I am often accused of being too optimistic about the prospects for the Irish economy. It is true I believe that if we hold our nerve with the adjustment (more on which below), and there isn’t a major deterioration in the external environment, we can get through this crisis. But my views on the appropriate strategy for getting through the crisis are at least as much determined by a fundamental pessimism about the financing vulnerabilities facing the Irish State.
It may be worthwhile to first summarise what I see as the crisis resolution strategy Ireland is pursuing. It can be summed up as adjustment with financing. I don’t think anyone disagrees that we need to make significant post-bubble adjustments: fiscal adjustments to put our debt on a sustainable path; banking adjustment to shrink the banking sector to a level consistent with feasible financing; and real adjustment to move resources from sectors with little growth potential (notably construction) to sectors with better opportunities.
Although the nature of the post-bubble economy is such that we have no choice to make these adjustments, to limit the damage from austerity and bank deleveraging to living standards it is important to make these adjustments as gradually as is feasible.
But this requires financing: financing for both the large budget deficit, and also for the banks given the insufficient availability of deposits and term funding. Since we cannot raise sufficient financing in the markets, we have been forced to rely on official sources.
(In determining the appropriate adjustment speed, we should also not forget that what we borrow now must be paid back with interest – much of it by our children who will also be asked to bear the costs of an ageing population. Deficit reduction today is not just a question of imposing hardship or not, but also how the burdens will be shared across generations.)
A central problem is that the future availability of financing is uncertain in today’s volatile international environment. This reality forces faster adjustment than would otherwise be optimal all else considered. Getting our deficit and bank funding gap down gives us the best chance of regaining our market creditworthiness. These efforts also give us the best chance of retaining the official funding that is necessary to allow us to pursue a reasonably gradual adjustment path. Moreover, a critical element of regaining market funding is that potential future lenders believe that a credible official lender of last resort is in place to give them confidence they will get their money back.
It is important not to lose sight of what a sudden stop of both market and official funding would mean: it is hard to see how it could not result in massive austerity as we have to close (at least) the primary budget deficit immediately and a likely collapse of the banking system. I think those who make simple statements about being pro or anti austerity fundamentally underestimate the vulnerability of our situation. Of course, reasonable people can disagree about the appropriate speed of the adjustment given these vulnerabilities, but it would be good to see a more appreciation in the debate about what is at stake.
Similarly, I find it hard to understand how people can make such strong statements about the desirability of not repaying the remaining unguaranteed senior bonds without showing an awareness of how close we came to a full scale bank run earlier this year. While the bank recapitalisation, deleveraging and liability guarantees are components of the strategy to stabilise the funding situation of the banks, the most critical element is the perception of the ECB/CBI willingness to act as a reliable lender of last resort. Do we really want to reopen depositor doubts about whether the ECB will support Irish banks? Indeed, I see the main function of the recapitalisation, deleveraging and guarantees as being the price that must be paid for the ECB/CBI to stand ready to play the necessary lender of last resort role. We should not let (mostly misplaced) anger at the official funders blind us to the vulnerabilities of our situation.
188 replies on “Optimism and Pessimism”
“without showing an awareness of how close we came to a full scale bank run earlier this year.”
What do you mean by that?
“I don’t think anyone disagrees that we need to make significant post-bubble adjustments: fiscal adjustments to put our debt on a sustainable path;”
We’re still facing a debt:GNP of close to 150%, are we not, with reportedly the highest level of private/corporate debt in the world in addition. But focussing on government debt alone, 150% (or thereabouts) is sustainable in your view? In an Irish context tied to a common currency.
Also on a separate matter, will it be practice do you think for the fiscal council to comment on Govt reports like the document produced today?
As one who can’t make up my mind on the whole current mess, I welcome this post. In two days time the Sunday Independent will, as usual, bombard us with arguments that we should default as our debt, etc. is unsustainable. To paraphrase Oscar Wilde, arguments are vulgar and frequently convincing. So, on Sundays I’m in the default camp but, reading the above, I see the merits of sticking with the program. I know it sounds simplistic but I can’t help feeling that, every time I go to an ATM and money does actually come out, it is better to ‘stick with the programme’.
Prof. McHale, as far as I can see, you are far too pessimistic about the ability of the Irish Economy and the Irish State to make it through a systemic or sudden economic shock—of any magnitude.
You paint various scenarios and pronounce their occurrence as certain doom for Ireland, its banks, its economy and its people. Your position is that, because Ireland would suffer so enormously from taking any position other than towing the ECB line and paying back all bank bondholders, we have no choice but to accept our fate.
I fundamentally disagree with this position of learned helplessness.
I feel I have to remind everyone that Ireland has faced shocks before, and ones far more dreadful than bank crises and broken ATMs I might add. This country has faced famines, wars of independence, civil wars, economic wars, emergencies, and survived. This country has left an empire, joined unions, changed currencies three times, closed banks, made devaluations, and seen recessions– all within living memory of many posters here I might add.
There seems to be an idea that leaving the Euro, or having to close AIB, would somehow be an event surpassing all of the above put together. That not paying bond holders would precipitate a financial apocalypse of some description, bringing about the rumination of us all. I agree that such decisions would be difficult, and would have harsh consequences; but I completely disagree with the assertion that taking them would have repercussions above and beyond what this country is able to cope with. People should read about the trails Ireland faced in the 1920s or during the War; or better yet, simply ask those who were alive during those years.
Ironically, now that the Irish people are the at their most educated, most industrialised, and most prosperous in all of their history, they are simultaneously in their most fearful state, terrified at the prospect of losing their new found sedan cars, Sky Sports, and chinese take-aways. It seems that many would prefer to lose their children to emigration instead–because that is the choice facing us if we carry on with austerity and cuts.
I am not afraid of the ATMs not working in the morning. I am not afraid because I known that Ireland and the Irish people can make them work again, by their own efforts and ingenuity if needs be. We may have been subjugated and humiliated by our masters in Europe, but we are still an independent and sovereign people, despite what our Government may claim. And our futures, financial and otherwise, are our own to determine regardless of what systems or ideologies other nations choose to operate by.
This country is well able to:
1) Immediately stop paying all bondholders of Irish banks
2) Bring order to the Irish banking system, recapitalising and merging banks, sacking and prosecuting incompetent management, and protecting ordinary depositors.
3) If required, leave the Euro and reintroduce an Irish pound.
4) Reform our economy for 21st century industry, attracting foreign investment and growing our own industries
5) Provide employment, justice and futures for all citizens of the republic
5) And if needs be, regain our independence from international unions and treaties should they turn away from their founding democratic principles.
Ireland is well able to survive a banking crisis of any kind. It might mean taking a few less shopping trips to Dundrum or Newry for some, but it will also mean less one way trips to Hollyhead and Dublin Airport for others. That is the choice facing Ireland, and we should be brave enough to face it. And, despite what some may think, we are able to face it.
I find this analysis to be almost totally persuasive. However, I would have some questions about the realism of some of the assessments in relation to the involvement of the institutions of the EU. Two notable examples.
