell us to protect our property and life? Flood protection design standards are low compared to other countries, and once-in-fifty-year defenses are breached remarkably often. Cities abroad are working hard to create retention basins and drainage channels for storm water. Dublin, a spacious and green city by comparison, has not done so.

Preliminary analysis by Met Eireann shows that the rainfall of the 24th October in Dublin was not unprecedented. More rain fell on 11th June 1963 and on 11th June 1993. A city like Dublin should be robust to events like that.

People have short memories, and politicians even shorter. After each flood, there is a call for better protection. That fades as the waters retract. Priorities change. The recent protest against the Clontarf flood defenses is a good example.

Last Monday also say failures in emergency management. Met Eireann issued a severe weather warning on Saturday. It was not accurate but extreme rainfall is fiendishly hard to predict. The warnings were actually fairly close to what came to pass. But while we have a tried and tested system for real-time weather prediction, we do not have a system that tells us where the water is likely to go once it has hit the ground. In fact, there are few gauges on rivers and streams. For instance, the OPW collection of hydrometric data omits the rivers Dodder, Poddle and Slang, where most of the mayhem was concentrated. The gauges that are there, are not linked to an early warning system.

A gauge on the Poddle would have warned that the water was rising dangerously high. The alarm could have been raised in Harold’s Cross. Celia may have had a chance with a few minutes warning.

A number of county councils now use MapAlerter, a service that sends out email and SMS messages to everybody in a particular area in case of emergency. Dublin does not use this system or any other.

Met Eireann issued a severe weather warning on Saturday. 48 hours later, the keys to flood gates and sand bags were still missing. That is just not good enough. Local flooding occurred to the untrained eye around 5 pm. The weather radar showed more rain coming. The emergency plan was invoked at 9 pm only, less than one-and-a-half hour before high tide. Why so late?

Water moves fast and with force. You have to act before the flood barrier breaks. In 2011, as in 2009, emergency workers followed the water. They did all they could, but there is little that can be done at that stage. Barriers need to be reinforced before they break. People need to be evacuated before the water reaches them.

In Cork and elsewhere, locals have done much to prevent a recurrence of the awful events of 2009. The national government has been less forthcoming. Dublin did not learn from what happened in Cork. The response to the 2009 floods was hampered by the Byzantine structure of flood management at the national level. The 2011 floods were local, and the line of command clear.

And now? Media attention will wane. There will be a few angry debates in the councils and the Dail. We will wonder why a shopping centre was build in a flood plain. We will wring our hands about the lack of accountability in the civil service. A committee will investigate and make sensible recommendations that will be ignored. Instead of waiting for those wise words, it is obvious what needs to done and now is the time to do it.

Early warning systems need to be put in place as a matter of urgency. That is fairly cheap and does not require intrusive intervention to awake the NIMBYs. The government should stop dragging its feet on the catchment flood risk assessment and management programme. Real-time hydrological prediction models must be developed, and not just for fluvial floods.

All this costs money. But Science Foundation Ireland has a large budget, not all of which is spent wisely. Let it fund the best hydrologists in the world to study Ireland. There are harebrained government subsidies in the areas of energy, transport, sport and what not that can be transferred to flood management without any great loss except to the cronies of governments past.

Heavy rains are inevitable. Flood damage is not.


Economic Renewal: Increasing Ireland’s Productivity and Growth

In a new initiative, the ESRI is running a series of half-day conferences on emerging from the crisis, with the first event focusing on productivity and growth.  The first event takes place on November 9th and the details are here.


Wonktastic Statistical Yearbook Released

Better than a John Grisham novel for policy wonks, the statistical yearbook of Ireland 2011 has been released from the CSO. Lots to dig into here, but I guess readers of the blog will dig into chapters 8, 9, and 16 on the economypublic finances, and prices first (links are to the chapter pdfs).

Banking Crisis

SSISI Meeting on Credit for SMEs

Some readers may be interested in going along to this talk (“Credit Access for Small and Medium Firms: Survey Evidence for Ireland” by Martina Lawless and Fergal McCann) at the Royal Irish Academy this evening at 6.

