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.
(2) Implications of a Greek write-down for defaulting on Anglo/INBS senior bonds
The first thing to be said is that defaulting on unguaranteed senior bonds would not be a State default. I doubt if there is an economist anywhere that doesn’t find it stomach churning for citizens to have to absorb the losses of private bond investors in what was a privately-owned bank when they made their investments. But there are pragmatic considerations that simply can’t be ignored. For good reasons, the ECB does not want to set a precedent of default on senior bonds within the euro zone. This would make an already fragile bank funding situation more difficult. In normal circumstances I would say — too bad. But the ECB/CBI has been providing roughly €150 billion in funding to Irish banks, taking significant risks of losses in the process. The quid pro quo is that losses are not imposed by the Government on seniors bondholders. Even if you don’t accept the give-and-take argument and say that the Government should call the ECB’s bluff, this would be extremely risky. My guess, for what it’s worth, is that the ECB would not cut off funding to Irish banks because of fears of broader contagion. But we should remember that until quite recently Ireland was suffering a slow motion bank run, digging us deeper and deeper into the hole of foreign dependency. The reason the run has stopped is because of confidence in the ECB/CBI to act as lender of last resort. Doubts would build again if we looked inclined to play chicken. The reasonable stabilisation of the bank funding situation has been a major success in Ireland’s stabilisation effort. Jeopardising this stability again does not seem to me to pass a cost-benefit test.
(3) Implications of a Greek default for restructuring the promissory notes
The technicalities of the Anglo/INBS promissory notes make it especially fraught. Simplifying drastically, the State made a grant of assets to these effectively bankrupt banks, essentially promising to make cash transfers of €3.1 billion for a decade. The full cost of grant was added to Ireland’s debt and General Government Deficit. Also putting aside the interest holiday in 2011/12, interest is paid on the full amount of promissory notes outstanding from the beginning. The promissory notes have been used as collateral with the ECB/CBI to access funding, and this funding has been used to pay off bank creditors, most of whom have been paid already. There is roughly €3.5 billion of senior debt left in the successor bank to Anglo/INBS.
One complaint is that the interest rate is excessive – over 11 percent on one tranche – but this is effectively a transfer from one arm of the State to another, given that Anglo/INBS is 100 percent owned by the State. The interest payments substitute for capital in terms of the total amount that needs to be transferred.
As far as I can see the issue with restructuring the promissory notes has absolutely nothing to do with defaulting on anything. As it stands, the State has to raise €3.1 billion a year to fund the promised transfers. This could create severe funding pressures post-2013 when it is hoped we will have exited the EU/IMF programme, and indeed such funding needs will make market investors more wary, making it harder to return to the markets at all. The alternative of securing the funding from the EFSF is very attractive from a funding/liquidity point of view. The idea that the ESFS will step in to actually cover the losses of these horrendously bankrupt seems to me to be fantasy. If I understand it correctly, the proposed restructuring has nothing to do with loss imposition on senior bondholders; it is an attempted exercise in good debt management.
I have covered a fair bit of ground and have certainly oversimplified many issues. I welcome corrections and alternative interpretations. But hopefully we can have a sensible debate about the implications of a Greek default.
127 replies on “Possible Implications of a Greek Default”
If Greece is allowed to negotiate a 50% discount on it’s sovereign bond pile and continue to receive funding far into the future without being declared in Default, how can it be that a fellow Eurozone member (bound by the same legal constraints) such as Ire is not allowed to negotiate a discount on it’s unsustainable sovereign debt pile projected to be 118% of GDP.
Cos Greece D/GDP is about 200%. We are
Midway between D, Fr & B & IT.
Maybe if we stopped collecting taxes & let public servants retire at 45, we could qualify.
The endless debate continues……………………….pass me another pint.
I think Greece is 160% heading for 200.
In any event it is unsustainable. Just as Ire debt pile is unsustainable.
Rogoff says that a figure over 80% affects growth and eventually becomes unsustainable…we are already heading there rapidly and with more austerity will inevitably drown in the debt pile unless we move to reduce it.
“For good reasons, the ECB does not want to set a precedent of default on senior bonds within the euro zone. This would make an already fragile bank funding situation more difficult.”
It is already more or less impossible for a bank to issue senior bonds of the type we are talking about (ie unsecured ones). The reason for this is that we all know they are risky because of the reality of the banking industry generally. There is no point in continuing with the line that any default on any senior bond no matter how unsecured and no matter how broke the issuer will disrupt unsecured bank finance. That horse has bolted.
The thing to do is to say it was regrettable and misguided to hold up the unsecured senior bond market as something that could be retained if only Ireland paid all those bonds off – but we can still credibly argue that there would still be an effect on other forms of funding which are still functioning as the few remaining investors who think that unsecured credit to a bank is risk free are put straight.
One thing that some people miss here is that the argument for the policy that has been pursued is nothing but supposed expediency on the part of the state and self-interest on the part of the banking industry and lobby. There is nothing more to it than sophistry. Actual capitalists and their antithesis are united in finding the whole thing pathetic – you could have Jim Rogers and Paul Krugman in the same tag team on it.
After Greece defaults, and foreigners start to get perplexed about the continuing high Irish budget deficit, and as the EZ looks more recessionary, investors will start to think about an Irish default. They will be aware that there will be a lot of pressure from the EZ and the Irish establishment to brand it unthinkable, but they will think about whether it makes objective sense.
As regards: “The argument is increasingly heard that if Greece is allowed a write-down on its debts then Ireland should be allowed a similar treatment. ”
Is it, really, or is it more that it might be, and it would be a good idea to try to stop it from being?
“The garda, aged in this 20s, was off-duty when he began directing traffic away from a dangerous bridge, which was covered in water at Ballysmuttan at around 7pm this evening.”
Prayers with him and his family.
“After Greece defaults, and foreigners start to get perplexed about the continuing high Irish budget deficit, and as the EZ looks more recessionary, investors will start to think about an Irish default. They will be aware that there will be a lot of pressure from the EZ and the Irish establishment to brand it unthinkable, but they will think about whether it makes objective sense.”
And of course it will make objective sense. Just as you point out the rational for not burning senior bank bondholders has no practical value…the horse has bolted…likewise, our aspiration to return to the markets next year is merely wishful thinking and also has no practical value.
So now that the opportunity is about to present itself, aka. Greece ..wouldn’t it be foolhardy not to to take advantage and save the nation countless
It appears that the bankers are now prepared to accept 40% haircuts on a voluntary basis…and, if I’m reading it correctly, such an agreement would not result in being excluded from markets.
“Charles Dallara, managing director of the IIF, warned there were “limits” to the hit that can be considered “voluntary”, adding: “Any approach that is not based on co-operative discussions and involves unilateral actions would be tantamount to default… and would isolate the Greek economy from international capital markets for many years.” Insiders at the briefings said a 50pc cut will be more likely.” ….Telegraph.
“….let public servants retire at 45”.
Yes I agree completely. The tyrranical practise in Ireland of forcing certain Public Servants to wait until 50 (or even in some extreme cases 57) is far to harsh and austere.
Prime examples of our insensitivity is that we expect a 50 year old former head of Government to spend the next thirty years in near penury after he provided us with twenty six years of exceptional service while his retiring 57 year old chief of staff is expected to subsist for the next 25 years on a mere pittance of four times the average wage and a “few coins” lump sum .
I suspect “growth” as defined by Rogoff is nothing of the sort really – just a growth of credit pulling forward consumption.
If it takes 200% debt to GDP in this present monetory system to prevent the banks producing opium again I think thats a good thing to be honest although unworkable in the euro setup.
Leverage is dead in a energy / credit starved world.
With each passing pointless credit event we just end up poorer.
how can it be that a fellow Eurozone member (bound by the same legal constraints) such as Ire is not allowed to negotiate a discount on it’s unsustainable sovereign debt pile projected to be 118% of GDP.”
Because the Irish don’t actually mind drifting into penury once they can tear each other to shreds along the way…
I am disgusted at how our national energy has been focused at tearing strips off our public servants. We are too small minded to be capable of collective action. We deserve to be screwed much harder than Greece. We are a disgrace
Good to see you back – neat haircut; that 3.6 trim suits you much better than the 4.4 lorenzoite_kojak style ….
Language matters: the distinction between Genuine Sovereign Debt and the various forms of Vichy_Banking System/Dodgy Developer Debt/ECB_EC_IMF Debt remains absolutely crucial …. particularly so from influential opinion formers, one of whom you now are due to your position on the Fiscal Advisory Council …. failure to make this distinction is to subscribe to The Conflationist Fallacy which does neither you nor the state you now represent any favours.
On Genuine Sovereign Debt – 100% Ireland does not have any intention of not honouring this segment of debt.
On IMF interim financial assistance – again 100% commitment to honouring this segment
ALL other segments are OPEN to discussion, negotiation, and if and when appropriate, write_downs, write-offs, restructings, default, and sale of both so_called pillar banks (excepting that fine boi_lding on college green).