“Since we cannot raise sufficient financing in the markets, we have been forced to rely on official sources”.
What does “official sources” mean? If the EFSF is intended, it is hard to see how such a structure could be viewed in such a light.
“While the bank recapitalisation, deleveraging and liability guarantees are components of the strategy to stabilise the funding situation of the banks, the most critical element is the perception of the ECB/CBI willingness to act as a reliable lender of last resort”.
If there is doubt about this perception, it is of the ECB’s own making.
Of course the Minister for Finance may be right and the ECB will “have no choice” (as per his radio interview) but to provide a “wall of money” but I would have my doubts.
John, do you. REALLY think that the ECB would, on foot of a Anglo ug bond default, crash the Irish financial system, with the ensuing contagion causing the crash of the euro? REALLLY believe that?
In any case, it’s NOT acting as lender of last resort, it’s acting as a provider of exceptional liquidity. Now, that is going to go on for a long time so perhaps it’s equivalent, but so long as they keep pretending it’s liquidity, then they have no leg to stand on.
I don’t know what fiscal adjustments really means – fiscal money is just deleveraged money.
Wanting to Reduce fiscal money so that banks can go on their credit games again is really depressing.
You have got the economy back to front again John – banks are there to serve the economy as a utility , the economy is not there to serve the banks.
This is what caused the global crisis in the first place – leverage , any investment losses are multiplied when they are leveraged.
You are essentially arguing for a continuation of a leveraged economy.
Why do you want to repeat the mistakes of the past ?
Reducing the money supply while also increasing taxes is economic vandalism not unlike the reduction of taxes when the money supply exploded.
This deflation is a mirror image of the Irish inflation – another 10 years of damage to service fictional financial indices awaits.
The physical economy be damned.
Europe is about to repeat the American “mistake” of 1980 – lets destroy and decapitalise everything physical to peserve the value of a fiction.
We need to divorce ourselfs from the anti – CB , we need to somehow cut a deal with the BoE.
First off, I should stress that I am not speaking for the fiscal council when I post on here. As to commenting on Government reports, I am sure I don’t need to tell you that it takes time for a council that is scattered around the globe to deliberate come to an agreed position. Although we are still establishing our practices, it is likely that we will limit our commentary as a council to our formal assessment reports and Oireachtas appearances as requested by the joint Finance committee.
On your other questions, I am sure I don’t have to convince you of the danger earlier this year of a broader “deposits are unsafe” meme getting started as wholesale deposits fled. Most people don’t give much thought to the presence of a lender of last resort, but it critically lies behind confidence in a fractional reserve banking system. The danger has passed, but we shouldn’t lose sight of this critical element of our system.
On the debt ratio, what really matters is the ability to be able to get to a sufficient primary surplus to achieve stabilisation. Ireland has shown a remarkable ability to adjust so far. While there is a still some way to go, what we have achieved so far gives me reasonable confidence we can make it. I take your comment about private/corporate debt to be a reference to the drag that household/business deleveraging will have on growth. This is a significant concern. However, recent growth trends indicate that we do have the capacity to grow despite the deleveraging. Of course, the wild card is the international environment. Mentioning “luck” in the past is something else that has annoyed people, but there are certain things we can’t control and they can’t go too badly. But even if they do, we will stand the best chance of avoiding the type of disaster that Greece has flirted with this week if we keep official lenders on our side.
By the way, keep up the excellent commentary on your blog. It is greatly valued.
Sterile debate – its pointless , the Irish Borg just follow orders.
The post by John McHale is presented in such a reasonable manner that it is persuasive…but then, isn’t that an art.
I would not count myself as being an optimist or a pessimist, rather more of a realist and would side with Jagdip on the question of sustainability. We are projected to have a debt mountain of 118% debt/GDP by the IMF. That to my mind is unsustainable. You only have to look at Italy today to see that a 120% ratio sends the bond markets into convulsions.
On an academic level Ken Rogoff says that 80% ratio affects growth and sustainability of debt. Look at growth…the Fed this week downgraded US growth projections for the next three years.
As we are dependent on a few major US multinationals for our export growth, this does not auger well. Coupled with this is the fact that our major pharma exporter is losing its patent protection this month on a major drug and this could have a big effect.
Our other trading partners are all facing lower growth or perhaps recession and the picture gets bleaker.
So we suffer austerity for the next three years to reach a point where our debt level is unsustainable anyway.
As for the banking situation…it’s highly likely that the deleveraging will keep us in the position where we have a zombie property market and no funding available for small or medium sized industry for the foreseeable.
So I would think that the glass is in danger of being emptied quickly even without Italy or Greece blowing up. Just look at what Osborne said about his contingency planning.
As I noted in a previous post, my guess is that the ECB would not pull its funding — and I certainly don’t believe that they should do so even if Anglo creditors were forced to take losses on their lousy investments. But I think Mr. Bond used an apt analogy on an earlier thread when he referred to Russian roulette. The odds may be with you, but . . .. However, it is not only a question about what the ECB would do, but even having the question raised could be hugely destabilising. I absolutely understand the arguments for making them bondholders take losses — I have made many of them myself — but at this stage I don’t think it comes anywhere close to passing a cost-benefit test.
Italy is running a small general deficit and actually has a primary surplus, so it’s issue is not really ongoing debt. It’s issue is that it simply does not seem to have the ability to create any reasonable level of growth to boost the denominator element of the debt/GDP equation, thus rapping it forever in a debt cycle unless it goes to a large outright surplus situation.
Ireland is very different in having a much higher growth potential going forward, even despite of our current woes.
From the link you posted..
“The Italian economist used his first press conference as ECB head to reassert the bank’s political independence and reject as “pointless” calls for it to intervene further in markets or become a lender of last resort. His knock-back came a day after Minister for Finance Michael Noonan called for the Frankfurt bank to stabilise markets by making a “wall of money” available to buy sovereign bonds.
“There is a strange schizoid attitude: on one hand people say our balance sheet is at risk [from bond-buying], others say we should expand the balance sheet to help everybody,” he said, insisting that the bank’s balance sheet “is not at risk”.
I think that nails the lender of last resort argument as we found out to our detriment last November when the late Brian was told the ATMs would seize up.
Of fundamental importance right now in relation to depositors in Irish banks is the status of the ELG. MN has indicated he may withdraw it when it expires in December. Many corporate treasurers are watching this carefully and have maturities which need rolling over. The late Brian made the same mistake in September 2010 and we had an exodus of deposits by corporates. Let’s hope the wallahs in the DoF don’t do the same again.
Even Germany would collapse at 6%+
The ECB is neither bidding up the price of Gold to the M1 or financing the defecit – its just sitting there watching the implosion
Whats keeping interest rates on Goverment debt extremely low on in both the US & UK ?
Its high powered money , not the bond market , – a CB that does not fund a Goverment defecit is not a CB.
Why can a commercial bank produce money ( and thats confirmed now because we cannot default on credit as it gets converted into money) and we must “balance the books”.
Absurd & idiotic.
The ECB wants us to pay private debts with little money – its a huge spanner in the works of the real economy.
