O’Leary and Walshe on Debt, Deleveraging and the Irish Economy

Ireland wants to reach a destination whereby it will have a smaller private debt level, a smaller banking system and stable public finances. That is the story of stocks. How it gets there, outside of default, is determined by flows.

And ebbs. Specifically by the amount of ebb which must be directed out of this country in order to pay of the gambling debts of the likes of AIB and Bank of Ireland (The latter of which I note is selling assets it squirrelled away for private gain.). However, as a result of the government’s continued fiscal imprudence, the debt “stock” level of this country is reaching high enough levels to make the required “flows” of debt repayment impossible to sustain.

The sane policy option is debt defaults and writedowns. However, the paper does not even consider these:

On the assumption that there is no write-down of debt (private or public), we argue that slowing the pace of banking sector deleveraging is the most important policy change required for the economy to reach its desired destination.
…..
Finally, debt write-off is not suggested as a policy at this point.

It is not acceptable to make these statements without justifying them. The onus is on the authors to explain why they have chosen to ignore the elephant in the room here. Debt write downs are a reasonable, and tested response to debt crises. They cannot simply be paid lip service in the crisis we now find ourselves in.

A quick note on comments. I’ve gotten a few complaints discussions aren’t being kept (roughly) on topic, so I’ll be a bit more aggressive in deleting comments that don’t add to a discussion on debt and deleveraging in the Irish economy.

Actually, as it happens this is one topic in which the Dork of Cork is in fact something of an expert.

What is the method of deleveraging envisaged by the Troika ? it looks as if BOI’s sell off of non Irish loans counts…

To me the real issue would be to call in all loans in breach of covenant…liquidate and take the hit. Is that what the troika are thinking along the lines of ?

@All,

What about the type of deleveraging going on? Prof. Honohan in the comments after the paper made the point that there are ‘core’ banking activities the CBI don’t want to see sold off too quickly, and ‘non core’ that should be gotten rid of quick smart. I’d be interested in people’s views on which activities should be classified as ‘non core’.

@stephen
That was my point ! Are the troika simpply saying
1) Too much liquidity in the Irish banking system or
2) Too much liquidity in Ireland

If (1)…then BOI sell off of what aren’t even Irish loans counts, and has no real effect on Ireland

If (2)…this suggests calling in all sorts of loans (commercial, mortgage etc) that are delinquent or in breach of covenant

Would like to know whether IMF satisified by Type1…and if they are, then we could even package up more Irish loans, and sell them fully off balance sheet (say to some SPV or intl bank)

If its (2) they want…to drain ireland of excess liquidity…well that needs to be postponed a while

@Paul q

” Eventually someone will pull the plug and we will move on.”

Difficult not to read that without thinking ‘down the plug hole’.

@Stephen

Core, I think is supposed to mean domestic retail and commercial. Anecdotally there is little discrimination. They are just trying to lend less. Banks were always regarded by stockbrokers as inherently stupid businesses whose function in the business cycle is to hand out umbrellas willy nilly when the weather is fine and then demand them all back at the first sign of rain. If you look at the sector relative against the FTA over fifty years you can see it is consistently dismal. Their only real achievement has been capturing the political class over the last 15 years.

@Stephen k

These threads stay open a long time. This is an extraordinary point in macroeconomic history with events, in terms of apparent policy or market realities shifts every few hours at times. Ireland is likely to be affected by them for decades – long after topical interest in sites like this has waned due to policy stasis. Would you like general topical observations to be posted elsewhere?

The ad hoc contributions to this site are streets ahead of the garbage that pollutes much of the interweb and twittersphere. I regularly look at Bloomie, Rtrs, Google, the FT and this site to keep up to date with what has been going on in the last few hours. That is quite something for an open forum. Are you sure you want to discourage everything that is not on-topic ?

The hypothesis that deleveraging should happen over a long period of time only makes sense in an inflationary environment. And that buries a lot of other assumptions, not least of which, is that there will be some form of debt monetization. In a deflationary environment, fast brutal deleveraging is not only the least painful, it is almost unavoidable (except in Japan’s case, but that is not relevant here since it borrows in the currency it prints). If that’s true and inflation is a de-facto default, how can default, in some form, be excluded as a potential outcome?