Banking Crisis

AIB’s Penny Stock Mystery

I know the government are desperately in search for some good news stories. So how about this one: Our stake in AIB is worth €30 billion; we’re saved! On second thoughts, um, er, maybe not. Anyone got an explanation of Felix’s puzzle that goes beyond “well, markets are dumb, particularly illiquid ones”?


Exciting New Scheme Revealed

The summit communique contains the following:

’12. The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the

Greek debt. Therefore we welcome the current discussion between Greece and its private

investors to find a solution for a deeper PSI. Together with an ambitious reform programme

for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with

an objective of reaching 120% by 2020. To this end we invite Greece, private investors and

all parties concerned to develop a voluntary bond exchange with a nominal discount of 50%

on notional Greek debt held by private investors. The Euro zone Member States would

contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready

to provide additional programme financing of up to 100 bn euro until 2014, including the

required recapitalisation of Greek banks. The new programme should be agreed by the end of

2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on

the IMF to continue to contribute to the financing of the new Greek programme.’


I don’t quite see the point of going through a default (which is not, of course, a credit event) in order to get Greece down to 120% of GDP in 2020.

But note the very nifty €30 bill to be contributed by ‘…the Eurozone member states…’.

This could include little us! Imagine, the team taking one for France and we are allowed to tog out!  

What is being proposed here is that European investors who lost money in Greece are getting bailed out to the tune of €30 bill, not by their host governments but by the team. Those who lost money in Ireland got bailed out, and continue to get bailed out, by the host government only.

You have to hand it to the French.

Banking Crisis

Anglo Bonds No Cost to Taxpayer Talking Point Gets Full Rollout

In advance of next week’s $1 billion Anglo bond repayment (congrats to all our international hedgie readers), the government talking point that repayment of this bond doesn’t cost the taxpayer a cent is now getting a full rollout, with Michael Noonan on RTE Radio’s News at One today and Leo Varadkar on Tonight with Vincent Browne both at it.

Both ministers were insistent that because the IBRC (i.e. the new Anglo-INBS institution) has sold loans worth €2.5 billion for a loss of €500 million, thus realising €2 billion, that paying the remaining €3.7 billion in unguaranteed senior bonds won’t cost the Irish taxpayer any money.

Let’s make this as simple as possible: Even if you wanted to view this repayment as costless because Anglo has its “own funds” to repay the bond, ask yourself who would be the beneficiary of these “own funds” if they weren’t used to repay unguaranteed bondholders. Every cent going to these bondholders is coming from Irish taxpayers.

Slightly less simplistically, Leo acknowledges that we are putting large amounts of money in the form of the promissory note payments (“the only money we’re putting in is the promissory note” — ah yes, “Other than that Mrs. Lincoln ….”). How did they arrive at the figure for the promissory note? The figure was arrived at by figuring how much money was required to keep Anglo solvent, i.e. paying back all its bonds debts. If we didn’t pay back the unguaranteed bondholders, then we could revise the promissory note payments down.

I know that the remaining unguaranteed bond debts are dwarfed by the approximately €40 billion Anglo owes in ELA but this talking point is irritating all the same. Honestly guys, please stop.

Banking Crisis EMU

Eurosummit Statement: October 26

Here‘s the official statement from last night’s summit. Other materials are here.


European Sovereign Debt Crisis

The conclusion of the EU Summit this morning marks one more stage in the evolution of this crisis (comments please!).  The longer-term dynamic for the crisis was extensively discussed in Tuesday’s Policy Institute/IIIS roundtable event. The presentations are below (audio/video coming soon)



You can tune in to today’s IMF conference on Iceland here.

One of the speakers is Jon Danielsson. He has posted two articles on VOXEU, in which he argues that the recovery process in Iceland is far from complete and that the crisis response was not optimal.  The bank-sector article is here; the overview on the IMF programme is here.