John wants to take almost all the bone tokens from the stone age village and tax the last bone.
What happens to commerce & cooperation in the village.
Will the villagers decide to obtain more bone tokens by eating their neighbours ?
Lets wait and see.
“We should not let (mostly misplaced) anger at the official funders… ”
In my view anger towards the ECB is not, (or at least not mostly), misplaced. The ECB has threatened to, quite literally, bankrupt the country if we do not repay private creditors in insolvent banks.
On what basis can the ECB engage in these types of quid pro quo arrangements?
We know it is not on the basis of the memo of understanding – in other words there is no express agreement that Ireland signed up to in this regard. So it must be from the treaty or statute.
But where in the treaty or statute does it say or imply that the ECB has this breadth of power. When I look at the statute or treaty or statute I see alot of talk of a right of consultation in relation to union decisions but I don’t see a right to veto.
And in my view that is what the ECB is in effect doing – vetoing our decision to impose losses.
I think a small thought experiment so to speak is useful to think about what is and what is not within the scope of the ECB’s power. Lets go back to 2005 and consider a scenario.
A small Irish bank goes bust and Ireland decides to impose losses on seniors. The ECB objects and threatens to restrict funding to Irish banks. Prior to this other Irish banks are not particularly reliant on ECB funding but markets would likely lose confidence in a financial system that had no lender of last resort. To avoid the serious consequences Ireland doesn’t impose losses.
Would that be legal?
If you think it would be, then where do you draw the line? Could the ECB cut funding if it objected to higher tax rates or, less dramatically, if it objected to higher taxes on banks or bank funding? There must be some line which the ECB can’t cross.
If you agree it is legally suspect how does the fact that Ireland is today in receipt of emergency funding change the matter?
Now there may be practical power politics reasons why it could. But the legal position would not appear to me to be any different as Ireland is either entitled to the emergency funding or it isn’t.
Now, you could say that the funding they are providing is illegal already, but that’s no argument legally speaking. And the ECB would never openly argue that in a court given the wider euro are situation.
Now the situation could be different if Ireland had agreed as part of the bailout to impose no losses. But we know that’s not the case.
And what surprises me is that nobody even really seems to ask these questions. The issue never gets out of the blocks which is surprising because as far as I see it if it’s not legal it at least arguably follows that its not practical and therefore an incredible threat.
@Bond Eoin Bond
I take your point and I suppose the Bunga Bunga antics of Silvio don’t help either…but the number quoted all the time is the debt GDP ratio of 120% and people don’t seem to care about primary surpluses.
We are in a better place for growth prospects but the headwinds are increasing rapidly.
That is the conundrum. If Italy still had the lira, it would have the flexibility to get out of the hole in which the country now finds itself. It has no guarantee that the ECB will do the necessary or, at least, the markets do not believe so.
We therefore have the situation that circumstances totally outside Ireland’s control will decide the major issue under discussion on this thread.
@ John McHale
Is it your position that the course laid out is sustainable/will lead to sustainablity or that it is the best chance at it? If the former then do you think M.Noonan in looking for a reduction on the promisary note debt and the ‘they could take a stake in AIB’ kite is acting in bad faith?
Its the ecology stupid….
Have a look at the scale on the left hand side of the photographs in the link below:
Then have a look at the chart on page 2 of the following document
Note the relatively sudden collapse in the area of both Larsen A and Larsen B
How many IMF loans would it take to “bail” all the resulting water out?
George Pap tonight…
“The bailout allows us to write-off a large part of our debt in the next few months [it] permits us to give the energy to build a Greece of growth.
Greek people, There is no problem with your deposits in the banks because of the bailout. They are even more guaranteed with us in the eurozone.
[…] This bailout is tremendous opportunity to rebuild country on new foundations.”
PAP WINS VOTE. 152-142
The interesting aspect of your post is that despite the ‘best efforts’ of government to address the ‘bank problem’ and ‘put it to bed’, your post still links and intertwines the financing of the State and of the banks as if they were the same entity.
That is the ongoing tragedy of Irelands position. Despite all the money (64B plus interest) Ireland is just as vulnerable today, if not more so, than it ever was because of the banks.
This comes from a dogmatically flawed ECB analysis of the banking system which has been fully accepted as gospel by Ireland and regretably also in this post.
The flawed analysis is so flawed that it is incredible that it is not being questioned more seriously. How a banking system should work was laid out in AJ Chopra speech at Kenmare. It is very simple.
Banks are based on deposits.
Ok Lets pay the bloody bondholders but the price should be as follows;
1. An immediate deposit protection scheme for the ELA banks up to 1 million, funded by a levy on the ELA banks. Depositors to rank first in any resolution.
2. Recognition that bank bond funding is finished for years to come. It is not coming back. Not this year, not next, not the year after.
Not is it wanted back. Ephemeral finance that can disappear overnight, in one month, in three months, in six months is a worthless concept to any economy.
3. Deleveraging targets to be offset by ‘deposits exported’ to other European banks.
The reason being that in theory Irish banks could be required to deleverage to extinction as the entire deposits of the country flowed out of the country to ‘safe-haven’ European banks. We should reject the arrant nonsense of the ‘deleveraging’ agenda. An agenda rooted in the interests of the Frankfurt club banks, who have been the main beneficiaries of this deleveraging agenda that they set for Ireland and the peripheries.
Surely more than three years after the the emasculation of the country to save the banks, we should have learned what a banking system is based on and tried to move to put one in place.
As noted by others, you write some very eloquent and persuasive prose for an academic, and I suspect that you were not one of those students prone to walk out on Mankiw’s lectures in Harvard; that is, assuming that you attended any – and my views on Mairt_een as the guardian of the ultra-libertine gospels are well known around here.
Acknowledging DOCM’s fawning subservience to the upper-echelon status quo, I tend to agree more with OMF and Ceterisparibus here and I generally take Bond and Jagdip seriously …..
My vulgar belief is that Ireland – to be sustainable – beyond the numbers and all those lovely mathematical ratios – requires an agreement with the ECB and the EC, facilitated by a pragmatic IMF, to write off (using whatever means that may prove to be appropriate or possible) a minimum of 60% of private banking system debt. This would still leave Ireland to survive (taking on the other 40%) the biggest banking bust ever in the Western world.
Irish household debt is one of the highest in the world; unlike Italy. for example, where it is low enough.
You note the important, and insufficiently discussed, issue of inter-generational burden-sharing. Taking the present generation – Ireland is exporting its most productive human capital; further the adjustments are skewed in a disproportionate manner towards the lower segments of society; the failure to signal a minor adjustment in taxation on the upper-echelons in today’s fiscal report is further evidence of this; the massive pay-offs for failure continue to be obscene; and so on, and so on, and so on.
A weak political class is prone to influence from very powerful vested interests and this is facilitated by the subservience of a generally supine citizenry. Time for some ruthless radical realism on behalf of the citizenry John? Waiting for Godot and the vicariousness of chance will take us down – but I’m sure that Blind Biddy will be tooling up with OMF before that is allowed to happen … unless she is co-opted onto the Fiscal Council in the meantime!