@Stephen
It seems that profitable/unprofitable and core/non core could be exact opposites in many cases. Non-core – profitable – e.g offshore operations in a country like Poland. Core- loss making – Irish residential mortages.
Which do you sell in deleverging?
The Irish mortage book and other ‘core’ activities are probably over-priced and marking them down to real value for sale would cause more taxpayers money to go into the banks.
So probably the profitable operations are the ones that will be sold, described nicely as ‘non-core’.

@Chris – that’s a good question. To some extent, the French banks have an intention to shrink themselves to avoid forced recap. However, their moves are inadequate. This is going to leave Sarko in that famous position of tide out and no trunks on. He has to avoid this so expect to see some ‘stealth recap’.

Joe Nocera in The New York Times has a story today on Howard Schultz, the founder of Starbucks.

Nocera says: With the help of Starbucks, we the people can do what government and the banks won’t: make loans to small businesses; Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses.

Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled “Indivisible.” “We are hoping it will bring back pride in the American dream,” he says. The tag line will read: “Americans Helping Americans.”

The issue raised in the paper may be as mucxh of an EZ problem as an Irish one.

http://in.reuters.com/article/2011/10/18/idINIndia-59955020111018?type=economicNews

@Chris
The problem for French banks is not the Greek default,which can be easily absorbed by the present capital (this would not be the case for an Italian default,which would be devastating and the end of the Euro),it is the rule changes that are discussed.If they are obliged to raise their capital to 9% of assets ,their shareholders will be diluted to a very large extent ,given their present share price,or the State will enter the capital in an election year.
There is a fixation on French banks,but the problem is the same for all Italian banks and most German banks.

@All

Aside from the energy issue raised above the issue here may or may not be core or non core business deleveraging but I believe that’s missing the more fundamental point.

The bigger issue here is that the banks are being forced to sell assets in line with the PCAR 31.03.2011 requirements at the wrong time in the cycle.

That’s the problem with Regulators – they are generally really bad investors – they’ve allowed the banks buy at the top and are now forcing them to sell at the bottom. Goodbody are right this is a crazy requirement. Its purpose being what exactly?

The bigger issue here is why are the CBI forcing this upon the banks and by the way its not even mentioned in the report, and its the equally crazy new capital rules.

I’ve suggested here time and time again what we need here is to say to the EU/ECB/IMF that the ROI is a Basel III free zone for the next 5 years. We don’t have banks so why the need to impose capital rules stiffer on our non banks ahead of the likes of Goldman and Barclays is beyond me and has been beyond me for some time. If this was a case of trying to put manners on the banks well again the timing of the Regulators is about 8 years off.

In markets timing is simply everything and Goodbody when all is said and done are simply highlighting that the deleveraging idea may in fact be a necessary one but not now, for the love of God not now. This requires the CBI to look outside its rule book and look to the effect its capitalisation rules are having on the wider economy – all bad in the short to medium term.

Recent talk from the EBA of stressing banks to 9% Core Tier 1 cap rules makes sense when the cycle allows but again not now – the valuation genie has flown and the losses need to be taken – when the losses are taken both private loans and sovereign bonds and the hole size is known with much more certainty then I suggest build from the bottom up i.e. start with 4% and get to 9% core tier 1 over time – not the other way around and the CBI and EBA are suggesting.

For investors potential losses and real losses on large amounts of capital are still a LOSS on capital – to an investor capital size is largely irrelevant. Prof Hon believes large capital sizes will attract foreign investors to our banking shores – he’s wrong.

@ YoB

the main reason for the deleveraging demanded of the Irish banking system is to remove the contingent liability which has dragged the Irish economy under. Its not about a fear of capital inadequacy within them as much as a fear that the size of their balance sheets was scaring off foreign investors in Irish govvies until this was rectified.

Look at how the likes of Finland have fared during this crisis, the lack of a major domestic banking sector has meant that there was never any fear of their economy blowing up. Its probably one of the only economies in Europe that does not have to worry about its banking system getting into some sort of trouble.

But i agree on the substantive issue – the cycle does not allow for a proper recapitalisation of the banking system in one big step, and this all seems to have been cobbled together in a very short time span and in a haphazard manner.

Slow bank deleveraging fans and turbo-efsf supporters might like top take note of todays move in France – Germany spreads.