Sane capitalists understand this distinction. IMHO, the sooner we see some ‘action’ on the latter OPEN segements, the sooner the Genuine Irish Sovereign may be welcomed back to the sovereign bond markets – and Patricia the Irish_Sovereign_in_Exile may come home.
‘Creditworthiness for a country with a large debt, a volatile economy and a large dependence on inward private investment is extremely valuable. ‘
Why did more than twice the subsribers sign up to buy Icelands debts in June at 5%? Icelands banks returned 7 cents in the euro to senior bondholders and nothing to juniors. The banks/government didn’t even return money to foreign depositors. Their creditworthiness is obviously not ‘extremely valuable’.
‘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.’
What is the IMF for? The IMF helped Iceland with loans, why not Ireland. Also there is an assumption here that the EU partners would not continue to help us with loans. This is highly arguable. Also Iceland returned to the markets very quickly when it got rid of odius bank debts.
‘The reason the run has stopped is because of confidence in the ECB/CBI to act as lender of last resort. Doubts would build again if we looked inclined to play chicken. The reasonable stabilisation of the bank funding situation has been a major success in Ireland’s stabilisation effort. Jeopardising this stability again does not seem to me to pass a cost-benefit test.’
Has the run stopped? Is that because of confidence in the ECB? Would doubts build in depositors minds in case of not refunding failed senior bondholders? Would those doubts be strong enough to cause depositors to leave Irish banks enmasse? All of these points are arguable, very vague and the argument smells of someone trying to put a round peg into a square hole.
Of course in all situations a default on senior bondholders in banks is preferable to a defualt on soverign debt.
Asute foreigners and investors will see that Irelands debt/GDP was 40% in 2007 is now 110% due to bailing out banks. They could figure that an Irish soverign default was because of the banks.
So even in the case of an Irish soverign default every knowlagable investor would know that it was due to trying to save the banks. They would know that Ireland has strong economic fundamentals and would be willing to invest in Ireland.
As chairman of the fiscal advisory council Dr. McHale can influence government policy. I would encourage Dr. McHale to listen and consider the views of academics like Drs. Whelan, Lane, O’Rourke, Gurgendiev, Kinsella, McCarthy Connnor, Krugman, Stiglitz, Feildstein, Roubini and many more. on the point of refunding senior bondholders of bankrupt banks. From the weak argument above in defence of refunding senior bondholders it appears that Dr. McHale may be falling into the trap of putting together an argument to fit/excuse the government policy.
Has the fiscal advisory committe been put together just to tick a box on the IMF list? I hope not.
The IMF is having a conference Oct 27th on Icelands response to the crisis. The chairman of our fiscal advisory council should be there as Icelands banking crisis was in some way similar to Irelands. We can learn from Iceland.
Look the question is not about whether we should default. That question has been asked and answered. Whats needed from now on and what was needed in the past was options. Written plans, so that if something goes badly up the spout then scenario A B C or D can be pulled from the cabinet. Rather than this passive victim stuff we are playing now.
Like why the hell on the night of the guarantee was there not a plan in place to establish new banks using the PRF. The buy the good stuff from the existing banks and let them fail and take their debts with them. They were Ltd after all. And if they can model weather for years ahead, surely a half a dozen nightmares can be inputted to see likely fall out.
So then have you lot been in conclave with Finance and come up with war college type run through’s. It’s all very well being the salient at Ypres when you have defense in depth, but there better be something in place should the breach come south of us and everything goes into general retreat. It would be bordering on treason should we be floundering about for a second time.
Should you even be commenting on this website now that you are a fully fledged insider on the fiscal council. You can,t have it both ways.
Where is the real voice of Ireland right now?. On one side you have a shower of headbangers outside the Central Bank and then on the other side guys like John McHale who is so far inside his views are toxic. I give up.
GDP John? Most if us live in the GNP economy.
Also, I agree w comment 18. Is this the view of professor mchale or a government (double: the pension board) appointee or the views of the independent watchdog? John should take a view at his colleague dr ahearne and recall to mind the issue of whether in taking on the role of chairman he didn’t forfeit public commentary.
debt/GDP forecast to be 179% in Greece at end 2012 (as is), i believe.
@ Phillip II
Alan Ahearne was the personal advisor to the Minister for Finance. The FAC is an independent watchdog that is capable of commenting publicly and without partisanship i would think, no? And Colm McCarthy seemed to be able to handle multiple useful public utterances at the same time as being the lead-author of An Bord Snip, did he not?
Interesting approach to trying to silence people you disagree with.
As Eoin notes, the fiscal council is independent of government. Its remit is also quite limited. Although my volunteer position on the council keeps me quite busy, which is the reason I have been AWOL here, I think it would be quite counterproductive if it stopped me from commenting on other issues.
Welcome back. We feared we’d lost you with you having been sucked into the maw of the government machine and, consequently, silenced. There is also the hope and expectation of some engagement on the issues which is becoming all too rare here. (Yes, I know, the opportunty costs are high and many of the comments are shrill, shillish or trollish, but still…)
However, some of the commenters do have a point about the ‘hat’ you’re wearing here. Your multiple appointments have been at the gift of Government. Nothing wrong, per se, with that. It is a tribute to your competence and integrity that the Government, in making these appointments, hopes that some of these virtues will rub off on it. But the Oireachtas, as the sole repository of the power and authority of the Irish people, has no say in these appointments – or, indeed, in any appointments to the various newly created or existing quangos or bodies that are overseeing key policy and regulatory areas as very necessary reforms are being pursued under the tutelage of the Troika.
This is not a criticism of you personally, or of any others appointed in this manner and for these purposes. The fault lies with the Members of the Oireachtas who, both individually and collectively, appear either unwilling or unable (or both) to assert the primacy of the Oireachtas over Government and to demand the resources and to establish the procedures to enforce this primacy. It would be far better for all of us if you, and some people with your capability, were working for and reporting to the Oireachtas on these matters.
Until such a division of powers and responsibilities is enforced, Ireland will struggle to recover from this mess.
And now to the issues you raise. And yes, your post and Karl Whelan’s are complementary. It looks like we are fated to rely on the ability of the Government to secure some future reward for Irish taxpayers swallowing the losses of insolvent banks, holding the pass for the EU and for not being the source of EZ bank sector contagion and financial meltdown.
It does seem to make sense, as Karl has indicated, to focus on some write-down of the CBI and ECB ‘liquidity’ support – aka sneaky solvency problem avoidance – and some restructuring of these darned promissory notes. But that, if it ever happens, will take place behind closed doors and any debate here or elsewhere won’t make a blind bit of difference. My only fear is that ‘eaten bread is soon forgotten’ and Ireland’s successful, though temporary, effort (despite its long-term national implications) to hold the pass will go unrewarded.
Engaging the Oireachtas might be an effective means of ensuring this remains on the agenda for the EU body politic.
While I don’t share John McHale’s views, particularly about the “good reasons” for ECB policy, I think it would be a great pity if he stopped posting here. Also, I really don’t see any change in his thinking since he joined the fiscal council.
“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. ”
Ireland’s debt dynamics are driven by the banking collapse. Sure there are the deficits but everything stems from the lack of a resolution scheme and the consequent shafting of the sovereign to save the banking sector. I think a lot of people in the market know what.
It would have been far more logical to melt the banks down . We’d be three years closer to some sort of a recovery. I think the markets know that.
And Ireland won’t CHOOSE to default. It will be let go by the market if it means France can be saved. Portugal will also be sacrificed I imagine.
The Greek tragicomedy is pathetic. So a 60% haircut does not constitute a credit event? WTF ?
The other thing is people need to wake up and stop pretending that any of this is principles based . Ireland and the rest of the PIIGS are like the French in the Franco Prussian War
“Nous sommes dans un pot de chambre, et nous y serons emmerdés”
We are in a chamber pot and we are going to be shat on.
Probably unlike most commentators on this site I actually work in the so called ‘markets’ and have done so for many years so I’m more aware than perhaps most what the so called insiders believe in Ireland refusing to pay the unguaranteed bond holders of Anglo and the rest of the Irish banks.
The answer is that the ‘markets’ have made their minds up long ago – the clue is in the name aka ‘Unguaranteed’.
The owners of these instruments simply expect to lose all the money given the turn of events over the past couple of years.
There will be no contagion backlash because of a default on these instruments – the market participants are completely at ease with the fact that losses here are probable and expect such an outcome.
The fisal council was a requirement of the IMF and McHale is head of the FC. Prudence suggests you keep your opinions to yourself when peoples standard of living is going to be slashed in the next three years.
JMcHale must have been a punk (true sense of the word) in his youth. Definition of Punk : BECAUSE YOU CAN.
@yields or bust
From your inside-the-markets perch, perhaps you can remind us of the discounts to par of senior bonds in the various Irish banks. Eoin might be able to help us here as well. Your post suggests they have become worthless.
“The owners of these instruments simply expect to lose all the money given the turn of events over the past couple of years. ”
Difficult to square this with the price these instruments actually trade at?