@ John McHale,
Keep up the good work John, I have always found your posts to be well balanced, trying to take on multiple perspectives and see the problem in world scale terms.
As some previous commentators have mentioned about leaving the banks fail, that idea might work if 90% of the country is employed in agriculture. However these days a larger % of the population is employed in areas other than agriculture, hence letting the entire financial system collapse would not be a good idea, might even lead to another famine.
As for growth, I would mention that certain emerging economies where growth is booming have very restrictive embargoes on imported goods, for example.
1) Brazil has very few Free Trade Agreements, anything imported is subjected to very very high taxes, sometimes up to 100% or more even. Perhaps Ireland’s Dept of Foreign Affairs should be making moves with the Brazilian authorities to break down this barrier so that we can export our goods services into a growing economy.
2) If we cannot export into a developing economy then can Ireland copy the Chinese method of accepting low cost raw materials in bulk and then converting them into high value processed goods on our own soil. China is doing this successfully in Brazil and various African countries
3) China, again has high taxes on imported goods, again this is a market we should be trying to break into. I remember the time when Ms Mary Harney when to China on a state visit years ago, talk was mentioned then of a direct air route from Dublin to Beijing, but that was all it was, plain useless oxygen wasting talk.
If growth in the traditional western world is stalling then we really should be making harder efforts to break into growing economies where we have good quality professional services / goods to offer and capitalizing on the growth there.
An interesting take on the Greek Debt Crisis by Michael Hudson.
Text and a video link, well worth watching.
Good link. Well worth watching. Thanks. Probably spot on. Scary.
@Mickey Hickey Joseph Ryan
My response last week to a query from K Whelan on CDS! Hudson appears to provide some empirics to me intuitive hunch … [btw Timmy G. still owes us €20 billion – who remembers?]
We often see graphs containing both GDP and GNP. Think we also need to see graphs with Vichy_Bank, Genuine Sovereign, and Aggregate so that we can continue to highlight The Conflationist Fallacy – and the Great Illusion of “OUR” Debt … and the Finalcialization of what used to be known as democracy.
Your gran_daddy would be proud of you! The Professorship of European Democracy awaits you at the Kennedy School of Government in Harvard.
This would drive you to joining the pessimistic club….
“As government figures questioned whether he could continue in office for much longer, Mr Berlusconi faced down renewed calls to resign and accused his opponents of betraying Italy. “As I sat at the table of talks here at the G20, I asked myself: Who else could represent Italy if I weren’t here?”
Delusional lunacy or ………
“However, recent growth trends indicate that we do have the capacity to grow despite the deleveraging. Of course, the wild card is the international environment. ”
The US is creating at best 100,000 jobs per month. Most of them low wage. many in sectors like healthcare. Deeply dysfunctional.
France is about to go embrace la grande austerite. The word looks so like Austerlitz. Italy is already in the hospital. Spain too. The UK ‘s Plan A is ****** . Big danger is an outright global recession. The bailout was predicated on international growth, remember.
So if we don’t get the growth where are we?
Then there is the credibility angle. Ireland has no choice but the markets just don’t buy the “leadership”.
And BEB and the way he might look at you with his ” Ireland is very different in having a much higher growth potential going forward”. Why can’t the Troika create a bond that sells with that message? Is it the PR that’s wrong?
Ireland is like an elderly relative placed in one of Dermot Desmond’s and JP McManus’s UK “care homes” . In need of emergency care but in reasonable shape otherwise last November.
For me the crucial element in the discussion is speed. How fast should we move?
John McHale says very clearly; “Although the nature of the post-bubble economy is such that we have no choice to make these adjustments, to limit the damage from austerity and bank deleveraging to living standards it is important to make these adjustments as gradually as is feasible. ”
I’d rather end the sentence with “as quickly as is possible”.
Today’s papers carry news of how the govt plans to squeeze more taxes and to cut spending year on year through 2015. Remember this “adjustment” started probably in late 2006 or early 2007 latest. Nine years of adjustment is going to create and amplify damage to living standards, not limit it.
With the news today, what business will invest in the domestic Irish economy? What family should buy an Irish house – even at current prices? Or should they wait?
This policy of slowly-slowly in response to our crisis will lengthen unemployment, emigration, and social damage. All it does is protect what David McWilliams would call the “insiders”.
The ECB is not going to withdraw funding of the banks due to not repaying ungaranteed bonds fully. That seems to be an accepted fact. If this is Russian Roulette it is being played with a empty canister.
So how would doubts about this cause a bankrun on deposits bringing down the banking system? The answer is off course they wouldn’t. Here is the sequence of events
Ireland decides to negotiate with the ungaranteed bondholders.
The ECB subsequently does not cut funding.
There are no bank runs on deposits.
In a cost benefit anaylsis it is clearly better not to repay those ungaranteed bonds.
Its very simple. 1
Billions of Euros for Job creation and growth or billions of Euro for people who funded a proerty bubble?
In my opinion your article conflates issues, and there is a fair amount of scaremongering thrown in as well. To take two topics:
Official funding has already been guaranteed until market access is regained (even if this extends beyond the original programme period) provided Ireland sticks to the programme. This was part of the Oct 26 conclusions. You refer to official funding as “uncertain”? Why? (Let’s assume that the EFSF can actually raise money in the smallish quantities needed for Ireland – and keep separate the issue of the EFSF in its entirety failing, in which case there are far larger issues to be dealt with). Do you think that if Ireland sticks to the programme the official funding is uncertain, or do you think that Ireland sticking to the programme is uncertain? I see no evidence so far that official funding will be withdrawn or that Ireland is not sticking to the programme.
We will never know whether it would have been possible to avoid paying this money, since the government has made no serious attempt to do this, notwithstanding all the election promises. The effort was abandoned as soon as the votes were counted. The ECB were totally against Greek PSI, yet it happened, since at a political level it was decided that for this issue at least, solvency is the responsibility of the EU Council and liquidity is the ECB’s job. The ECB is still providing liquidity to Greek banks. A “firewall” has been put in place to handle the resulting impact on banks. So given that a default of €100bn is going to occur and countermeasures have been put in place to minimize the fallout, it is not credible that a default on unguaranteed debt of €3bn would cause some sort of EU-wide banking system collapse, given the bank recap plans in place now.
This issue should have been approached as if it were related to solvency and not liquidity, and discussed at ECOFIN/EU Council level. However this was never done. In fact Enda Kenny has had no meetings with any other EU leader except for the odd side meeting at EU summits. His passivity is pervasive and worrying, and is frequently brought up in Dail debates.
In the case of Greece, Germany and the IMF did not simply defer to the ECB, but by insisting on PSI they correctly put the ECB back into their liquidity box, which is where the ECB belong. The Irish government should have taken a similar approach to the problem of the unguaranteed debt. The ECB will not simply withdraw liquidity from Greece just because they dislike the Greek PSI. In the same way the ECB would not have withdrawn liquidity from Ireland, just because they disliked “Irish PSI”. They have obligations to provide liquidity, and cannot simply set different rules for different countries. Now the Irish government might have failed to persuade the other governments, but it could at least have set the agenda, and made an intellectually coherent case in public and in private, even if this was ultimately rejected. Simply asking the ECB’s opinion (when the answer is known in advance) and then refusing to bring the issue up at ECOFIN level, is a weak and pathetic response to what the Tainiste called “economic treason” (before the election of course).