Research on the Crisis

You may be interested in the papers that will be presented at the Economic Policy Panel meeting in Warsaw over the next two days, supported by the National Bank of Poland.  The papers are available here.

The list includes

  • a comprehensive overview of eurobonds by Carlo Favero and Alessandro Missale
  • how housing slumps end by Agustin Benetrix, Barry Eichengreen and Kevin O’Rourke
  • the interplay between sovereign risk and banking-sector risk in European bond markets by Ashok Mody and Damiano Sandri
  • a new proposal for automatic recapitalisation of banks by Patrick Bolton and Frederic Samama


Symposium on the Euro as Greek Tragedy: Call for Papers

Symposium on “The euro: (Greek) tragedy or Europe’s destiny? Economic, historical and legal perspectives on the common currency”

University of Bayreuth (Germany), 11 – 12 January 2012

Funded by the “Volkswagen Foundation”


The European debt crisis has brought the European Monetary Union (EMU) to the brink of collapse. A large variety of proposals are currently being discussed, ranging from different stabilisation mechanisms to outright default and the exit of individual countries from the euro zone; even a complete dissolution of EMU no longer appears unthinkable.

The aim of this symposium is twofold: First, we seek to encourage a genuinely pan-European debate on EMU that will overcome the multitude of (highly diverse) national debates. Currently, economic analyses and policy suggestions follow well-established national fault lines (mirroring earlier divisions between “soft” and “hard” currency countries), which makes agreeing on a common diagnosis of the problem and suggesting a therapy exceedingly difficult. Second, we wish to draw on the rich experience of past monetary unions in helping us master the present and the future of EMU.

Lessons from monetary history
(Call for papers)

Half of the sessions will be devoted to lessons from the past, i.e., explaining the conditions under which monetary unions have worked well in the past as well as appreciating the importance of monetary history in shaping the attitudes of different countries towards EMU. Researchers working in the fields of economics, economic history, European integration, political science, history, history of economic thought and legal studies all have important contributions to make in this regard and are encouraged to submit their papers. We will strive to maintain a balance between the different disciplines and we welcome in particular submissions from PhD students and early career researchers.

Different perspectives on the current crisis
(Invited presentations)


Prof. Albrecht Ritschl (key note speaker)
(London School of Economics)

Prof. Agnès Bénassy-Quéré
(CEPII and University of Paris I Panthéon-Sorbonne)

Prof. Manfred Neumann
(University of Bonn)

Prof. George Pagoulatos
(Athens University of Economics and Business and College of Europe Bruges)

Prof. Andreas Paulus
(German Constitutional Court and University of Göttingen)

Prof. Niels Thygesen
(University of Copenhagen)

A specific focus of the invited presentations will be on why economic analyses of the current crisis and policy suggestions to overcome it differ markedly from one country to the next. Following the key note lecture by Prof. Albrecht Ritschl, Prof. Niels Thygesen will elaborate on the “Different perceptions of EMU among the major initiators”. His analysis will be complemented by three country-specific perspectives, namely by Prof. George Pagoulatos’ view from the euro periphery, Prof. Manfred Neumann’s perspective from a “hard currency country” and the possibly “intermediate” French view by Prof. Agnès Bénassy-Quéré. Prof. Andreas Paulus will elaborate on legal aspects of the bail-out mechanism.

Submission and Selection process

Submission Deadline: Friday 18th November 2011

Applications by e-mail (with pdf-file attachments) should be sent to by Friday 18th November the latest. Notifications of acceptance will be sent by Friday 25th November 2011.

Please submit a 1-page summary of the paper you wish to present accompanied by a 1-page CV and (in the case of PhD students only) a letter of support from the PhD advisor.

PhD students / early career researchers wishing to participate in the symposium without presenting a paper: Please submit a 1-page explanation as to how the topic of the symposium relates to your research, a 1-page CV and (in the case of PhD students only) a letter of support from the PhD advisor.

Expenses:  Accommodation and travel expenses will be covered for all participants. If travel expenses are expected to exceed 150 EUR (for Germany based participants) and 350 EUR (for all other participants), please do indicate in your application the level of travel expenses you would require.