@DoC: “Oui, un ménage de deux: formidable! Mais, un ménage à trois: le boom! boom! C’est la vie!

Anyhow, back to deleveraging. I appreciate all the efforts to dissect the entrails of this predicament. I follow some of it, but much is beyond me. Some commentators have clearly made an effort to analyse the paper (and fair do’s to the authors for putting it into the domain of us wolves to savage.)

Back of it all, we have a physical economy. Money (in all its formulations – apart from cash and notes) is a virtual entity. However, debt, which is also a form of money is a very, very unfunny entity. The damn thing grows and grows and consumes a portion of your (possible) future income. This has unfortunate consequences if your economic Model-in-Use (not your political economic …ism) mandates a continually increasing exponential trend line. The blind-faith of in this belief will encounter a very disaggreable suprise. And it is my considered opinion, that is exactly what has happened.

To be fair, its not a singular event, but a long sequence of eventlettes (sic). Like the slow, build-up of oxidation on the surface of metal. So, whilst coming to a proper understanding of the essential requirement for a specific type of energy to drive our economy up that mandatory trend line, may not appear to be a meaningful intellectual matter – until it bites your Gluteus Maximus. But then its too late.

That’s the predicament with deleveraging – attempting to go in reverse without a reverse gear! It has to occur, with all its dreadful social consequences. So, while I appreciate the many useful comments above, please remember how our economy actually works – in the physical world:not the virtual world of finance: no matter how intellectually interesting it may be.

So, I we have to ‘delever’; what has to happen? How will it be done? And crucially, who will initiate the process and guide it? “There will be winners and there will be losers. But the economy will be worse off.”

Brian Snr.

@ Bond. Eoin Bond

On Finalnd, I wouldn’t be so sure of that, I’d say they’re probably due a property price ‘correction’ which would adversly affect the banks. The politicans are starting to talk about the dangers and my rule of thumb is once they do, it’s too late.

Though broadly speaking I agree, at the moment they’re the best of a bad bunch.

@Brian
The MMTers propose replacing much of credit with Gov Bonds – which is just money with a time factor that unlike credit does not net to zero when debt is repaid (goverment debt/money stays on the books and is not payed off in General except for in mentally retarded financial jurisdictions)
Here is Cullen Roche response to a sceptical Bruce Karsting in yesterdays Zero Hedge article on the subject.

“Bruce, the reason for the decline in interest rates is actually central banking 101. When the Tsy spends it creates reserves in the banking system. If the Fed does not control the amount of reserves then their target rate drops as banks compete to rid the reserves. This is why reserves create downward pressure on the FFR. This is the only reason for paying IOR currently. This is all well documented over the last few years as the Fed’s balance sheet has exploded.

The point is, the Fed always controls the price of its debt via monetary policy. They are the price setter as the monopoly supplier of reserves. You call artificially low rates manipulated, but that’s false as well. The natural rate of interest on govt debt is zero as is evidenced by the fact that the Fed has to manipulate the amount of reserves in the banking system to keep the rate from dropping to zero. This is 100% proven by now. Not even debatable.

If the Fed didn’t manipulate rates by paying IOR the rate would drop to zero and everyone would see that deficits create reserves in the banking system and result in a 0% FFR. The FFR is actually manipulated HIGHER 100% of the time. Again, there’s no theory here. All you have to do is look at the balance sheet expansion in the last few years and the Fed’s response…..”

I think the main weakness of the MMT universe is the final settlement of foregin transactions but I am a mere Dork and could be wrong – anyhow we have not got the Gold standard for 40 years and it is not coming back anytime soon in my opinion – we have however free gold on the ECBs balance sheet for 10 years and free floating currencies for decades , really since 71 but with restrictions gradually lifted over time.

Credit is not coming to the west again for a generation – we may as well get used to it and spend money into circulation hopefully to increase our non oil based capital.
PS I persume IOR is interest on reserves
http://www.federalreserve.gov/monetarypolicy/ior_2010.htm

@Eoin
“Look at how the likes of Finland have fared during this crisis, the lack of a major domestic banking sector has meant that there was never any fear of their economy blowing up.”
Er, isn’t that because in their banking crisis in the ’90s they effectively liquidated their domestic banking system? Now who might have said we should follow such a path here and who objected to it? *whistles tunelessly*

The data contained in the Goodbody report is useful. I don’t think some of the narrative or the conclusions are backed up.