Your piece seems to justify the Irish government’s passivity on the EU stage, and its deference to the ECB, on the basis of fear that the ATMs might stop working, yet the ATMs are still working in Greece; also it fails to separate out the liquidity and solvency aspects of the problem, which is important, since different EU institutions are responsible. The government should be condemned, not comforted, in its approach to this issue.
Excellent post Bryan g.
This canard about ATMs is unworthy of anyone least of all the leader of the fiscal council. Even he admits its a bottle of smoke. So why John engage in this blatant political scaremongering?
Given that Ireland had made a firm decision to pay back the Anglo bonds in full and that Ireland had some reserves, did it make economic sense not to buys the bonds back at ~75 cents that they traded at all summer long.
What insider Frankfurt club bank made the cool ~€200 million profit between September and November. Could we not have done a deal with Michael O’leary or some such to buy the bonds at that time and split the difference.
Or was it better to give the whole profit to Goldman Sachs or Abramovich such like.
The most serious question to be asked is has Ireland completely lost it smarts when it comes to the real world. On second thoughts…don’t answer that.
Shouldn’t Eoin Bond be along by now to tell us about how after burning a small capital instrument in a bankrupt bank in a peripheral economy the entire Euro area would resemble an episode of The Walking Dead? Maybe he’s at Kilkenomics, sneering at such as vikram Seth, Karl Whelan, Faisal Islam and jeff Sachs..:)
Beyond the continual reworking of the same old issues on this list – to default on bonds and agreements or not to, fairness or lack thereof, deficit closure rate, and so on there is a far more important reality that gets little attention. The global economy is in a depression and there will be little or no sustainable growth for Anglo-American countries not endowed with high value commodity resources. There is abundant circumstantial evidence of disintegration of infrastructure in the US and elsewhere including Ireland. Rapidly rising logistics costs and stealth taxes are changing operating assumptions about the sustainability of globalised manufacture of food, consumer goods and industrial products. Climate change seems to manifest itself not as warming or chilling but as more energetic weather events with high disaster provisioning costs as Dublin residents have been recently been reminded.
Somewhere along the way the pressure to ‘join the dots’ becomes undeniable. In this new world of limits there is mounting evidence of the hubris of every government (not just the Irish state) in suggesting that that they can sustainably influence GDP/GNP. Those who have no vested interest in delusion (and some on here) have already concluded that Irish growth predictions are unlikely to materialise. As a small flexible state which retains the power to tax and reshape company law and which possesses many advantages including a huge diaspora and an extremely influential MNC sector, Ireland still has degrees of freedom unavailable to less fortunate states such as Greece.
I think it would be to the advantage of many contributors to this list to consider some exploration of the issues a deepening global depression raises for Ireland and to move beyond retrospective commentary and analysis on the ongoing antics of banks and of state and federal government agencies. Or perhaps I am in the wrong place!
@ Phillip II
“Maybe he’s at Kilkenomics, sneering at such as vikram Seth, Karl Whelan, Faisal Islam and jeff Sachs”
Eh, what? You’re getting to the point where you should probably stop posting on here, you’re embarrassing yourself more and more each time. You don’t even make a point anymore, you just seem to come on here to vent or whinge.
I’m a big fan of John Maudlin btw, so would love to be down at Kilkenomics.
@ Bryan G
Very good analysis but from which I would draw entirely different conclusions. As I have said above, the weakness in the presentation by John McHale relates to the involvement of the institutions of the EU. The ECB has not changed its opinion about PSI but the view the two major governments took of the Greek situation caused them to decide to ignore it. Or rather, France went along with German insistence in the matter as long as some of the funding responsibility was transferred to the EFSF. (As Colm McCarthy pointed out last weekend, you have to hand it to the French!).
In any case, the issue is not the view that the ECB takes of burning the bondholders that matters but the impact such a step would have had on the holders of other similar bonds and on their future willingness to invest.
I found the slides by Mike Dooley of TCD at the Policy/institute round table on 25 October and posted by Philip Lane very informative notably the charts at pages 11 and 23 on capital flows and bond spreads respectively. It would be helpful of they could be posted on a regular basis to see what view holders of capital and lenders are taking of Ireland’s progress. After all, the old joke says that the difference between an optimist and a pessimist is that the pessimist is better informed (or is it the other way round?).
On your comment;
“Let’s assume that the EFSF can actually raise money in the smallish quantities needed for Ireland – and keep separate the issue of the EFSF in its entirety failing, in which case there are far larger issues to be dealt with”.
If the EFSF cannot raise small amounts, it most certainly will not be able to raise large ones. In fact, what everyone appears to be ignoring is that the decision of the German constitutional court granting a temporary injunction blocking the “Neuner Gremium” of the Bundestag last Friday effectively renders inoperable the proposed bond-purchasing role which it is expected to take over from the ECB. In short, the stand-off in Germany between proponents of German economic orthodoxy and the need for actions to meet the needs of the situation continues. The idea that it is between an institution – the ECB – and the governments of the EZ17 is a fiction. The possibility of a “sudden stop of both market and official (whatever that means!) funding”, however, is not.
The proof of the pudding will be in the placing and pricing of the EFSF €3 billion bond launch for Ireland (next week?). The debate about burning bondholders and, for that matter, the public statement of the inability of the present government to create clarity with regard to its taxation and spending intentions, are but sideshows.
What is stopping Ireland or the banks from buying back undervalued bonds that they fully intend paying back? It seems incredulous to me.
Could the NPRF not independently make a nice profit knowing govt policy? Why give the profit to others? Who is preventing Ireland exercising reasonable discretion in this matter?
This is a good piece. Just some thoughts (not 100% thought out)
In 2008 the ECB forced a melding together of bank and sovereign debt. The two are now inextricably linked.
But banks (who generated bank debt)receive liquidity from the ECB at say 1% whereas states receive funding on debt markets at about 4%. This “spread” is being used to enrich the financial sector in a circular scheme. This problem can only be rectified when the rate charged by the ECB for banks to borrow becomes the same as the rate paid by states to borrow. I don’t know how to do this but until that is done there will be no solution. The financial sector are resisting this because this “spread” is their only way of making money at the moment.
Where this ties into the pessimism optimism thing is this – optimistic re the economy and pessimistic re the outcome of this banking coup.
@ Tony Owens
I hope your are not (in the wrong place that is).
Your comment is absolutely pertinent, the entire Irish “establishment” (i.e. public sector and organised labour) approach in Ireland being posited on the idea that the economic tide is coming in, and that all boats, even those overladen, will be lifted by it, when the very opposite is the case.
Cargo will have to be jettisoned, notably the Croke Park Agreement and the silly pretence that “official” social welfare, pay and pension levels can be left untouched.