Prof. Dr. Bernhard Herz (University of Bayreuth, Germany)

Dr. Matthias Morys (University of York, UK)


Banking Crisis

Comments at Central Bank Mortgage Conference

For those of you who missed the excellent Central Bank mortgage conference a couple of weeks ago, the presentations are available here. I’ve also written up my own comments from the day and posted them here.


The Future of Banking

Edited by Thorsten Beck, a new VOXEU e-book has been released on this topic.  An overview is here, while the free download of the e-book is here.

A call for action

A new eBook, The Future of Banking, contains three headline messages:

  • We need a forceful and swift resolution of the Eurozone crisis, without further delay! For this to happen, the sovereign debt and banking crises that are intertwined have to be addressed with separate policy tools. This concept finally seems to have dawned on policymakers. Now it is time to follow up on this insight and to be resolute.
  • It’s all about incentives! We have to think beyond mechanical solutions that create cushions and buffers (exact percentage of capital requirements or net funding ratios) to incentives for financial institutions. How can regulations (capital, liquidity, tax, activity restrictions) be shaped in a way that forces financial institutions to internalise all repercussions of their risk, especially the external costs of their potential failure?
  • It is the endgame, stupid. The interaction between banks and regulators/politicians is a multi-round game. As any game theorist will tell you, it is best to solve this from the end. A bailout upon failure will provide incentives for aggressive risk-taking throughout the life of a bank. Only a credible resolution regime that forces risk decision-takers to bear the losses of these decisions is an incentive compatible with aligning the interests of banks and the broader economy.

Policy recommendations

There are many policy recommendations, but I would like to point to three:

  • European Safe Bonds: Several authors present the case for a forceful resolution of the Eurozone crisis. Critical of Eurobonds, Markus Brunnermeier and co-authors have proposed an alternative solution in the form of ‘European Safe Bonds’ – securities funded by currently outstanding government debt (up to 60% of GDP) that would constitute a large pool of ‘safe’ assets. The authors argue that these bonds would address both liquidity and solvency problems within the European banking system and, most critically, help to distinguish between the two. ‘European Safe Bonds’ could effectively separate the sovereign debt from the banking crisis, and would allow the ECB to disentangle more clearly liquidity support for the banks from propping up insolvent governments in the European periphery.
  • Capital and liquidity requirements – risk weights are crucial. While ring-fencing might be part of a sensible regulatory reform, it is not sufficient. Capital requirements with risk weights that are dynamic, counter-cyclical and take into account co-dependence of financial institutions are critical. Capital requirements, however, do not work independently, but operate in their effect on banks’ risk-taking in interaction with ownership and governance structures – so one size does not necessarily fit all. Similarly, liquidity requirements have to be adjusted to make them less rigid and pro-cyclical. Though banks are under-taxed, the currently discussed financial transaction tax would not significantly affect banks’ risk-taking behaviour and might actually increase market volatility; in addition, its revenue potential could also be overestimated.
  • The need for a stronger European-wide regulatory framework. If the common European market in banking is to be saved – and the authors argue that it should be – then the geographic perimeter of banks has to be matched with a similar geographic perimeter in regulation, which ultimately requires stronger European-level institutions. Many of the regulatory reforms, including macro-prudential tools and bank resolution, have to be at least coordinated if not implemented at the European level. Critically, the resolution of financial institutions has an important cross-border element to it, which calls for a European-level resolution authority for systemically-important financial institutions.
  • Categories


    In Nov and Dec 2009, Ireland was hit by extensive floods. Last night, there were floods in Dublin. The damage is probably smaller, but this time a life seems to have been lost.

    After the 2009 floods, a number of deficiencies in flood control and emergency management were noted. See Hickey (behind paywall), Oireachtas, Tol. However, as I noted last year, this was not translated into action. More money has been allocated to flood control, but the institutional structures that failed in 2009 have been left unreformed.