A couple of points:
1. I’m not sure what value benchmarking the decline in household wealth to peak house prices has. It wasn’t earned wealth per se, but mark to market.
2. “For our purposes, we assume that the credit expansion phase ran for 24 quarters from the start of 2003, so slightly less than the average. One could argue that the credit expansion actually began well before that date.” – I’d suggest 1998ish :(.
3. In the “International debt reduction episodes” section, they don’t address Ireland’s lack of its own currency.
4. The deleveraging plans mostly relate to banks selling off overseas assets. The deadlines being imposed will be expensive for Irish banks (/taxpayers). But importantly, this doesn’t reduce the over-indebtedness of the Irish private export.
5. Their “slower bank deleveraging recommended” isn’t adequately explained. Nor do they mention any amounts.

That said, if ILP didn’t have to sell their assets at a big loss, their shares might be worth a punt 😉

@hoganmayhew

A bank cannot have a rating above its hosting sovereign. The rating of the sovereign has been destroyed from within. Until the rating of the sovereign is fixed, the ratings of the banks cannot be fixed.

This brave new world where states are expected to maintain large financial buffers so as to be able to offer unlimited funding to private financial institutions while those self same financial institutions are only obligated to their bottom line now seems to be the accepted wisdom.

What a very odd place the modern EU is, Denmark excepted.

@hoganmayhew

You are mistaking my intent …The key thing is to protect the sovereign rating.

Sorry, my mistake, I am in full agreement with you there.

I suppose my question is, with the banking bailouts already having seriously compromised the sovereign here is it completely outrageous to suggest that they now be compelled to take a roll in digging the sovereign out or have we accepted that the tens of billions we put into into the banks to guarantee their survival were a gift?

As one of the non property owning classes you can imagine that I am not happy merely to see the banks survive, I expect a quid pro quo.

On the FDIC style schemes Chopra’s FAT tax seemed to be a good way to go, and that might be administered in such a way as it was not spent on “current” expenses.

The lack of join the dots thinking between managing sovereign debt and de-leveraging personal debt was underscored today in the Irish Banking Federation’s rejection of Matthew Elderfield’s entreaties for its members to stop raising rates on variable mortgages. And as Michael Finnegan trapped recently, the BoI is promising a bumper Xmas of charges for its business customers.

@Brian
The deleveraging in Irish society is nasty because they are not replacing credit with money – creating a physical rather then just a monetory depreciation of people & assets because of lack of use.
This is a capital extraction gamble by the euro masters I guess – they probally understand us more then we do ourselfs – the bet on the borderline mental retardation of the populace has been a good one so far……… but negative externalties can build up over time that can ultimately affect the return of your capital.
There is a balance somewhere ………… it could be famine , it could end next week – it depends on what the collective population will put up with I guess.
But getting back to the foundations of leverage

@ Hogan, Shay.

“The current plans are all based on money being paid back. This clearly isn’t going to happen in all cases.”

The scores on the doors I have for this at the moment is as follows: I’m saying this to see if I’m even in the ballpark.

The banking system is on one way splintering – they won’t lend money to each other, but in another way playing a great game of class solidarity – the’ve managed to pursuade the ECB and to an extent the EZ that the number one priority is to maintain all systemic banks, and systemic means all of them, see Anglo for details.

Ireland is going down a route of regaining creditworthiness, which translates as taking on more austerity faster, and repaying all senior bondholders, guaranteed or not. The side bar of this plan (see Chopra), is actually then to move the debt that the Irish sovereign put into the banks over to the new pan-European grand bargain. Whilst a good thing from the Irish point of view, it is potentially problematic from a class point of view if the funding of bank recapitalisation is put on the shoulders of all European tax-payers, not just the Irish ones.

Eureka’s comment that the markets want the German tax-payer on the hook resonates here.

In some cases, eg Northern Rock, it is entirely possible that money put into a bank might come back to the state, as the bank is retructured and resold.

However, if the banks are looking to be supported collectively, then I would go down a ‘polluter pays’ route, and whether it is via a Tobin Tax or a FAT tax, the financial system should be putting money aside for its own rescues when necessary.