So only public sector and unions comprise the establishment here do they? No bankers, developers, private sector protected species, politicians, etc? That’s good to know. Your right, we must BEGIN at the bottom of the economic heap, and work upwards….
Nice to see that there are a few serious economists in Ireland, while the rest are performing their stand-up comedy routines in Kilkenny.
Ireland should stick to the strategy outlined by John McHale (which is, of course, the one bequeathed by the previous government) since it is now clearly bearing fruit. After so much effort put into it, and sacrifices made, dumping it at this time, when it is beginning to pay off, would be final proof that the Irish are thick.
Competitiveness is improving dramatically, as evidenced by the dramatic and ongoing fall in Ireland’s comparative price level, which should go below the Eurozone average in 2011 for the first time. Ireland has had the lowest HICP inflation rate for 43 consecutive months.
This improved competitiveness is leading to Ireland moving back to the top of the EU15 growth league table, where it reigned continuously from 1988 until Q4 2007. Ireland had the highest EU15 increase in GDP between Q4 2010 and Q2 2011. The business PMIs for September were published yesterday, and again Ireland was at the top, being one of the few to show growth, while France’s, Italy’s and Spain’s were amone the many to plummet.
business PMIs for October 2011:
Unfortunately, the excellent news about Ireland’s growth contained in the October PMIs was overshadowed in the global media by our marxist Foreign minister’s declaration of war on the Vatican. However, when attention returns to economic matters, the fact that Ireland is moving back to the top of the EU15 growth league table is bound to hasten the day when the speculative bubble against Ireland in the bond markets bursts.
Of course, the picture is not all rosy. EU and UK growth is very disappointing. But, relatively, Ireland is now doing very well in relation to growth.
As someone who has persistently encouraged people to ‘look under the bonnet’, I find your approach and insights refreshing and very necessary. But we are very much in a minority.
You missed the quotation marks! The qualification implied might have been better spelt out by me. I was referring to those paid from the public purse. I have absolutely no objection to hitting the other categories you mention, and hard e.g. by way of increased taxation. But not to maintain differentials in pay and conditions between the public and the private sectors which are utterly unjustified.
The reference to “organised labour” is to the overlap between trade union representation in the public and private sectors and the largely irreconcilable objectives that the two wings are seeking to achieve under the banner “protecting frontline services” but in reality thier own salaries and perks.
Front page of today’s “Irish Times”
“SPENDING CUTS and tax increases amounting to €3.8 billion will be contained in next month’s budget, according to figures published yesterday by the Government. The adjustment is larger than had been mooted until the summer, but less than advocated by organisations such as the Independent Fiscal Advisory Council.”
“Cargo will have to be jettisoned, notably the Croke Park Agreement and the silly pretence that “official” social welfare, pay and pension levels can be left untouched”
And you’re going to have to bring the prices way the **** down. Way the **** down
And house prices wiill have to come way the way the **** down again. with all that means for the banks.
The PMI figures for Italy and Spain suggest negative Q4 GDP prints of -1.0% and -0.5% q/q respectively, or -4% and -2% if you want to annualise them, if we assume there is no major rebound in them this month or next, which given the backdrop of Greece etc seems a fair assumption. We’ll get even worse figures from Greece and Portugal, France will probably have something slightly negative, and Germany will probably be flat. Ireland is a bizarrely positive outlier in relative terms.
“What is stopping Ireland or the banks from buying back undervalued bonds that they fully intend paying back”
It’s not as easy as you think, and the gains on senior debt buybacks would’ve been much smaller than people realise, but it’s certainly something that should have been pursued a bit more aggressively. I can only assume the ECB did not want to set the precedent of having senior debt be susceptible to losses via a formal tendered buyback offer, even for a basket case such as Anglo. And there certainly would’ve been an impact on the other Irish banks abilities to fund themselves (no laughing down theback). You’d have to give investors a premium to the then-Market price too, so please let’s not think that we could buy them back for 60 cents ala Shane Ross’s suggestion, but we still could have maybe shaved €100mio off that redemption this week (you’d never get even close to 100 per cent take up without a coercive element, which we definitely would not have been allowed use). Better than nowt.
But back to your original question, on a broader basis – what makes you think we are not doing this?
McHale:…there are certain things we can’t control and they can’t go too badly.
David O’Donnel: …A weak political class is prone to influence from very powerful vested interests and this is facilitated by the subservience of a generally supine citizenry.
On the button!
Time for some ruthless radical realism on behalf of the citizenry John?
You have a deep sense of humor David.
John the optimist
Hmm…by your logic then Colm mccarthy, Karl Whelan are not ‘serious’ economists.. Here’s a proposition…try saying that to their faces 🙂
One thing that I found striking in you posting is the fact that you make absolutely no mention of the unemployment level . On that front there is no reason for optimism .Even if Ireland knows an export-led recovery ,it will not reduce much the unemployment level because the labor content of these exports is minimal .Exporting industries in Ireland are very capital-intensive and employ a small number of people (even though they are very well paid).The deleveraging of public and private debts can occur only if the domestic demand is restrained .In fact Ireland is fast moving from being a low saving rate country to being a high saving one .This is a necessity for any recovery ,but for a large segment of the population there will be no recovery at all since they will be stuck in long-term unemployment.
re But back to your original question, on a broader basis – what makes you think we are not doing this?
With a bit of luck you are right, though the impression I got was that there was another ECB unwritten prohibition that Ireland in its subservience was complying with to the unwritten letter of the law.
In Ireland we have the ability to manufacture facts that comfortably fit the current mindset. For example the Celtic Tiger would reign forever and the property boom was our reward for centuries of living in poverty. Now that we are staring at a mountain of debt we have difficulty accepting that reality. As we ramp up the debt month after dreary month we all rely on the model that says if the Government keeps priming the pump we will successfully spend our way out of debt. That is a very comforting thought. Iin the old days if you questioned the CT you were a “begrudger” today you are spoiling Ireland’s chances of recovery if you suggest the Government should wake up and smell the coffee.
The world economy is on soft ground as government leaders blame Greece for mounting unemployment. It worries me that countries which obviously have not so far been affected by the Greek debacle are so quickly reaching for PR straws that suggest their own economies are slowing because of Papandreou. As mentioned several times previously in comments the chances that external events will derail our Gov’t’s recovery plan are increasing by the month. I agree that balancing the primary budget is of the utmost importance. It is clear that in our weakened state we are in no position to survive even a world wide minor recession.
Are you by any chance referring to the purchase of Irish sovereigns at 8% plus yields with their Co-Co money?
Thanks for replying and for continuing to actively engage on this blog, it’s appreciated that you have a formal role now and even before you put your own name to your views. It would be highly mischievous if anyone were to attribute comments here to the formal view of the Fiscal Advisory Council.
With respect to the bank run “this year”, you can see the analysis of deposits this year at the covered, domestic and all-Irish banks here.
Maybe there was an inter-month bank run but it’s still not immediately clear what “close-thing” bank run you might be referring to.