    In 2009, there were issues with emergency management too. They showed up again last night. There was local flooding from five o’clock onwards, and more rain predicted, but the emergency plan was not invoked until nine o’clock, when river banks had already been burst and with less than one-and-a-half hour to go till high tide. Warnings to the public were late, and little information was provided about what to expect where and when. Twitter was the best source of information, although facts were freely mixed with spoofs, jokes, and bitter disputes about the correct spelling of fliuch.

    After the 2009 floods, a number of conferences were organized with speakers from Great Britain on the state of the art in the urban management of pluvial floods. No lessons seem to have been learned.

    Anticipation is key in emergency management. If you know where the water will go next, you can move people, goods, and traffic out of harm’s way before damage is done. If all you can do is react, chaos will ensue and damages are unnecessarily high.


    Possible Implications of a Greek Default

    Note: I had not seen Karl’s post before writing this one, so it is not meant as a response.   Since the two posts cover somewhat different ground I hope they are complementary. 

    The argument is increasingly heard that if Greece is allowed a write-down on its debts then Ireland should be allowed a similar treatment.   Unfortunately, a number of different things seem to get jumbled together in the discussion: the costs and benefits of default on State debt; the costs and benefits of default on senior bonds in the former Anglo and INBS; and the costs and benefits of restructuring the promissory notes.   I don’t pretend to have all the answers, but it seems worthwhile to try to disentangle the different elements. 

    (1) Implications of a Greek write-down for the possibilities of an Irish write-down

    There is almost universal agreement that Greece’s debt is unsustainable.   Largely against the will of the Greek government, the EU/IMF funders are demanding burden sharing with private sovereign bondholders.   This is unlikely to ease the austerity burden being imposed on Greece.   The immediate benefits will go the official funders in the form of reduced loans that they have to make to Greece. 

    So could Ireland follow the same path?   While we are certainly not out of the woods in terms of debt sustainability, the situation here is quite different.   The debt to GDP ratio is projected to peak at about 118 percent of GDP in 2013.   Irish bond 9-year bond yields have fallen from a peak of around 14 percent to about 8 percent now – still far too high to return to the markets but reflecting increasing confidence that Ireland will avoid default despite the chaos in the European crisis-resolution effort.   Whether or not you believe that Ireland’s debt is sustainable, a move by Ireland to default on its sovereign debt is likely to be badly received by the official funders.   There is no guarantee that official support would continue to be forthcoming.  Loss of that funding would require the deficit to be closed cold turkey, with the austerity having devastating effects on living standards and the economy.  Even it official funding continued, it is highly unlikely that the required austerity measures would be lessened.   My conclusion is that it is hard to see a short- to medium-term gain from defaulting, with huge downside risks.

    Longer-term, a default would obviously enough lower the amount of money we have to pay back.   Against this would have to be weighed the cost of the loss of the asset of creditworthiness/reputation.   Defaults can sometimes be viewed as “forgivable” if undertaken (or forced) as a last resort.   The reason is that they don’t reveal that much about the country’s underlying willingness to honour its debts.   A default by a country that can pay is quite different, and would involve a huge reputational loss for a country that begins with a strong reputation.   Creditworthiness for a country with a large debt, a volatile economy and a large dependence on inward private investment is extremely valuable.   I find it hard to see how a cost-benefit analysis would support trying to voluntarily follow a Greek default precedent. 

    Banking Crisis EMU European economy Fiscal Policy

    How Would a Greek-Style Haircut Affect Ireland?

    Someone asked me today how a Greek-style haircut for private bondholders would impact on the Irish debt situation if applied here. Without any claim that this is a prediction for what could happen to Ireland, or a policy recommendation, here are the calculations.

    While the figure grabbing the headlines is the 50%-60% haircut for private holders of Greek sovereign bonds, it appears that the bonds bought by the ECB will not be written down, nor will the IMF loans. FT Alphaville discuss a UBS report that calculates that a 50% haircut for private bondholders actually implies a 22% reduction in total debt.