@ David Burke
“Prudence suggests you keep your opinions to yourself when peoples standard of living is going to be slashed in the next three years.”
rant much? Not that it makes a lick of sense either…
The Fiscal Advisory Council’s suggestions are not binding and are simply supposed to be a independent view on what the government should consider doing, or to take a view on what the government has already enacted. Shouldn’t we want more public interaction with such a body, and not less?
@Bond. Eoin Bond
‘The Fiscal Advisory Council’s suggestions are not binding and are simply supposed to be a independent view on what the government should consider doing, or to take a view on what the government has already enacted. Shouldn’t we want more public interaction with such a body, and not less?’
Shouldn’t we want more public interaction with such a body, and not less?’
The Irish Public Sphere is particularly weak, and this ‘weakness’ is one of the institutional reasons that Irish society now finds itself in such a dire situation due to abysmal failures in governance. The more open, substantive, and critical the discussions on all areas related to public policy the better – and John McHale is to be commended for continuing to engage …
@Mr. Bond & DO’D,
I fear you are both, similar to so many here and elsewhere, missing the point. My take is that it is John McHale’s integrity and public spiritedness that prompts him to engage here. You might say ‘hats off to him’ and isn’t half a loaf better than no bread. But, for me, he is the exception that proves the rule. How many others, in similar positions, are prepared to engage?
This, quite simply, is just not good enough. Public debate has to take place – and should take place – prior to policy decisions being stitched up behind closed doors by ministers, their advisors, senior civil servants and quangocrats (and subject to the influence of god knows what vested interests). We are extemely adept at shouting the odds when policy decisions (and the associated enabling legislation) are presented as a fait accompli, the party-line is laid down in easily absorbed and regurgitated sound-bites for the TDs, the government spin-machine is cranked up and the necessary legislation is whipped through the Oireachtas.
This is totally contrary to good governance. It is for government to advance what it wishes to achieve based on the democratic mandate it has secured; it is for the Oireachtas to decide, in the public interest, how these policy objectives may be best achieved. It is for government to propose; and for the Oireachtas to dispose.
But we have a situation where government both proposes and disposes – and has command of all the power and resources it requires to get its way. And if falls to the people, if they are unhappy with some or all aspects of this exercise of excessive dominance, to use any election or vote between general elections to fire a warning shot across the bow of government. This is both inefficient and ineffective as it may have unintended consequences.
In the interests of good governance bodies such as the Fiscal Advisory Council, NESC, the NCC and a revamped ESRI should be resourced by and report to the Oireachtas. It would then be very clear what ‘hats’ people like John McHale would be wearing and we would all benefit from the efficient and effective ex ante scrutiny of government policy proposals and proposed executive actions.
The price is based on the understanding that the Govt will continue to pay the history thus far would suggest that this is what the Govt will do – what I’m suggesting is that if the Govt decided it won’t in fact pay the level of surprise would be minimal given what has gone on. In simple terms in holders of these instruments cannot believe their luck.
The price is a reflection of the bigger fool theory – we saw in relation to house prices that the bigger fools being the banks can get their pricing badly off.
“The reason the run has stopped is because of confidence in the ECB/CBI to act as lender of last resort.”
This is plain wrong.
Firstly, as noted by Karl on this forum, where is the evidence that the run has stopped. Deposits have not increased in any significant amount. The best that can be said is that withdrawals have stabilised, probably because most corporate depositers have already withdrawn their money.
Secondly, any increase confidence in the Irish banking system has nothing to do with the ECB, but with the fact that BOI and AIB are two of the best capitalised banks in Europe thanks to the taxpayer.
So the comment of yours, that, ““The owners of these instruments simply expect to lose all the money” is not actually correct?
Not one single senior bondholder in a Eurozone bank (in fact any EU bank outside of the now-cancelled experiments in Denmark) has faced a default in any number of failed or failing banks. It is not Irish government policy to backstop the banking system and senior bondholders – it is European economic policy to do this.
There are two general reactions to being appointed to something ‘official’ by the government. The usual one is to have it polish your ego, fill you with self-importance, and stop wasting your time and providing openings for criticism by engaging with the hoi polloy. The other is to remain interested in and seek the opinions of outsiders. It is possible J MCh may fall into this unusual category so bear that in mind if tempted to lob bricks.
In the communication age you can look at ‘official advisers’ or ‘committee members’ as at least in part a way of excluding advice from all the other people who might have views. A filtering mechanism. Appointees should be aware of this and stop themselves becoming just another stooge for the insders.
“Shouldn’t we want more public interaction with such a body, and not less?”
Absolutely. It is a bit rich of people to complain of unaccountable, non-interactive governance/advice to governance (as I have done many times) and then to have the legs cut from under you by someone complaining that they should keep their opinions and discussion to themselves. Down with coteries, up with this sort of thing…
The promissory notes are interesting. We don’t know the haircut on them and we don’t know how much Anglo are being charged in interest for repoing them, though we can maybe guess.
Without knowing that, we don’t know for sure how much more capital the interest on the notes is providing to Anglo (i.e. the difference between interest income and repo cost).
We also don’t know what the future movements of interest rates charged by the central bank will be, so we don’t know the sustainable position of Anglo into the future (if interest rates rise, will Anglo require more capital – the repo cost increases while the interest income remains).
While the state is responsible for funding Anglo, contingent liabilities will remain. This will slow the recovery of the sovereign. It therefore makes sense to me that somebody else is responsible for the funding of Anglo beyond simple capital. A good long time ago I thought that the ECB should fund national bank resolution corporations for nothing. I still think this is the case. The states would provide the capital for the approved resolution corporations, but that capital would be in the form of zero coupon bonds which would be ECB accepted for liquidity purposes. This would remove the contingent liability of varying interest costs and destress the sovereign.
In terms of capital itself, I think a shared approach would be beneficial – some from the state and some from the eurofund – both funded by financial transaction taxes (like Mr. Chopra’s FAT tax). Given the limitations on NCBs to control capital flows (they have no control), it is a bit rich to expect states to be responsible for the outcomes, even if they are corrupt and inept.
I should probably have stated that the ‘owners of these instruments would not at all be surprised to learn they had lost all their money’
It amounts to pretty much the same end result – the expectation of a complete loss should/would not come as a great surprise, except of course it seems by the ECB.
If the Govt had made it clear with ongoing and consistent market updates since entering office last March that the position of unguaranteed bond holders was very different to their guaranteed equivalents – and by every means suggest why particluarly that is the case – the suprise and expected contagion would be a non event. They haven’t done that – that didn’t play the nuclear card well and now they feel compelled.
while in theory you are correct that senior debt could easily have been subject to large or total losses if you were to simply look at the impairments on the balance sheers, many people have also assumed that government’s would always step into the breach in terms of bank insolvencies and bondholder protection. Senior debt did not take a haircut during the Scandinavian financial crisis, for instance, and this was a point fully agreed on by the Swedish official (i forgot his name? Was it the same guy Nyberg who wrote that report?) who spoke to the Oireachtais committee back in 2009 or thereabouts.
However, you are wrong in terms of the contagion in my view – advanced Western economies do not let their banks go bust, its a core unwritten rule of economics. Change that principal and you will get a total repricing of the credit curve (which may in fact be a good thing, but probably not right now), something which is already happening due to the increasingly erratic political and regulatory rhetoric being used by some of the EU’s major policy makers.
I have said this many moons ago, but the implicit backstopping of the financial system is and has been a major subsidy for credit creation, credit creation being a standard government economic policy for the last few decades. We can argue that such policies are terrible or now clearly undesirable, but lets not kid ourselves into thinking that they did not, and do not, exist.
“We are in a chamber pot and we are going to be shat on.”
It sounds more elegant in French but I kind of go along with the general logic.
I will ask Silvio on Thursday what it feels like to be in that pot. I’ve no doubt he will provide a colourful answer – but probably not in French.
ECB economists have much more robust constitutions than you give them credit for.
More especially when it those in the colonies that have to eat the unmilled corn.
This is not a question of a mathematical calculation of whether Ireland can or cannot pay. It is question of why Ireland should pay. A massive quasi-fraud has been perpetrated on the Irish people by a very powerful European institution. This in addition to the continuous quasi-fraud being perpetrated by the ECB on depositors through the deliberate downranking of their deposits in terms of security.
The imposition of private bank debts will be the equivalent of Maupassant’s ‘grande blessure saignante’ that will remain between Europe and the people of Ireland for generations to come.
If Ireland is to be forced to pay these bank bonds as is now the case, they should be paid with large public doses of bile and spittle. When a country is being raped it should not feign good grace for the sake of appearances.
The attached Reuters report may be of interest. (It is curious, to say the least, to see a debate reopened on this blog about how Ireland can demolish the contagion firewall when the entire thrust of the debate at the European and international level is about how to erect it and make it sufficiently fireproof).
Those subscribing to the view that the involvement of the ECB still remains crucial – a view with which few would disagree, and especially not Paul Krugman – should find this second Reuters report reassuring.