This does not cover the money the Irish banking system owes the state which is not likely to be covered just by selling them off. I’m happy to see the profits from recovered nationalised banks go to the state, and/or some kind of extra tax as suggested in the programme for government, to pay back the money – over 30 years if necessary.

But if the whole thing is sorted out at EU level, then again, not only does some kind of Financial Tax seem necessary, but also some accounting for money that states have to write off for banks, and some way of clawing that back.

@ All

There is a fire alarm ringing somewhere!

http://ftalphaville.ft.com/blog/2011/10/18/705201/french-bond-blow-out-chart-du-jour/

It is all very simple really. In round figures Irelands GDPis 150 bn. Current Sovereign debt is about 120 bn (80%of GDP). Defict is 15bn. If the government cuts expenditure by 15 bn GDP will crash by about 20 bn, long term damage will be done to the education and the health systems destroying long term productivity. However the Government will only save about 8 bn because of reduced tax take because of the depression it caused so the deficit will remain at 7 bn. However the Critical ratio of sovereign debt to will INCREASE to 100% as GDP crashes, making default more likely not less. This is problem with austerity it can if used to liberally quite literally kill the patient.

Given the international situation is deteriorating it is quite clear to me that if the government go for the significant cuts above the 3.5 bn demanded by the troika the country will immediately go into a steep secondary recession, the coalition will break and we will have a new government fronted by SF before the end of next year. In fact even with the 3.5 bn there is a significant chance that this may evolve. What they should be doing is pressurising the Trokia for some sort of break 30 – 40% on the 30 bn Anglo bonds – we only took on these bonds to save the German and French banks after all – and also look at much less cuts of 1 bn or so the difference made up by bond haircuts and a once off raid on the big 100 bn pension pot and getting their paws on some of that huge domestic savings of about 10 bn by a wealth tax, property tax or whatever.

@ Jules: “It is all very simple really.” Thanks for that. If only … …

Now: Could someone please compose an :Idiot’s Guide’ to all
this bonding, etc., stuff.

I have a naive, unstructured and inadequate (aka: an everyday non-technical) understanding. I know that there are different types of bonds, and what this means in legal terms for borrowers. But a Gov? The state is a sovereign. It can, has done, and will undoubtly do so again, say to the institutions who lent it money: “No can pay”. What is the actual outcome here? Short v longish term? Who pulls the short straw?

If the Irish gov had told our local banks that no cash (of any description) would be given to them? Then what would they have had to do? File for liquidation, or what? Who would be out of pocket in that situation? Please do not tell me that the ATMs would shut down and the sky would fall in. I endured two bank closures. One of 3 weeks, the second of 10 weeks. Sky is still up there. The ATMs ceased to fuction: it was inconvenient, but the economy trundled on.

If I am a commercial bank, and I have 100 on deposit, how much can I legally lend out? 90? or 900? Makes an awful big differ. If that 900 is virtual money (I created it myself, on my own spreadsheet), then I lose nothing if the lender tells me to get stuffed – yes?. OK, I can sue. But if the guy is broke?

So, my significant question is this. If the origin of xx% of the loaned-out money is an electronic creation – who is losing, if its not repaid?

@ SK: Sorry for this pesky question, but I am mightly confused. I am unable to comprehend how one can lose something they never, actually, physically, owned.

Brian Snr.

Hmmm…it looks like we are going to wiggle out of this one

The Ecb, and German, concern was that there’d been a huge liquidity influx to the domestic system. And it’s confirmed that Ireland will take a sneaky approach to this issue:
1) Stop all loans outside Ireland, and sell exisiting
2) Do not make loans in Ireland to MNC’s, and ‘nudge’ larger domestic corporates to seeking credit facilities from abroad

These actions will of course reduce the bank’s gross balance sheet…but have no effect on the total quantum of liquidity in the economy

Section 3.1 “The clear advantage of EDP debt is that no assumptions on the prices, marketability or liquidity of government assets need to be made”.

Typical of economics lets set out our false assumptions first, then lets build our “robust” model on that!

@Hogan

You may be happy to invest in junk bonds or deposit at junked banks, I, and I suspect many others, are not.

Firstly let me say that O’Leary and Walshe are absolutely correct when they argue for slower deleveraging. The problem is that they do not go far enough.