    In Ireland’s case, the latest EU Commission report estimates (page eight) that our year-end general government debt will be €172.5 billion or about 110 percent of GDP. The report also estimates that by the end of this year, we will owe €38.2 billion to the EU and IMF.  (Table 4 on page 23).

    We don’t know how much Irish sovereign debt the ECB own but it’s believed to be a large amount. I do remember a report from Barclay’s claiming they owned €18 billion by June 2010. Let’s say ECB owns €22 billion of Irish debt (that’s just a guess, I really don’t know). Combine that with €38 billion from EU-IMF and you have €60 billion in debt that wouldn’t be getting a haircut. Better guesses of ECB holdings of Irish sovereign debt are welcome.

    Now apply a 50% haircut to the remaining €92.5 billion of our debt and you reduce the debt by €46.25 billion, or 29 percent of GDP, getting the debt ratio down to 81 percent. (Of course, we’d still be running large deficits, so it would start increasing again.)

    So that’s the answer. Perhaps worth noting, however, is that an alternative method of writing down Ireland’s debt by close to 30 percent of GDP without haircutting private bondholders at all would be to have Anglo’s ELA debt to the Central Bank of Ireland written off.

    According to its interim report Anglo owed €28.1 billion in ELA at the end of 2010 but this had risen to €38.1 billion by the end of June. This is because Anglo transferred €12.2 billion in NAMA senior bonds to AIB in February to back the deposits that were being moved out of the bank.

    On July 1, Anglo was merged with Irish Nationwide Building Society (INBS) to form what is now called the Irish Bank Resolution Corporation (IBRC). As of the end of 2010, INBS had €7.3 billion in loans from the ECB. However, €3.7 billion of this was backed by NAMA bonds and other assets that were transferred to Irish Life and Permanent. INBS has been in receipt of ELA since February to replace this lost funding. While this has been admitted by a Department of Finance official (see this story) the exact figure has not been released. I assume it is about €4 billion.

    So my estimate is that the IBRC now owes about €42 billion in Emergency Liquidity Assistance to the Central Bank of Ireland. If the European authorities ever decide they like the idea of haircuts for Irish debt, it would be fair to ask which of a fifty percent haircut or a write-off of ELA would be more likely to damage Ireland’s reputation or cause financial market contagion.

    Economic growth

    More on Savings Rates in Ireland.

    Seamus’ excellent post today reminded me to post something I looked at some weeks ago. The September Budgetary and Economic Statistics from the Department of Finance carried some really useful information in Table 25 on investment, Gross National income, and gross and net savings. The figure below shows the evolution of gross and net national saving and the gross total available for investment from 1995 to 2010.

    We can see clearly from the figure that the spike in net national savings in 2007 is rapidly diminished, with only 21 million euros put aside, so to speak, in 2009, and 1951 million euros in 2010. Occasionally the notion gets floated that there is a load of money somewhere in a bank account to be taxed. This should be dispelled rather quickly, as households don’t seem to be saving their way through the crisis much at all. In addition, the total available for investment seems to have dropped off, with no rebound in sight, which is a worry.


    ESRI Research Seminar: Inflation Expectations, Central Bank Credibility and the Global Financial Crisis

    Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2.
    Date: Thursday 27/10/2011.
    Time: 4.00 pm.
    Speaker: Petra Gerlach-Kristen, ESRI.
    If a central bank’s promise to keep inflation stable is credible, long-run inflation expectations should not respond to economic news. This paper studies market participants’ inflation expectations in the euro area, the United Kingdom and the United States as implied by inflation swaps. We find that inflation expectations up to ten years out seem to respond to commodity prices and unemployment news and that some of these reactions have apparently become stronger and longer-lasting since the onset of the global financial crisis. This might be due to second-round effects and thus to a decrease in central banks’ credibility.


    Europe’s Growth Emergency

    Zsolt Darvas and Jean Pisani-Ferry address this topic in this new Bruegel Policy Contribution, which is available here.