German budget lawmakers are due to convene in private in Berlin today to begin scrutiny of the two leveraging models. The first would raise the EFSF’s capacity by insuring a fraction of countries’ funding requirements, and the second combines capital from European and non-European public and private investors, the draft said. The two are not “mutually exclusive,” Steffen Seibert, Merkel’s spokesman, told reporters yesterday.
“The capacity of the extended EFSF can be enlarged without extending the guarantees underpinning” it, the draft said. Even so, “the leverage which can be achieved can only be determined after dialog with investors and rating agencies around the new instrument, and in the light of prevailing investor appetite over time for the sovereign bonds of particular member states.”
If the above from Bloomberg is accurate it would appear that nothing of substance will emerge tomorrow.
Or reworded…our new SPIV depends on some Arabs buying this and our ability to arm twist the rating agencies..which shouldn’t be a problem because we have already threatened to ban the.
Even Lord King is buying it…he thinks it’s a sticking plaster…see Telegraph.
Ecofin meeting (all EU 27 fin ministers) meeting cancelled, but the other three meetings (Eurogroup, EU27 and EZ leaders) to take place. No reason for cancellation of Ecofin meeting, it was more focused on the bank recap framework though.
The ECB is concerned to ensure that markets continue to fund European banks at a tolerable rate.
If I were an investor wondering whether or not to invest in those European banks, I would be concerned to know exactly what might happen to my investment in a Spanish, French, or Italian bank if it were later shown to be insolvent. I might look around Europe for an example of a totally bust bank and my gaze might fall on the shell of Anglo, to see what happened my fellow-investors in that case. If I saw that they received nothing, or a fraction of the promised return, I would take it as a salutory lesson, and keep my money in my pocket. The consequences of a large number of investors learning this lesson would seem to be rather worrying for the ECB, so they, understandably insist that even the estates of deceased banks must to continue to pay the debts they incurred in life.
Given that the European banking system is becoming more, not less, fragile every day, does it make any sense for us to continue trying to convince the ECB to let us try a Euro-area bank default experiment, rather than pushing for far larger-scale assistance in building the multi-billion euro firewall for their benefit?
disagreement on bank recap scheme by non EZ members (ie UK, Sweden, Poland etc) seems to be the issue. They wanna see the exact structure of the upgraded EFSF first.
I don’t believe for one minute that I’m wrong in relation to contagion with regards to Unguaranteed bonds.
If the storyline of the Govt since March had been suggesting :
“We the Irish Govt are fully committed to repaying, in full, senior Govt Guaranteed bank bonds as assumed in accordance with the previously agreed Govt Guarantee prgramme signed in Sept 2008. The Irish Govt has simply no obligation implicit or otherwise to repay Unguaranteed private debts of the covered banks. The Govts obligations agreed in Sept 2008 begin and end with regards to bonds which fall under the definition as Guaranteed.”
If the above or words to that effect we stated week in week out, in a coordinated fashion by a Govt spokesperson since March, no owner of any of these instruments could in any way be surprised when the coupon or principal repayment date came around and no cheque appeared.
It’s simply untrue to suggest the banks in the West don’t go belly up what about the 40% hit to the deposit holders in Amaganbanken. More importantly there is no provision in the IMF/EU/ECB MoU for these liabilities and as a result the Govt are in many respects covered on the double.
To the holders of these instruments – the banks have gounds to state “we’re broke, only for the support of Govt we wouldn’t be here, you as a unguaranteed bond holder don’t have a Govt sugar daddy supporting your claim so you’re on your own, now piss off and fight your fight in the courts if you so wish, there’s no cash here”
It’s not complicated despite what JMcH believes.
@Bond Eoin Bond.
Looks a bit ominous. Seems there is a dash for safe havens this afternoon with bond yields tightening and the DOW is off 136 point now.
Gee, it’s almost as if they know what’s going to happen, like they are watching a few insiders sell…
You wonder? What? What’s happening? Can’t see a news site where I’m sitting.
Biggest thing I’m aware of is Silvio maybe thinking of stepping down? Markets might see that as a good thing though 🙂
Panic off…DOW only 80 points off now and the euro has recovered to 1.39 and a bit. The Euro is doing remarkably well for a currency under siege.
It appears, according to a Reuters report, that Angela is still fighting with Nicky on ECB involvement. He tried to slip some wording into the draft communique which Angela didn’t agree with….
It ain’t over until………
We’re almost back to Apocalypse Now. Let me know when I should put up the Die Valkyre clip… I love the smell of burned shorts in the morning…
“It’s simply untrue to suggest the banks in the West don’t go belly up what about the 40% hit to the deposit holders in Amaganbanken.”
You saw the part where i said “except for the now-cancelled experiment in Denmark”, right? As i suggested, they have now decided that senior creditors will no longer take a bath on failed banks, such was the negative feedback resulting from Amagerbanken and Fjordbank Mors (which, incidentally, had a combined balance sheet of around €3.5bn, or 20% if IRNW).
It is clearly EU and ECB policy that no bank is placed into liquidation or that the important senior debt funding channel is endangered via bondholder losses. The ECB seem more willing to endanger small periphery sovereigns than risk core funding merchanisms. This is a strange policy, as is the lack of a coherent resolution regime still to be put in place, but they are very clearly the realities on the ground as things stand.
The issue of whether Anglo bondholders would be surprised by taking a loss is not the issue – its what RBS or Dexia or Landesbanken bondholders might think in such a situation that is the problem.
Ecofin meeting cancellation maybe not quite as big a deal as maybe first glance. Think the other EU guys just want to see all the cards on the table before they sign on. Still some things to agree on re ECB and EFSF though, nothing is done and dusted by any means yet…
Why you and others feel compelled to maintain the pretence that regardless of the decision making within the banks, those who provided liquidity and capital to them are obliged to be repaid in full, is simply fanciful.
Banks are the bastions of capitalism, it’s what they live and die for – quite why the normal rules of capitalism are not allowed wash upon the doors of badly run banks and their financiers makes zero sense to me and many others.
Deposit holders and the other providers of liquidity always have an allocation choice – it just so happens that sometimes ordinary deposit holders and average fund managers make bad decisions and allocate it to poorly run banks and hey presto sometimes they lose money, it’s a fact of life. No amount of ECB or EU pretence can avoid that awkward capitalistic fact.
To me that is not the issue however – let the losses fall where they deserve to fall – the bigger issue is when the losses have been divided up it is at that point the WRONG thing to do is to insist on a full recapitalisation of banks to a higher level than prior to the imposition of the losses.
No business no matter how big or small can be expected to go from zero to hero overnight. The CBI are attempting to do this here and it is failing as a solution in a glorious fashion. Timing matters hugely in these things and requesting the irish banks deleverage to the extent they have been expected to do is a receipe for further guaranteed losses – this makes no sense.
Solution: Let the losses fall where they are required to fall, if a bank can survive then allow it so do, have that bank rebuild its capital in line with the cycles recovery and simply set aside daft recap rules until the cycle recovers and time allows.
@ Bond Eoin Bond
“It is clearly EU and ECB policy that no bank is placed into liquidation or that the important senior debt funding channel is endangered via bondholder losses. The ECB seem more willing to endanger small periphery sovereigns than risk core funding merchanisms. This is a strange policy, as is the lack of a coherent resolution regime still to be put in place, but they are very clearly the realities on the ground as things stand.”
Agree. Given that they have rendered the sovereign insolvent (I use this word in it’s loosest sense) is it not reasonable that we should now seek to repair some of the damage by means of a follow-on debt reduction programme as appears likely to be granted to Greece.
And for good measure the core Tier 1 of Amagerbanken from its last market update in the last week of Oct 2010 ??
You maybe surprised to know that it was 13.5% – reiterating the point, once again, that oodles of capital is not quite the panancea that Regulators would have one believe.
You are correct it does seem an odd policy to allow a sovereign to impose
losses but not so a bank.
I think I’ll simply agree to disagree in relation to the imposition of losses on Anglos Unguaranteed bond holders and the potential spill over effects on the funding of other banks.
I believe its up to the investor to do his/her homework and establish if there is similar risks within the business models and loan books of the banks as mentioned. Making a claim such as ‘how was I to know’ is not credible for so called sophisticated (and very well paid) professional investors.
@John Mc @Philip II
“Interesting approach to trying to silence people you disagree with.”
I often disagree with what John McHale writes , and have often expressed deep concern about whether Karl can keep up his car payments :). but I find myself in the unfamiliar territory of actually agreeing with (Mr, Professor, John etc) McHale on this one.
IMHO many of us, including me, use pseudonyms for genuine reasons.
In fact if I was not allowed use a pseudonym I do not think I could particiapate in the various discussions which take place on this excellent site and express my views as freely as I do..(In many parts of Europe where I work and have worked “free speech” might be on the statute books but is in reality only treated as a quaint new concept which is largely ignored unlike in Ireland)
In return for being allowed to use a pseudonym on this site I feel especially obliged to “play the ball and not the man”even when I passionately disagree with what someone has written. It takes more effort to be diplomatic but not that much more.