The ECB was happy to see the expansion of longterm loan lending on the part of Irish banks funded by interbank and bond lending. Ireland, now the reluctant owner of the banks, should not agree to any deleveraging just because the ‘deposits’ have flown away. The ECB position on this is in fact ludricous as exemplified by an extrapolation of their position if deposits fell a further 50%. What then? The ECB solution would be more deleveraging.

Now to the green jersey.

A banking system, based on loans funded by deposits, was until the ECB arrived on the scene considered fundemental to the workings of an economy based on credit. I cannot therefore accept that the loans already advanced into an economy can be hauled back in haste precipitating the destruction of that economy, purely because the owners of deposits en masse, decide to withdraw those funds from the banks.

In such a situation capital controls are not only necessary but essential. It is not just the owners of capital that have rights, the citizens of a country also have rights.

Under no circumstances should Ireland accept the ECB premise of deleveraging based on a deposit base that is severely diluted through flight of capital. If Ireland does not have a LOLR, the ECB must act as LOLR until balance is restored in the ‘fullness of time’. It cannot and simply should not be allowed to destroy an economy just to ‘get its money back’. It is after all a central bank not a debt collector!

The issue of Irish pension funds not being allowed to invest in government bonds but allowed to invest in Greek, Spanish, Italian, Porteguese, French and German is so anti-green jersey as to amount to a decree of economic war against the State.
My own pension fund now stand at a loss of 15% over a ten year period. If all of that fund had been invested in Irish bonds over that period, I would be able to retire in a few years at 60, looking forward to a retirement foreseen by Lloyd George in his Limehouse speech:

It is rather hard that an old workman should have to find his way to the gates of the tomb, bleeding and footsore, through the brambles and thorns of poverty. We cut a new path for him, an easier one, a pleasanter one, through fields of waving corn.

Instead, the fund managers, invariably subsidiaries of banks, invested in other banks and more banks and more banks again until their bonus’ grew fat and the pension fund grew thin. A few years ago one Irish pension fund was doing road shows explaining that they were going to invest in a number of sure things. Right at the top were, Northern Rock and Anglo Irish bank.
Then the governemnt arrived and took some more just to pay Bertie, Cowen and the PS the very handsome stipends.

The waving corn has long since lodged in the field and the harvest is now looking very poor for private pension fund holders.

Nevertheless I would contend we are citizens before we are investors.
I already wear the green jersey in a 41% tax, a 7% USC, 4% PRSI, etc etc. But the heaviest cost I and many others bear in terms of the green jersey is the cost being meted out to the next generation.

I would happily bear a very heavy green jersey if their futures could envisage ‘fields of waving corn’ again.
Sadly it does not look that way.

@Joseph Ryan

My own pension fund now stand at a loss of 15% over a ten year period.

JTO again:

I hate to be the bearer of bad news.

But, UK inflation hit 5.6% today.

UK inflation is now out of control.

The Bank of England has embarked on a new round of Quantitative Easing, which is economist-speak for they are going to print and print money until they run out of paper.

Prepare for UK inflation hitting 10% in a couple of years.

As a result, it is increasingly likely that the £sterling will suffer further falls in coming years. So, Irish pension funds invested in UK bonds yielding 2% will have their value eroded even more in coming years.

I do hope that you find a way to sue your pension fund manager.

“Foreign ownership of Irish banks by well capitalised, well funded international banks would reduce funding concerns and also remove the contingent liability from the Irish government, resulting in a double benefit.”

This sounds like nonsense to me. Why would would foreign ownership make any difference. When the banks were owned by their shareholders – presumably many of them were foreign – bu=t we still felt the need to bail them out. What will have substantially changed?

@desmond

I have a suspicion that levering up increase employment. More of it = more employment etc until the sustainable limit is breached. At that point delevering becomes inevitable and this is negative for employment.

Should I write to Vox?

@Grumpy
The authors claim have isolated the excess capital hypothesis in their model.

Sure leveraging up their capital gives more monies…can create more jobs…but over leveraging means the funding/loan becomes a capital/solvency risk. Their point seems to be that ‘over’ de-leveraging creates excess/unused capital, which the workers seek to appropriate.