    Patterns of Investment

    For the past four years domestic economy has been in freefall, which has resulted in nominal domestic demand falling from €172 billion in 2007 to €126 billion last year.  This massive drop has been spread unevenly across the three components of domestic demand:  consumption expenditure is down €11 billion; government expenditure on goods and services is down €2 billion while investment in fixed capital is down €30 billion.

    The fall in the domestic economy has been led by the fall in investment, which in just four years has fallen 63% from €48 billion to €18 billion in nominal terms.  The real decrease has been 52%.  There is nothing in this snapshot that we don’t already know.  The pattern of the four components of nominal GDP since are shown here.


    Investment rose strongly up to 2006.  It was largely unchanged in 2007 but the rapid fall since then is clearly shown.  Table 15 in the National Income and Expenditure Accounts provides a breakdown of the investment by type.

    In 2006, investment was €48.3 billion and €38.0 billion of that was accounted for by the construction and property sectors; dwellings (€22.6 billion), roads (€2.0 billion), other construction (€8.8 billion) and also costs associated with transfer of land and buildings (€4.5 billion) which makes up the bulk of the ‘other’ category in the above graph.  By 2010 these four categories made up €10.7 billion of the €18 billion total. 

    The domestic economy has seen a nominal fall of around €46 billion – unsurprisingly 60% of this is due to the collapse of the construction and property sectors. 

    The Non-Financial Institution Sector Accounts gives an insight into the breakdown of investment by sector.

    The household sector has gone from the largest source of investment as recently as 2008 to the smallest in 2010.   If we use the figure for Consumption of Fixed Capital as provided in the Non-Financial Accounts we can get a measure that could be considered a form of Net Investment.

    For the economy as a whole gross fixed capital investment exceeded consumption of fixed capital by less than €2 billion in 2010, with firms having an outturn of negative €2 billion. 

    We will get revised macroeconomic projections from the DoF as part of the forthcoming budgetary process.  Their most recent projections are from April’s Stability Programme Update.  Investment is expected to continue to decline in 2011 with a real drop of 11.5%, but minor growth is forecast for 2012.  This growth is expected to quickly accelerate with real growth in investment of 4.5% projected for 2013 increasing to more than 5% for both 2014 and 2015.

    There is little sign of this.  The Q2 National Accounts show that real investment in the first half of 2011 was down 11% on the same period last year.  This is in line with DoF projections but there is little to indicate that a turnaround in investment will occur in 2012.  The collapse in household investment has eased but that was all that could occur as the overall drop now exceeds 80%.

    The scope for further declines in investment is limited but absent both a willingness to borrow and a willingness to lend the scope for a return to 5% growth rates also appears limited.


    Final Reminder – European Sovereign Debt Crisis Roundtable on Tuesday

    Please note the change of venue (extra capacity can now be accomodated)

    Henry Grattan Lecture – The European Sovereign Debt Crisis

    Speakers: Peter Boone, Mike Dooley, Jean Pisani-Ferry and Ciarán O’Hagan

    Date: Tuesday 25 October from 4.00 to 5.45pm

    Venue:** Tercentenary Hall, Biomedical Sciences Institute, Trinity College Dublin, Pearse Street

    ** Please note NEW VENUE

    This public lecture will discuss the European Sovereign Debt Crisis one year on from Ireland’s €85 billion bail out by the European Union-International Monetary Fund. This lecture is part of the 2011-2012 Henry Grattan Lecture Series which will address the theme of The Debt Crisis: Causes, Consequences, Controls.

    The lecture, which is being jointly organised by the Policy Institute and the Institute for International Integration Studies (IIIS), will be chaired by Philip Lane, Head of the Economics Department, Trinity College Dublin.

    Speaker Biographies
    Peter Boone
    Mike Dooley
    Jean Pisani-Ferry
    Ciarán O’Hagan
    Speaker Biographies

    Social conditions

    VOX article on longrun determinants of health

    Here is a VOX article on my joint work with James Smith and Mark McGovern on long-run determinants of health in Ireland. The extent to which decisions made in one decade have impacts on later ones is an important area of economics in terms of examining theoretical mechanisms and working out discounted values of public policies. The extent to which modern national policy-makers can target such obvious problems as infant deaths due to gastroenteritis is limited. However, there is still a strong role for looking at the long-run effects of policies aimed at improving, in particular, childhood mental health.