Of course sometimes it (using a pseudonym) results in uninfomed and irrelevant specualations about me or my background when someone is pesenting a counter argument.
Personally I do not care what anyoneś professional status is (although I am slightly envious of those who feel free to use their own names on this excellent site) only on their opinions and informed analyses which I try to learn something from.
The leaking of the wording in the draft conclusions of the European Council on ECB involvement (see Reuters link above), and especially the gloss put upon it, may be the reason why there is continuing dispute on the issue. As regards recapitalisation, Greek banks are down dramatically (no surprise there!) and, given the generalised misgivings about PSI, it may be that to try and finalise a deal by tomorrow evening simply risked sinking the entire enetrprise.
Does Enda really understand what is going on? It appears not judging by the following from RTE…
“Enda Kenny was responding to Fianna Fáil leader Micheál Martin. who asked the Taoiseach if restructuring bondholder debt would be on the table. He said it would be on the agenda for Greek restructuring and that this was an opportunity for us to do the same.
Mr Martin criticised the lack of detail coming form the Taoiseach on what would be on the agenda at the summit.
Mr Kenny said the Greeks would end up paying dearly for their restructuring with severe austerity, and they may not be able to return to the bond markets for the next decade.”
Did nobody tell him the proposed Greek debt restructuring is being done on a voluntary basis and therefore no credit event arises.
On the austerity bit…are we not being tortured with austerity? And more to come for three years.
At least Martin has copped on.
“I believe its up to the investor to do his/her homework and establish if there is similar risks within the business models and loan books of the banks as mentioned. Making a claim such as ‘how was I to know’ is not credible for so called sophisticated (and very well paid) professional investors.”
I actually agree with you. The problem is that we have created a €5trn (guesstimate) senior funding market which has essentially traded without any credit premium for the guts of a decade. If loss-potential becomes a very real possibility you’re going to have to retrain a whole set of what are current just money managers, and turn them into credit traders instead.
You will then have to fundamentally change the way funding is priced and credit is charged for within the banking system, a process which will not occur easily or quickly. You can expect a funding crunch for anyone bar the safest of banks, a list that is rapidly dwindling, with obvious knock on effects for the general economy. Now this is very clearly where we should end up eventually, but i’m sorry if i cannot see any ability for either the financial system or the overall economy to take such a shock in the short to medium term given the state of them right now. For similar reasons, this is why the likes of Basel III will continue to be both delayed and watered down over the next year or two.
Reading John McHale’s post again, it strikes me that there is a fundamental flaw in his thinking….
“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”
At a projected 118% debt/GDP it is doubtful that we can pay. See Rogoff and Rheinhart.
The use of the word default is unfortunate. What is proposed for Greece is a voluntary debt restructuring which will not trigger a credit event or default.
Ahoy there. Long-time lurker, first-time poster.
Just wondering if anyone knows what the projected primary deficit is for 2012?
Rant?. Call it what you want. A govt appointee should not be on these boards, its unprofessional.
this debate is academic anyway. Euro is finished no matter what high brow comments are made on this site. Take it easy.
@ David Burke
you called him a punk. Unlikely that you’ll be taken seriously. Take it easy yourself dude.
“What is proposed for Greece is a voluntary debt restructuring which will not trigger a credit event or default.”
I’ll wait and see what the ISDA say – so far they’ve been quite strict on what constitutes a default; this would easily fit in the categry they’ve previously used.
In any event, it looks like the EU ‘powers-that-be’ are miles away from agreeing anything substantive. They usually push these kinds of things right down to the wire, but this is getting a bit worrying as it seems the wire is being pushed back as well.
Must be chickenwire…
Sez Ackermann and the IIB. They write the CDS stuff. Just as in law there are many legal fictions, a financial fiction will be created with this soft restructuring proposal.
I think it is wishful thinking. Anyone outside the golden circle is going to go to the ISDA. The ISDA are going to say “yes it is a credit event, yes it is an event of default”. Much like the rating agencies will say “you can dress this up all you like, it still tastes like chicken”.
If it’s wishful thinking then Angela and Nicky have been wasting their time.
I’m sure Ackermann can sort out the ISDA..who pays their wages.
The main French media are leading this evening with the continuing knock ’em down drag ’em out row between Merkel and Sarkozy on the role of the ECB and the uncertainty with regard to arriving at an agreement tomorrow. The consensus view is that France has lost its position as an equal partner to Germany and this is because the country failed to put its fiscal house in order in the manner of Germany. Indeed, the Prime Minister was ridiculed in parliament for his obviously specious claim that France was taken the “initiatives” with regard to the crisis.
We will see what happens! In the meantime. best to keep one’s powder dry.
If Michael Martin has copped on, I would like to know to what!
An interesting item from the FT. Oliver Sarkozy is a half-brother to the President of France.
“If loss-potential becomes a very real possibility you’re going to have to retrain a whole set of what are current just money managers, and turn them into credit traders instead. ”
This is far from a trivial point. Capitalism is supposed to work by capital being allocated by people who have an understanding of the economy, in a way that approximates to something beneficial to the economy. That ‘risk’ was ignored is a failure of the capital allocation function and it was the under or non pricing of risk that has not far off fubared many economies.
It is simply a bad idea for an economy to have capital allocated and effectively credit made available (or not) by people who don’t understand a very significant part of what they are doing.
Moving away from ‘money managers’, it used to be the case that the fundamental bedrock for professionals advising on or conducting investment business was an understanding and appreciation of the background economics and politics. Very oddly, the modern idea of CPD requirements seem too often to concentrate on rules, product characteristics, tax and the like. It seems that the regulators have little interest in the most important aspects of what used to be regarded as ‘competence’.
There should be a requirement that people know what they are doing – in more than a box ticking sense.
I’m pretty sure that your view that the Danish “experiment” has been cancelled is wrong. Bank Package IV added new mechanisms to encourage mergers (there being over 100 banks in such a small country which makes no sense) rather than require all failing banks to use the Bank Package III mechanisms (which impose losses on seniors), however the BP III mechanisms remain. Also while there are new provisions for government funding to assist mergers, there is also a very strong push to limit taxpayer liabilities – one of the BP IV mechanisms shifts the burden from senior creditors to the banking sector as a whole, since the aim is for the government under BP IV not to take any more losses than it would have under BP III. Here is Danske Bank’s view:
Outside the EZ there have been much stronger public policy initiatives to limit taxpayer losses as a result of bank failures. Denmark has taken the strongest actions, but Sweden is following Denmark’s path, albeit more cautiously, and the USA and UK have also taken some steps. The EZ is the real laggard here – it has been three years since the crisis really hit – what progress has been made and where is the urgency?
Any time you remove a government subsidy the price of that item (in this case bank credit) is going to go up, however most would agree that the benefits outweigh the costs, since it minimizes moral hazard and since socializing bank debts has a toxic social impact. There will never be a “right time” to do this, so the right time is now.
Denmark was the only other country other than Ireland to guarantee all bank debt in 2008, however the EU submissions at the time could not have been more different. The Irish submission read as a PR piece – saying that it was all just a liability problem, trust us. The Denmark submission was much more hard-headed and recognized that there could be a solvency problem too. There’s an intellectual coherence in the Danish response over the last 3 years that should be taken as a model. They have a clear strategic picture of what they want the system to look like, and while getting there from here may not be a straight line and may involve some tactical changes and adaptations along the way, that’s the way public policy should be made.
There has been, and still is, no intellectual coherence in the Irish response, just a never ending series of forced measures taken at the last minute under duress. Just like the EZ response in fact.
re “Nous sommes dans un pot de chambre, et nous y serons emmerdés”
If one was in any doubt about this, that doubt was dispelled by Dr Merkel today (via Channel 4 news) also quoted by Reuters
So the Irish were expected to take one for the team. Problem is, there is no team.
The wealth of Europe has been fleeing towards Germany for the past three years. This euro crisis has been a bonanza for the German population.
“Nous sommes dans un pot de chambre, et nous y serons emmerdés”
As French is neither my native or mother tongue I am delighted to have found an opportunity agree with those sentiments and still avoid entering the debate until after the polls close.
However, hopefully the past and present tense is more applicable in the second part of that very appropriate sentence.
If we assemble our own team we might be able to eventually depart “le pot de chambre” albeit with a very distinct “eau de Frankfurt” aroma and avoid the future which “nous amis” have in mind for us. 🙂
New York Times – Update on the Ostriches in the ECB & The ScapeGoating of poor Silvio & Distressed Bankers etc
There is also a question of what happens with the European Central Bank’s substantial holdings of Greek bonds, which have an estimated face value of about 45 billion euros. Jean-Claude Trichet, president of the E.C.B., has said that the central bank would not participate in any voluntary debt relief for Greece, known as “private sector involvement,” because it is not part of the private sector.