With respect to the debt sustainability, this debate will roll on. But even if there is a primary surplus the legacy debt must surely be a relevant consideration. Nobody seems to question that Greece with a debt:GDP of 170% heading towards 200% is unsustainable. Somehow we seem not to have persuaded our partners that GNP is the more relevant consideration for Ireland and that on that basis we are near enough to Greek territory ourselves. It almost seems that the latest summit proposal which might see Greek debt:GDP to fall to 120% by 2020 was almost designed to keep Ireland (and perhaps Italy) from trying to present the begging bowl, but if we convinced our partners that GNP was the relevant base on which Ireland should be measured then we too might have been able to extract further concessions.
@ Overseas Commentator
“One thing that I found striking in you posting is the fact that you make absolutely no mention of the unemployment level.”
Absolutely. Well said. A bit of a blind spot to Mr McHale it seems.
“The deleveraging of public and private debts can occur only if the domestic demand is restrained.”
Deleveraging of public and private debts cannot occur together unless through outright bankruptcy/defaults or with a high current account surplus. This is our problem. We cannot generate a large enough current account surplus with the astronomical debt load that we have and with global economic activity rapidly detiorating. And even if we could we would still require much stronger linkages between the MNC’s and our domestic economy. Destroying the domestic economy is not a solution. Unfortunately too many, John McHale being one of the most vocal and influential advocates, think that it is. It is this that causes him to ignore the unemployment crisis. The unemployed are, lets face it, expendable.
Like it or not, a bankrupt country hasn’t much leverage.
At the extreme, those who advocate default seem to forget that the IMF, the lender of last resort, is already part of the existing web and thinking Republicans in the US Congress or China, would just allow the IMF take full responsibility for a country that rejected the European rescue, is fanciful.
David O’Donnell’s point on making private bank debt sustainable has merit but there is no ready manna from heaven for a still rich country.
Greece was what could be termed in the equivalent of an examinership situation, needing a second bailout; the argument that Ireland was sold out even though it was not at a terminal stage, is inevitable. But those in Ireland who argued for a referendum on bank support would have got the same reaction as the Greeks if the Government had went that route.
People who may never have made a consequential decision in their professional lives can easily propose ones without considering the downsides. Allowing banks to collapse in 2011 would have put tens of thousands of others’ jobs at serious risk compared with for example doing that in 2008.
In typical Irish fashion like the land annuties issue in the 1930s, the obsession with the search for scapegoats overseas allows people to ignore the issues that are within our own control.
A former Greek minister said this week that the value of the ECB’s support for Greece has been €230bn, including €50bn purchases of Greek bonds.
The narrative of the begging bowl is that eaten bread is soon forgotten.
There is little focus or interest on the challenges from changes afoot internationally.
It would indeed be a shock if a group of eight rich people put forward some radical proposals that could impinge on the world they know but in Ireland, there is little risk in arguing for the status quo.
The private sector Irish Exporters’ Association this week called on the Government to massively help companies develop business in the BRIC countries — as if non-commodity trade relations can produce results, if at all without years of hard slog.
When the median wage in America in 2010 was below €19,000 – – 50% of the workforce under that level – – why should Ireland with a problem of high longterm unemployment be immune?
The world’s third biggest economy, Japan, has 35% of its workforce on less than the Irish minimum wage, working as temps.
As for the fairytale that Ireland can build its own siege economy or theme park, CAP welfare has prevented depopulation of the countryside but has stymied the devlopment of our own natural resource base.
The typical farmer gets paid by Brussels and adds a few euros more. The insignificant turnover in land suggests the sytem provides a saitfactory living.
@Brian G on the old establishment canard that not paying off speculators will lead shortly to brains being eaten on the streets by panicked proles beside smoking cash machines:
Your piece seems to justify the Irish government’s passivity on the EU stage, and its deference to the ECB, on the basis of fear that the ATMs might stop working, yet the ATMs are still working in Greece; also it fails to separate out the liquidity and solvency aspects of the problem, which is important, since different EU institutions are responsible. The government should be condemned, not comforted, in its approach to this issue.
Crushing and irrefutable. Expect no response from the BondAid enthusiasts, other than humming and hawing about private commitments, the wishes of our European partners and networks of contracts.
@Eureka on the many ways that the EU is being run as a private sector bank support scam.
This “spread” is being used to enrich the financial sector in a circular scheme. This problem can only be rectified when the rate charged by the ECB for banks to borrow becomes the same as the rate paid by states to borrow. I don’t know how to do this but until that is done there will be no solution. The financial sector are resisting this because this “spread” is their only way of making money at the moment.
It is odd that this privileging of survival of the financial sector over the state does not get more attention since it highlights rather nicely who the show is being run for.
ECB Support? The oxymoron of the century.
More like here is a noose we made for your neck.
There is no ‘value’ to a temporary loan accepted on basis of blackmailers threat to implode your economy. And on conditions that put the country into a right wing straightjacket.
If the ECB really wanted to support Greece or Ireland, it would have come up with a bank resolution scheme that burnt private investors.
The ECB is the simply a bulldog for the Frankfurt bank club. They want their money back, the ECB barks, bites and does regime change if you try to vote on an issue that is uncomfortable for its bankers club.
When the median wage in America in 2010 was below €19,000 – – 50% of the workforce under that level – – why should Ireland with a problem of high longterm unemployment be immune?
You know better than most that America continues to suffer from severe trickle up policies making the median wage a misleading measure of the overall wage bill and thus the economic situation.
Not to say that we are not overpaid and underemployed but ubergeldwirtschaft and Euro-austerity will not correct that problem. The ECB with Christian Democrat Germany and its hangers on have primary interests other than us prospering, until we publicly recognize this the Irish policy debate will continue to be an embarrassing charade for “suffering until Merkel is re-elected and then suffering some more.”
After reading John McHale’s post three times my depression about the fiscal advisory council has settled right back in.
Deficit reduction today is not just a question of imposing hardship or not, but also how the burdens will be shared across generations.
Readers will note that this argument is somehow not applicable to the continuing bailout of unguaranteed bank bond holders.
We should not let (mostly misplaced) anger at the official funders blind us to the vulnerabilities of our situation.
The “mostly misplaced” is rather telling. No one outside of the European financial sector and interest groups or the political right of the Eurozone establishment thinks that the ECB has done a good job. The anger is in no way misplaced.
There are too many critiques of the ECB’s behaviour over the period of the global financial crisis to really go into, the last one I read was Brad be Long’s on the half hearted government bond purchase scheme, but under Trichet the ECB took narrow monetarism with Eurozone characteristics to absurdly damaging levels and it is only with his long overdue departure that there is any sense we might start to wake from the nightmare.
Banks are being supported because they have supplanted the cash economy. In the bad old days your average Irish town had two or three banks catering to 50 bars, 200 retail businesses, a few dozen doctors/dentists/solicitors and a hundred or so of the wealthiest farmers. The majority of people never saw the inside of a bank. The retail businesses sold on “tick” and were the bank for most people, Post Offices handled savings accounts without chequeing.