    Banking Crisis

    Anglo Bonds: Not Coming From the Taxpayer

    Via NAMA Wine Lake, I came across this very important statement from An Taoiseach on September 28 about repayment of Anglo bonds

    If the Anglo bondholders are paid, they will be paid from their own resources. This will not come from the taxpayer. The Minister for Finance has been dealing with this situation at the ECOFIN meetings.

    This is really good news. I had been under the impression for some time that all of the funds used to pay Anglo bondholders came from the taxpayer. But apparently that’s not the case. Phew, that’s a relief. Hats off to the Minister for his excellent work at those ECOFIN meetings.

    Update: In case anyone thinks Enda’s on his own here with this idea of Anglo bondholder payouts not coming from the taxpayer, listen to Leo Varadkar on RTE’s This Week today (32 minutes and 25 seconds in). When asked about the looming payout to bondholders, Leo says

    Well that’s not quite the case. What’s happening in relation to the Anglo bondholders is they’ll be paid from Anglo’s own resources, from the sale of its own property assets, for example. The only money that is being put into Anglo Irish by this government is the promissory notes, the €3 billion a year that we are required to give to Anglo, or what is now the IBRC, as a result of the deal made by Fianna Fail and the Greens, and we are trying to have that changed. That is our major objective at the moment.

    I recommend strongly that the government retire this particular piece of spin immediately. Every cent that is given to bondholders is an additional cent that will have to be poured into Anglo by the Irish tax payer, whether as promissory note payments or some rejiggered version of these notes.

    Banking Crisis

    Ireland and Iceland: One Letter, Six Months, Three Years On

    Reading Paul Krugman’s recent posts (here and here) reminded me that I forgot to write a post about my recent trip to Iceland. I presented at a very interesting conference on sovereign debt organised by Reykjavik University. Here is a link to slides and papers, which were presented on October 7 and 8.

    My presentation was titled “One Letter and Six Months? Ireland and Iceland Three Years On”–the slides are here. One issue I discussed was whether Euro membership ultimately helped or hurt Ireland.

    Much of the discussion surrounding Iceland in 2008 focused on the fact that they were outside the Eurozone and so could not obtain liquidity support from the ECB. While this was viewed as a negative factor, one could argue today that the (enforced) Icelandic approach avoided the mistakes associated with confusing a solvency crisis with a liquidity crisis. My conclusion: Without a clear policy on bank resolution, the Eurozone is not a good place to have a systemic banking crisis.


    Electric vehicles

    The Guardian reports that electric cars are not selling well in the UK.

    The CSO does not report sales of electric cars, but it does report “other fuel types” which, by elimination, must mean electric. In 2008, 6 such cars were registered, or 0.004% of all new cars. This rose to 9 (0.017%) in 2009, 23 (0.027%) in 2010 and 45 (0.054%) in the first nine months of 2011.

    Hybrids are doing better: 2,600 were sold in 2008-2011, or 0.7%.

    The government still aims for one in ten all-electric by 2020 (on the road, not new sales; see Hennessy and Tol (2011, Fig 10) for an estimate of the impact on carbon dioxide emissions). That is roughly 230,000 cars. We’ve bought the first 83. Only 229,917 to go. (The target for 2012 is a more modest 6,000.) .

    The ESB has put up a good few charging points. Initially, power was given away for free, but I can’t find evidence that that is still the case. There is a purchase subsidy of 5,000 euro per car, and a zero VRT. The motor tax is 146 euro per year.

    Car buyers are apparently not impressed by the subsidies and tax breaks on offer, and the exchequer is not losing any money on this scheme. However, the investment by the ESB is pointless. Instead, they could have paid the money as a dividend to the government.


    Maastricht Letter: Irish Government Debt Dynamics

    The “Maastricht Letter” provides a lot of detail concerning the government debt dynamics  – available here.