Still, any insistence by the E.C.B. that it should be exempt from the pain of a debt devaluation could be controversial.
The central bank might insist that its holdings be transferred to the European bailout fund, Mr. Pascual wrote.
IMHO – handcuffing of the ECB is a Gigantic Error of Judgment …
The Germans are not going to ask the Italians to enter an Irish style austerity programme, are they?
Surely the German inflation phobia will have to be treated first before Milano ever goes under the knife.
Relatively apocalypse in Switzerland
Novartis is shutting down a factory employing 700 because of the strength of the franc .
there is no escape
@Brian G on the necessity of eliminating the unconditional public assumption of bank debt.
There will never be a “right time” to do this, so the right time is now.
In Ireland’s case this is particularly apposite, one of the things which has not happened here is any reduction in the level of liability the state has for private debts, which is utterly incredible.
We have pumped tens of billions into private hands there has been no quid pro quo. Certainly we have a gold star from the Troika for services to the international financial system, the eternal if Teutonically subdued gratitude of Deutsche Bank shareholders that we gave them time to reduce their exposure to peripheral risk and a Euro Monetarism merit badge (“Debt is Dignity, Self determination is Shame.” in gold on blue) but our exposure to the critically flawed Eurozone financial system model has not been reduced one whit.
That is why there has to be a serious attempt to construct and publicly articulate a policy on the banks that involves other than “Doing what we are told.” – our interests have diverged very sharply from those doing the telling.
I do hope that John McHale gives that some serious consideration before recommending more austerity to pay off more investors while betting wildly that future growth will be high enough to avoid sovereign default.
Missed the afternoon and evening action. I don’t think anything significant transpired other than the DOW dropping 200 point and reports that the IMF are considering stepping in….to godknows what.
Looking around the markets, interesting that Greek 10 year came in 56 bp.
Someone must reckon they can make money at about 39euro. I doubt if JCT is adding to his pile.
This looks like the real McCoy…..
FinMin offers banks a new plan
It combines the issue of devalued bonds with some cash, as haircut is likely to come to 50 pct
All eyes are on Brussels on Wednesday for the eurozone summit that could determine the future of the Greek debt and of the bloc in general, with the likeliest scenario on Tuesday being for a 50 percent haircut, which Eurogroup president Jean-Claude Juncker said private investors will have to accept.
The plan on the table, according to sources in the Belgian capital, provides for the replacement of the existing Greek bonds held by private investors with new ones with their value slashed in half, combined with the payment of cash. As a result the total amount of bonds held by private investors would go down from 205 billion to 102.5 billion euros.
According to this plan, which Finance Minister Evangelos Venizelos presented to the managers of Greek banks as the likeliest solution, for every 100 euros of Greek debt that private investors own, they will get 15 euros in cash and 35 euros in 30-year bonds with a 6 percent voucher, although the ratio of cash and bonds could change.
The payment of cash is the carrot for the private sector to participate in this plan, as unlike the plan presented last July, it does not include any guarantees for the new bonds by the European Financial Stability Facility (EFSF).
Venizelos also met with the head of the Institute of International Finance (IIF), Charles Dallara, on Tuesday, with government sources qualifying the meeting as “very positive,” while Dallara stated that there is no agreement on the level of the haircut.
Ahead of the crucial summit meeting on Wednesday, Austria’s Finance Minister Maria Fekter said on Tuesday that there is a limit to the funds the eurozone countries with a triple A credit rating can provide to Greece: “We’re committed to our contribution, but the measures can’t cost much more than that because we’ve got to look after our AAA ratings,” she stated.
Meanwhile, Venizelos reassured Parliament that there is no danger for social security funds from a debt haircut.
“Any solution for the long-term sustainability of public debt will be accompanied by measures which not only maintain but also visibly improve the current level of assets held by Greek social security funds,” Venizelos said in a statement.
“The government has planned and is decided to undertake all necessary measures to ensure its social and insurance policies.”
So buy at 39… Get 15 back in cash and 35 in new bonds with no guarantees.
I believe its not worth the risk. The neuvo bonds will likely sink.
“for every 100 euros of Greek debt that private investors own, they will get 15 euros in cash and 35 euros in 30-year bonds with a 6 percent voucher”
If you were sitting on an insurance contract that would give you back 100% instead and triggering it might bring down one or two of your competitors…..
The odd thing is, most of the holders of CDS covering their Greek positions really don’t want to have to claim…. there must be some can of worms in there. A big black pit of worms.
At the moment, it all looks like it’s starting to unravel. Nobody is thinking about what’s best for Europe and the Euro. Their minds are on other things. It will be interesting to see how the day pans out.
Eureka, with apologies to @Eureka.
Next time the Irish meet the ECB, quote Trichet and tell them that the, whether they know it or not, the Irish government is not in the private sector either and will no longer participate in any voluntary debt write down and refuses to be the recepticle of bad debts from the private sector.
And indeed from the actions of those doing the telling.
“they will get 15 euros in cash and 35 euros in 30-year bonds with a 6 percent voucher, although the ratio of cash and bonds could change.”
Thats bigger than a 50% haircut when you assume that the new 6% bonds aren’t going to trade at par for a while.
re our earlier debate about the ECB capital – while it has ~6bn or so on its own balance sheet, apparently it also has a call on the other Eurosystem NCB capital, which amounts to 80bn. Also, i forgot they agreed a 5bn increase in ECB capital over the 2012-2013 (1+2+2) period, so that’ll bring them up to 10bn i think by next year.
Oh, I agree, they could ‘take’ the NCB capital (not just the eurozone, but the wider ESCB). I’m sure the BoE would be delighted to pony up. And then the national governments could recapitalise their undercapitalised NCBs… doesn’t really work, does it?
What should have been done three years ago was to suspend profit payments to governments while the capital base was built up as you say it will be for 2012-13.
@ Eoin Bond
“The ECB seem more willing to endanger small periphery sovereigns than risk core funding merchanisms. This is a strange policy, as is the lack of a coherent resolution regime still to be put in place, but they are very clearly the realities on the ground as things stand.”
Now that you admit what the realities are perhaps it is time to question first principles?
Maybe just maybe the ECB have greater interest about the welfare of banks than the citizens and governments of Europe? Maybe the governments of Europe are also beholden to these banks to a greater extent than they should.
Are you RTE Prime Time presenter Donogh Diamond?
The same guy that anytime he is interviewing sounds like he just spent a year in a padded cell with Milton Friedman and Alan Greenspan?
You are now advocating socialism for the rich for some reason?
Do us a favour and remember that the next time you are demanding social welfare cuts.
Are these ‘money managers’ in the senior funding market that may have to be replaced or re-trained to price risk part of these wonderfully efficient markets where every piece of information is reflected in the price? And are these the omniscient and omnipotent markets before which elected politicians are expected to kow-tow?
Quite a few ordinary citizens recognise that they elected politicians who weren’t capable of minding the shop or who were suborned by those exercising economic power and influence, but it’s perhaps easy to see why they are not a little disgruntled that they are picking up the tab for the outcome of incompetence over which they exercised no control.
“Maybe the governments of Europe are also beholden to these banks to a greater extent than they should.”
We live in a credit-fuelled society, and ever-increasingly-so from 1980-2007. As such, yes, we rely massively, and overly-so, on banks. We are now living through what is, in Rogoff’s terms, the “Great Contraction”, which will see a massive deleveraging of balance sheets at a public, private and household level over the coming decade. We will require banks to be the safety break on that process to prevent a full-on depression, and will only be able to exit this ‘beholdenness’ once we have paid down the existing debt to much smaller levels.
@ Mr Hunt
completely agree. Financial markets have messed up massively over the last decade, but as per my comment to Eamonn above, and my comments on financial-market-subsidisation further above, we have lived in a society that has demanded ever cheaper credit from our banks and ever greater returns from our savings/investments (and ever decreasing fees on such as well), that combination of “demands” implying that we either didn’t understand risk/reward trade off’s, or that we had solved for the ‘risk’ component of that equation, X increasingly equalling zero somehow. Remember, those “ordinary citizens” benefitted massively from overly-cheap and overly-available credit, and while there is a very complicated debate about where the blame lies between bad-lenders and bad-borrowers, at least some blame lies with both parties as both of them benefitted from the credit super bubble.
The only real answer as to how this ‘worked’ is now quite clear in the financial market subsidisation or backstopping we have seen come to the fore in the last 4 years, this the necessary answer to a crisis which threatened (and still threatens) to dismantle many of the standard political and societal principals/frameworks (ever increasing wages, safe cheap/free pensions, generous social welfare) we have grown to assume are there forever (principally the general stability we have seen in the last 20 years).
I’m not saying this is right or this is how capitalism or economics should work, but i am surprised that so few understand this or saw/see it coming. We still have people harping on about moral hazard, efficient markets and how contagion should not happen in such efficient markets (good money always replaces bad etc – yep, eventually it does, but not sure what happens to the economy in the potentially long vacuumn inbetween). Difficult to know whether to laugh or cry when faced with these arguments.