EFSF – yes we are heading for a big spin on the €2T number (got to outdo G. Brown and his 1T number after all) aka “look into this dazzling ball of light so I can blind you to not look at other things that maybe don’t bear up to scrutiny”

I’m still predicting 40% haircut on Greek debt (but done in a very complex way). When is 40% not 40% and all that?

I don’t know how FOI works in places like Belgium, France, Germany but if anyone does, they might want to see if they can get their hands on letters from the Chairmen/CEO’s of major European banks to various Finance Ministers and unelected EU officials in positions of power over the past couple of weeks.

You will probably see more ‘warnings’ in the press from bankers EZ politicians/the public over the next 3-4 days about collapse of world banking system, ATM’s switched off, riots, etc. if they don’t get things sorted out this weekend without forced recap of banks and no additional haircuts.

Is it true the Chinese have been dumping $ assets recently?

@ All

The major conclusion of the document under discussion is as follows;

“Economic growth can happen while economies deleverage but the pace of deleveraging is important – Studies have shown that if private sector deleveraging can be slowed, this can have positive implications for GDP growth. For this to occur, further European assistance is needed to solve Ireland’s banking problems”.

The likelihood of this assistance materialising seems to me to be entirely pertinent to this thread.

It is now confirmed that the sum that Germany has in mind for the maximum firepower of the EFSF is one trillion euros. (Schaeuble is in hot water with his party colleagues but that is par for the course). According to FT Deutschland, the deal is to be set out in and EFSF guidelines document to be concluded tomorrow. The major difficulty, of course, remains the likely calls on this sum which can only be assessed in the light of the achievement of an overall deal, a possibility that Merkel is putting in doubt because, it would seem, of the difficulty in coming to an agreement with France, notably on the Greek writedown issue. If the latter is high, the additional calls on the EFSF in respect of the parlous situation of Greek banks (and other financial institutions – notably pension funds – holding Greek bonds) will obviously be higher.

The FAZ published a dialogue between Schaeuble and Issing some days ago where Issing, without blinking an eye, said that Greece could not, of course, be forced to leave the euro but were the country to decide to do so, that was its sovereign decision. cf.

http://tinyurl.com/3px6t9f

@docm

“The major difficulty, of course, remains the likely calls on this sum which can only be assessed in the light of the achievement of an overall deal, a possibility that Merkel is putting in doubt because, it would seem, of the difficulty in coming to an agreement with France, notably on the Greek writedown issue. If the latter is high, the additional calls on the EFSF in respect of the parlous situation of Greek banks (and other financial institutions – notably pension funds – holding Greek bonds) will obviously be higher.”

This is a choice as follows:

Do you want to keep the eventual Greek writedown liability in the books of the banks, waiting to go to the sovs and the efsf later, or do you want to skip part of that. There is an option value to not skipping any of it, not least political in nature. The flip side of that is that market participants have an option value to assess that reflects the possibility politicians do understand the context viz tail risk. The first option I mentioned might come at the price of having the second option valuation tend to zero in some ‘models’.

@DOCM
Do you really believe that nonsense after all that has happened ? – leveraging goverments base is a weapon of mass destruction – it cannot be a base if it is leveraged.
He does accept the crisis is centered in Europe – this is because Europe was the primary exporter of capital.
Why was that DOCM ?
It all goes back to the Euro.
Its the heart of darkness.
Especially since the early to mid 1990s they have been exporting european capital in a gigantic slave trade arbitrage.
This is the ECBs friggen baby
Trying to offload this crisis on Treasuries is vile.
Advanced Treasuries such as French & German fought the ECBs fiscal dogma mantra in the 90s but failed –
You are accepting political choices in a box of their making.
I smell tyranny.

Martin Wolf has an excellent analysis here :

http://www.ft.com/intl/cms/s/0/d09c8910-f972-11e0-bf8f-00144feab49a.html

Check out the graph of pre crash external balances

“it is an indisputable fact that excessive state spending led to unsustainable levels of debt and deficits that now threaten our economic welfare”.

This is BS. Chopra nailed it in his paper.

Because many European banks are large and global, but remain the responsibility of their home country when they fail, bank failures potentially threaten the sovereign where the bank is domiciled.

The absence of an EU wide bank resolution system threw the debt of the banks onto the sovs. The transmission system has to be bypassed. Like Kinnegad .

@ seafóid

I am, of course, in full agreement with this view.