Any hint of a stilted formality on my part is purely related to your chosen nom-de-plume 🙂
Those who employed a huge expansion of credit to disguise a continuous decline in labour’s share of total income – and a more than corresponding increase in the gains secured by those at the top of the tree – are still at it. Rajhuram Rajan coined the phrase ‘let them eat credit’. The Great Deleveraging that is required across the board simply can’t be avoided.
The policy challenge is to manage the impact across the socio-economic strata and to ensure some semblance of the real economy may be secured and expanded.
Three years into this mess and senior EZ politicians are only just beginning to seriously address the massive deleveraging of their banks that is required. At least, in Ireland, much of this has been done. But now, almost the entire focus is on Barry Desmond’s ‘rectal fiscitude’. This is certainly required, but it needs to be counterbalanced by some serious structural initiatives in the real economy.
But all we’ve got is some window-dressing draft legislation on lawyers and doctors and on competition law and some grandiose notions about a holding company for the semi-states (NewERA). It may tick some boxes for the Troika, but there’s no doubt that some wool is being pulled over their eyes as I expect their primary focus is on the big picture fiscal, banking and financial stuff.
If you listen carefully you can hear the sound of the straining at the leash of the usual suspects salivating at the prospect of returning to ‘business-as-usual’. It doesn’t bother them if the real economy goes down the Swannee as they’ll be able to defend much of their absolute gains and certainly be able to defend (if not enhance) their relative position in the food chain.
Difficult to know whether to laugh or cry when faced with these arguments.
+1, nice post.
The correct response when faced with these arguments is sneer, belittle and ignore as the arguments are really being made to satisfy political imperatives rather than explain the actuality of the current economic situation.
I know that John Quiggan’s “Zombie Economics” might be a little low brow/to the political left for many of the contributors here but it is a tidy little resource for getting through an argument with someone especially committed to many of the tired economic orthodoxies that failed to explain the origins of the current crisis but stridently insist we need to keep the neoclassical economic faith to get out of it.
Peugot has announced 6,000 job cuts, looking for 800m in cost savings and lowers forecasts. All zippidy-doo-dah in the French economy then. I wonder how Fiat is doing. No such problems at VW.
Rumours about Silvio stepping down seem to be getting stronger. Not to be announced until after G20 apparently. I’m told he’s ‘had enough’.
Rumours about no agreement on Greek debt haircut % by 6pm even stronger.
Rumours that David Cameron is going to take someone behind the bike shed for some fisticuffs tonight too! Spoiling for a fight apparently (obviously needs to put on a show for his backbenchers).
The PR world is full of rumour and counter-rumour today. I must try and find some facts.
@ PR Guy
facts are overrated! But yes, Silvio to go in January seems to be a done deal. But of a standoff on the Greek haircut too, but reckon that gets sorted. Bigger question as to EFSF leverage solution being workable in reality.
When does a union become an empire? When it extracts wealth from one place for the enrichment of those in another.
Enda paints a very bleak picture of impending Greek suffering. Isn’t it amazing how distant it feels to us. Psychologically it’s happening to “the other” – not to our fellow Europeans.
If the Euro does not end because of economics it will end because of politics. No point in defaulting without leaving it. There is no way Greece can default and stay in the Euro. Same goes for us.
“I must try and find some facts.”
As Eoin says, please don’t! The only facts are spin – the rumours give the subtext to the ‘facts’.
I’m very tired of all these complex arguments.
Why cannot the current Irish government produce two long-term (say 20 years) plans:
Plan1 showing how Ireland is going to reduce our debt level to an acceptable level (say 60% of GDP) and the tax and spending levels required, assuming no default on debt. Also assuming no or very low growth in GDP.
Plan 2 assuming a Greek type solution with a 60% default followed by Greek style austerity to assure ongoing external funding.
It seems to me that the Greek approach might be more beneficial after the first few years and allow the economy to get back to sustainable growth. It also seems that Greece is going to be forced to do the things that we should be doing if we wish to stay in the Euro. This is not a bad deal if it means forgiveness on over €100 billion of debt?
‘We still have people harping on about moral hazard, efficient markets and how contagion should not happen in such efficient markets (good money always replaces bad etc – yep, eventually it does, but not sure what happens to the economy in the potentially long vacuumn inbetween). Difficult to know whether to laugh or cry when faced with these arguments.
A good SCREAM is healthy …..
Move of the day: Klaus Regling discusses his trip to Ireland with the pragmatic marxists in Beijing – and after a blind panic in the ideological committee, Beijing moves to save what used to be known as ‘Capitalism’ and buys up the EFSF; worth noting that they have already bought up the US.
Pragmatists of the day: Eoin Bond & The Chinese Communist Party
@Shay … there is hope.
No BAGMEN need apply 😆
@ Bond, Eoin Bond
“Bigger question as to EFSF leverage solution being workable in reality”
Leverage is what has us in this mess in the first place.
If Jack gives me 10 Euro I can only lend Paul 100 Euro if Paul pays me in installments not exceeding Jacks minimum deposit term with each installment being equal to Jacks initial deposit. But if Paul has to use the 100 Euro to pay off debt to Michael then there is no way he’ll be able to pay me back. Leverage can only work if there are very strict rules and if it is NOT used to repay debt.
In this scenario it basically prevents Paul defaulting on Michael but it leaves me on the hook to Jack. Then there is the mechanics of actually turning that 10€ into €100. That would involve some kind of printing of money. But it doesn’t produce inflation because it is being selectively printed for creditors – so it doesn’t produce inflation – it produces millionaires.
So leveraging the EFSF will work for Goldman. It will not work for society. It’s a trick to print money for the select few.
Facts are a menace. The sad fact that this latest Greek deal is unlikely to work is being buried in the hysteria. Even if they get a 50% reduction it will only amount to 28% of their debt pile and according to Angela today it will be 2020 before they have a ratio of 120% debt/GDP. Apparently that level is unsustainable. So why all the commotion?
It would appear that only a hard default and exit from the Euro will put them back on a sustainable path in an acceptable timeframe.
@ALL in Government
‘Speaking to the Dáil today, Mr Kenny said Greek-style haircuts on the country’s sovereign debts are “not a panacea” for Ireland, as such a move would lead to accelerated austerity, damage overseas trade and hurt Ireland’s attraction for investment.
Would someone PLEASE explain the CONFLATIONIST FALLACY to An Taoiseach – [hint: distinction between genuine sovereign debt and vichy_banking system debt … a few of his old high infants’ graduates are available if required …
The other sad thing is that the failure of the Greek strategy will be blamed on them defaulting and not on them staying in the Euro too long (there will probably be a 6 month period post default where they cling pathetically to Euro membership before giving up and recovering).
This is all a global coup by the banking elite.
One of the tentacles (Gupta) surrenders to the FBI.
@all (& An Taoiseach …
IMF wants 75% Haircut on Greece
Live WSJ blog for Krisis Junkies …. (to be contd.)
It get better…..
“Two deputies from the Northern League, a member of the ruling centre-right coalition, fought with members from the opposition FLI party speaker Gianfranco Fini, grabbing each other by the throat as other parliamentarians rushed to separate them.
The sitting was suspended for a while after the fight, which broke out because of sarcastic remarks on television by Fini alleging that the wife of League leader Umberto Bossi (pictured below) had retired at 39.
It was only last year tempers flared in the lower house of parliament in Rome with one MP calling an opponent “a piece of —-” before several ended up wih black eyes.”
Meanwhile the Greek haircut is going nowhere and an involuntary write down seems probable according to reports.
Remarkable that the Euro is trading at 1.3960. And the DOW is up.
Thats because the 21% haircut was actually break even.
The 50% haircut was really a 20 something % haircut.
None of these are enough and will just mean Greece will be back to square one very fast.
“we have lived in a society that has demanded ever cheaper credit from our banks and ever greater returns from our savings/investments (and ever decreasing fees on such as well), that combination of “demands””
Oh I must have missed those ‘cheap credit now’ marches Fintin O’Toole and Jack O Reilly organised! What a heap of rubbish.
Don’t get me wrong. Joe Soap was happy/suckered into taking the cheap credit, but before it existed there was no major demand.
Everyone including the banks saw the dangers of cheap Money.
However since the seventies the banks have learned that everytime they release the cheap credit, cause a major crisis they get bailed out by governments. Just look at Citi bank in South America.
Ratings agencies are now lowering credit ratings of banks based on the idea that some governments are now less likely to bail them out!
It was a Ponsi Scheme!
The only winners are those who were those who got in early.
You talk about “ordinary citizen benefiting massively”
I would argue when we look at the aftermath of the Ponsi scheme very few people (investment bankers and bank employees that got bonuses) did and virtually nobody under 40 did.
You yourself talked in the past about your own negative equity.
Getting the limit on our credit cards increased did not make us richer.
“I’m not saying this is right or this is how capitalism or economics should work, but i am surprised that so few understand this or saw/see it coming.”
Do you include yourself in that statement?
Do you realise you are trying to advocate harsh capitalism for the poor and socialism for the rich in order to maintain the current system?
If I saw that governments were trying to breakdown the benifits enjoyed by the powerful insiders and vested interests i might be able to stomach all this austerity. But the investment banks went straight back too business in 2009. Nama is spending 2-3 billion on wages over 10 years. Meanwhile tellers in bank of Ireland get their wages cut by 28% and their pensions are attacked.
@Bond. Eoin Bond
“a standoff on the Greek haircut too, but reckon that gets sorted”
By ‘sorted’ do you think they will go the whole 9 yards and make the haircuts involuntary?
That would take some guts that I don’t think they have…. but I could be wrong. They might make the threat this evening though. I’m not up to date on the news this afternoon (too busy scheming on behalf of my masters of the universe) but I didn’t notice any sign of a deal being cut on haircuts by 6pm today though I thought I heard the bondholders were going to up their offer of 40% by a small amount at 5.55pm.
Meanwhile, back at the ranch, the leaders are all arriving and putting on their ‘serious people’ faces for the cameras today I would think. German and French PR Guys and image consultants were pulling their hair out the other day when Angela and Nik were laughing at that question about Silvio (which I read was not shown on Italian TV?). Silvio was furious!
It seems Ambrose is not impressed with the leverage part of the proposed deal…
“The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.
As countless economists have pointed out, it concentrates risk. Germany’s €211bn commitment to the fund is not technically breached but the risk of suffering large and perhaps total loss is vastly increased. Creditor states switch from protected senior status on Greek, Portuguese, or Italian debt to the bottom rung on new slabs of sub-prime structured credit. The bluff might well be called.
The consequence will be to bring forward the downgrade of France and other states. It will accelerate contagion to the core, not stop it.
Why is Germany pushing for such a destructive policy? Because it dares not cross the €211bn red-line that has become totemic in the Bundestag, and because it has for ideological and cultural reasons excluded the one option that can plausibly halt the eurozone crisis – which is mobilizing the full fire-power of the European Central Bank.”
(Telegraph online) “Merkel wins rescue fund vote after raising spectre of war”
Jaysus, they’ll be annexing Greece next!
…and lining bondholders up against the wall (they will probably need to get in the queue though)
re It would appear that only a hard default and exit from the Euro will put them back on a sustainable path in an acceptable timeframe.
This is the solution that Germany wants but not just yet.
Does anybody think that if Germany really wanted to solve the ‘euro’ crisis that was incapable of imposing its will and financial muscle to achieve that objective a long time ago.
Germany wants its own solution to the euro crisis. That solution includes Greece out and others too but in a way that is seen as the complete fault of the ‘defaulter’. Meantime the wealth of the continent flows towards the ‘safe haven’ that is Germany.
Nobody should be deluded for a minute that Germany is incapable of planning and executing a strategy to achieve its long term objective in this crisis.
That is what is happening here. Germany wants Greece to default but a time that best suits German objectives.
And so far this crisis has been very good for Germany. It will take large scale employment hits in Germany before Germany moves to resolve the ‘euro’ crisis.
Problems elsehwere in Europe are collateral damage to be managed until the timing is right…. Right for Germany.
Interesting theory Joseph. As Miyamoto Musashi says, “there is timing in everything.”
It will soon be 5.59pm. The last minute cometh. Unless there’s going to be some injury time to allow a late goal.
I’m with Ambrose …
“…. mobilizing the full fire-power of the European Central Bank.”
They really should read The Annals of Genghis Khan – ‘Only a fool goes into a battle he knows he cannot win; A bigger fool goes into a battle while leaving The Nuke back at home; A wise fool goes into a battle he knows he can win without a fight by pulling out a Nuke and ciggie lighter (which would terrify poor ol van Rompuy but delight Juncker), smiles – pauses – stands his ground – and they will all go home and do what is necessary. Simple really ….
5.59? Shurely you mean 1759 time 😆
To conclude – a must view:
Weapon of Mass Confusion
Blind Biddy is not impressed.
Is the whole thing falling apart? I see Nicky is going to make begging phone calls to china tomorrow and Regling has been sent there in person.
They seem to be losing it!!!!!!
“we have lived in a society that has demanded ever cheaper credit from our banks and ever greater returns from our savings/investments ”
I don’t buy that . Most regular people want to know their money is invested somewhere it can earn a stable return. Equities have been going nowhere for more than 10 years. Low interest rates drive up asset prices to unsustainable levels . The suckers who buy property have no choice. Low interest rates are a joke. Who do they ultimately benefit? Banks get coked out of their heads on risk they don’t understand and the externalities are paid by the taxpayer. A decent cost/benefit analysis would show that Ireland would have been better off with mortgage rates north of the 7% mark. It might even still have a banking system !
And who ultimately benefitted from the financialisation of accumulation of the neoliberal counter revolution ?
In 1976 the top 1 percent of households in the United States accounted for 9 percent of income generated in the country; by 2007 this share had risen to 24 percent. According to Raghuram Rajan (former chief economist for the IMF), for “every dollar of real income growth that was generated [in the United States] between 1976 and 2007, 58 cents went to the top 1 percent of households.” In 2007 a single hedge fund manager, John Paulson, “earned” $3.7 billion, around 74,000 times the median household income in the country.
So the 99% aren’t getting anything.
Ta for reminder to MonthlyReview …. a snippet or two …
In the way that even an accumulation of debts can appear as an accumulation of capital, we see the distortion involved in the credit system reach its culmination. [Karl Marx, Capital, vol. 3 (London: Penguin, 1981), 607-08]
In 1997, in his last published article, Paul Sweezy referred to “the financialization of the capital accumulation process” as one of the three main economic tendencies at the turn of the century (the other two were the growth of monopoly power and stagnation).2 Those familiar with economic theory will realize that the phrase was meant to be paradoxical. All traditions of economics, to varying degrees, have sought to separate out analytically the role of finance from the “real economy.” Accumulation is conceived as real capital formation, which increases overall economic output, as opposed to the appreciation of financial assets, which increases wealth claims but not output. In highlighting the financialization of accumulation, Sweezy was therefore pointing to what can be regarded as “the enigma of capital” in our time.3
To be sure, finance has always played a central, even indispensable, role in capital accumulation. Joseph Schumpeter referred to the creation of credit ad hoc as one of the defining traits of capitalism. “The money market,” he added, “is always…the headquarters of the capitalist system.”4 Yet something fundamental has changed in the nature of capitalism in the closing decades of the twentieth century. Accumulation—real capital formation in the realm of goods and services—has become increasingly subordinate to finance. Keynes’s well-known fear that speculation would come to dominate over production seems to have finally materialized.
Looks like well worth an early morning read ….
Much ado about nothing.
Waking up to a lot of boring Eurowaffle. ‘The markets’ will no doubt be happy enough for now.
What Europe needs is a leader of last resort.
No, that’s not a typing error.
Summary from the Guardian here:
‘Eurozone crisis: banks agree 50% cut on Greece’s debt’
Oh for a Bryan G that would ascend
The brightest heaven of explanation
Blogospheres for a stage, and economists
To debate the swelling debts,
Then should the warlike Krugman, like himself,
Assume the port of Keynes, and at his heels,
Leashed in like grads, should def’cit tax and spend,
Crouch t’create employment. But pardon, bloggers all,
The flat, untutored spirit that hath dared
On this unworthy posting t’invoke
So great bruiser. Can this website hold
The vasty fields of Europe? May we cram
Within th’electronic sphere the very papers
That did affright the board of ECB?
Oh pardon! Since a since single comment may
Attest in little place a million:
And let us, ciphers to this great account,
On your algothrithmic forces work.
Suppose within the framework of this world
Are now at war two mighty monarchies.
Behold how mighty Finance sweeps the plains,
And drives the politicians all asunder.
Piece out the imperfections of our thoughts,
Into a thousand jobless see each cut
And make imaginary expanded contraction;
Think, when we talk of debtors, that you see them
Hiding their bills in the shameful drawers:
For ’tis your thoughts that now must guide our leaders,
Carry them here and there, jumping through airport customs,
Turning the destructive votes of many years
Into the demand of an hour-glass; for which
Admit me, blogger to this unfolding:
Who, Grumpy-like, your humble comments pray,
Gently to comment, kindly to debate, this play.
Bravo, Gavin. The Bard himself would doff his hat. But, I fear, our musings here have little import – even though the willingness to enage of some has led to the identification of some valuable common ground.
Excellent – there’s no doubt that everything looks much better when expressed in epic poetry. Definitely an area of core competence for the peripherals.
Not epic but:
EU Council conclusions:
ECB said no.
But fifty percent haircut.
Springtime for Europe!
The retirement of the Great One:
“My Name is Trichet:
Look on My Works Ye Mighty!”
A shambles remains…
I would still like to see a ‘credit event’ – just to see what would happen. They have been going to extraordinary lengths to avoid causing any disturbances around the CDS black hole.