The German media are now carrying suitably animated denials that Schaeuble mentioned any figure for “pimping” the EFSF.

Herewith another excellent article from the FT by Thoma Klau.

http://www.ft.com/intl/cms/s/0/84bd896c-f973-11e0-bf8f-00144feab49a.html#axzz1b7s8VY5Q

It is worth noting that what Schaeuble in his exchanges with Issing had in mind for “fiscal union” in the medium term was simply moving what is currently a competence to coordinate in the area of economic and monetary union to full EU competence i.e decisions by way of the “Community method”. As an example he mentioned competition. (What is often lost sight of in the Pavlovian reaction to anything to do with treaty change in Ireland is that the famous Crotty judgement implies that a referendum will be required only if the proposed changes alter the “essential scope or objectives” of the existing treaties).

New german occupation of Greece ?

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_19/10/2011_411114

@ Ceterisparibus

From the article you linked:

“Schaeuble also said European governments would adopt a five-point strategy ”

The hand of FG?

It does look like we are coming closer to some sort of Endlösung. But that’s what they said back in March too.

@Gavin
“the hand of FG.”
Of course….didn’t Enda tell them last week not to change the Treaties.
We are punching above our weight and he has the ear of the Frau.

@PR guy
Sarky going to Berlin is instructive. Earlier reports that they were deadlocked must be accurate. Maybe he is hoping Angela will give him a present for the baby and save the French Banks. Then little Sarky will have a bright future.
He also wants JCT to buy a few bonds for the baby now that they are yielding over 50% more than bunds.

@ All

When cross checked with French and German media coverage, this report by the Guardian appears to be fairly accurate.

http://www.guardian.co.uk/business/2011/oct/19/sarkozy-flies-in-for-emergency-euro-talks?newsfeed=true

@Ceterisparibus

Yes, we were all at the opera while Carla was giving birth to a baby girl, Sarko and Merkel went off for a little Aida of their own (interestingly, the premiere of Aida was postponed because of the Franco-Prussian war!).

It’s all getting a bit close to midnight – which suggests that more fudge and can kicking will be the order of the day on Sunday

@DOCM

Looks like Barrosso is losing it….
“He told reporters: “This weekend, I will insist on the need for decisive answers on all the five points of this roadmap, of this comprehensive package … It is a question of credibility for Europe that it can turn up at the G20 in Cannes with the main agreements in place.”

And the Chinese are getting a bit uppity…..
“The solution to the eurozone crisis is for Europeans to work harder and for longer, rather than being cushioned by the welfare system, said Jin Liqun, chairman of China Investment Corp, China’s sovereign wealth fund. He warned on Wednesday that Europe’s fundamental problem was that its workers were simply not productive enough.
“The root cause is the overburdened welfare system built up since the second world war in Europe: sloth-inducing, indolence-inducing labour laws,” Jin told Channel 4 News. The average Chinese working week is nearly 48 hours, the maximum allowed under European law. “We work like crazy,” said Jin. Graeme Wearden”

@seafóid

“Underneath all those caps lurked the mentality of the Squid. ”

I saw the interview with Jin Liqun – he’s a squid through and through.

I was in China not long ago and had some interesting conversations. The workforce is two-tier these days it would appear. Those who are now effectively working in the private sector for squids like Jin, working in terrible conditions and are being driven to early graves to make the squids richer. Then there are those still employed by the State, mostly in makey-uppey jobs (e.g. to stand in a uniform at the bus stop to wave down the next bus for those standing in line) so that there aren’t millions of unemployed roaming the streets and causing bovver and who are as idle as any “indolent sloth” European.

Of course, if Europeans did work as long and as hard and as cheaply as Jin makes out the Chinese do, he would be the first one to complain about the impact on China.

Anyway, what’s the craic today I wonder… will the summit this weekend unravel before it even begins?

Can we have a thread on here tomorrow just for the weekend summit? Please?

Figure 11 of Irish private sector debt to – confirms my belief about the nature of bank decapitalisations of real physical economies that drags consumption from the future into the present to increase short term profits

First the post 87 IMF piloted shock
Then the maastricht thingy really kicked in post 95
Then the Official Euro entry sent us into orbit.

2008 was all about running out of road – no more consumption no matter how many derivatives could be made to counteract the negative wealth effect of unproductive private debt.