Today the vast majority of people have a bank account, credit cards, mortgages, loans, investment accounts. A collapse of our banking system would have serious repercussions because it would result in a return to a cash economy. Brigid are you saying we cannot spend what we do not have, Sean boy that is exactly what I am saying. This is a terrible turn of events Brigid we are exceedingly lucky that the ECB continues to fund our spending. Sean boy all good things come to an end and the ECB is not a river that will run forever
Every regime carries the seeds of its own destruction, capitalism had a brush with death after 1929. The mixed economies as in Scandinavia, Germany and Holland have given new life to Capitalism and no doubt it will continue to evolve. Governments and their banks will undergo painful restructuring, the impetus to effect change will come from the streets. The existing economic models are malfunctioning. The appointment of Mark Carney as chairman of the Financial Stability Board yesterday is a harbinger of change. Carney has made positive comments about the OWS movement and has indicated that changes to economic models are urgently needed. While he will be dealing with G20 banks primarily you will not see bank stability/sustainablility tests that result in a pass followed by bankruptcy within 90 days while he heads the FSB.
Would you be referring to a supra national body who might have a large stock of Irish bonds on its book & not only sovs- all bought at a discount.
Eh? Ok, think smaller and simpler than supra-national.
This report gives an interesting insight into the meaning of “official funding” and reveals what went on behind the scenes in Cannes. Once again Merkel (this time entirely on her own, as Sarkozy sided with Obama and Cameron) blocked any solution. The excuse on this occasion is that the Bundesbank would not agree to allow a portion of its gold reserves – linked to the SDR issue – to be used in the manner suggested, it being “independent” (so independent that no one in Germany sees anything evenly remotely odd in Merkel’s former economic adviser being appointed to replace Weber to head it).
As the story is being carried in Welt am Sonntag, it should provide an interesting opening to the markets on Monday.
The pulled funding of €3 billion for Ireland gets a mention and is described by one commentator as a “debacle”.
Having checked the Google Translate version, I find that it is fairly intelligible, if one bears in mind that in German the verb usually is at the end of a sentence. As this blog has taken a literary turn, one might say that we are in a situation up with which, as Myles na Gopaleen might say, the Germans will not put.
But what is left?
re The pulled funding of €3 billion for Ireland gets a mention and is described by one commentator as a “debacle”.
I am very curious about the EFSF ‘pulled’ funding for Ireland. Does this mean the Troika are going to get a bad mark on their card in January.
They are not keeping to their side of the bargain it seems.
Now, if I were on the negotiating team, I would send them a impolite reminder that unless they kept to their written side of the bargain, then Ireland would not be able to keep to the unwritten side of the bargain, ie.
‘The bit where the blind Irish donkey is able to interpret the ECB nod or wink or whatever to mean that we must empty the kitty whenever they say ‘Hup, there’.
This doesn’t reflect the true reasons why people were annoyed by your invocation of “bad luck” in your “Not so stupid” post on 21 August. I don’t think anyone is annoyed by your decision to acknowledge that “there are certain things we can’t control and they can’t go too badly” for the state’s chosen strategy to succeed. The single biggest annoyance is probably that this acknowlegement seems to have come so late. When late last year the state fully acquiesced to the ECB/EU/etc.’s demands it was, we all now confess, taking a big bet on the expectation that global recovery would be strong enough to allow Irish exports to cure all ills and cover all bills. (In fact it was taking a martingale on its just-failed bet that export-led growth would keep us off external assistance.) You spoke up to clearly support this decision. Yet your first indication that this was a big bet on global recovery seems to have come only well after rien ne va plus, in fact only when the horse began to visibly fall behind (to mix metaphors a little). That is not in any way to suggest that you had assured the Irish Economy audience that a strong global recovery was a sure thing, or even the safest bet all things considered. On the contrary, you seem to have omitted to state your odds on strong global recovery, and in fact to have omitted to draw our attention to the fact that this was an important, and uncertain, variable at all.
This was very notable in “Plan A*” of 12 February. Here you said that “four major sources of (diminishing) uncertainty  stand out” as making it unclear that ‘the plan’ would work out for us. One of these was “Growth”, so I will quote it in its entireity:
One has to squint very hard at this paragraph to find in it even the most tacit acknowledgement that our future growth rate is in the hands of not only the internal properties of the Irish economy, but also the prospects of a world economy which was (and of course remains) scarred with disaster areas of bad debt and malinvestment not all that different to our own, only sometimes much bigger. As one would expect, various people objected to this omission in the comments. I even asked you directly to please go on the record on the issue. No dice. Of course, the significant thing is not that you didn’t respond to someone’s question in a blog comment, but that the question had to be asked at all. By last February, even a bright Junior Cert. student asked to list five potential threats to Irish economic recovery would have been likely to put weak global growth in a prominent place. Further, a “substantial minority of market observers” (as @grumpy put it) were already saying that a strong global recovery was not only uncertain, but unlikely. To be absolutely clear, what is annoying people is not that you didn’t agree with this minority view, but that you failed to respond to, or even acknowledge, the view in a timely fashion – back when we were coming around to make a critical decision which was effectively, in very large part, a punt on the minority view being wrong – instead apparently discovering the issue only later, well after the decision was largely made in accordance with your advice. What adds to our annoyance is that this is by no means the only matter in which your advice seems to have followed a similar pattern.
@ Joseph Ryan
What can I say? I suggest that you read the Google Translate version of Die Welt article. It is a big tough world out there and, without wishing to appear condescending, I would suggest that this blog needs to pay more attention to what is happening in the world and stop the navel-gazing that is so evident in many of the contributions.
The fact is that the carpet appears to have been pulled from under the EFSF by Merkel and I frankly do not have the vaguest idea of what is going to happen next.
If this is the basis for your annoyance with me (or representative of the list), then all I can say is that I am a much harsher critic of myself. I take it as a given that people understand that for an economy as integrated into the global economy as Ireland’s, the potential growth rate is closely tied to trends in our export/FDI markets. This is central to the ESRI’s medium-term model, for example.
I welcome robust criticism of any ideas I forward here, but do you really need to personalise your comments to such a degree? (I am thinking more of the last thread than what you have written here.) None of us has a monopoly on wisdom, and a big part of the value of a site like this is that we should be able to have robust and respectful disagreements as we all grope towards the truth. It is a pity that many of the original contributors have given up. You mention grumpy above; he is not a bad example of someone who takes no prisoners in criticising ideas, but as far as I can recall never descends to the personal.
Thinking of the 14.4% unemployment and the thousands of emigrants does tend to lead to anger.
The govt have been handed the rule book to a really rubbish game. They’re doing well but it’s big picture time. Zero deficit and privatize everything. Let the “company” running the health service of Ireland raise money in the markets – not the government. A brave new world of international service providers competing for unborrowed tax payers money is what’s coming. Sovereign debt is just too dangerous
“…Zero deficit and privatize everything. Let the “company” running the health service of Ireland raise money in the markets – not the government. A brave new world of international service providers competing for unborrowed tax payers money is what’s coming. Sovereign debt is just too dangerous.”
Are you for real?
@ John McHale
‘It is a pity that many of the original contributors have given up’
That is, I suggest a reflection of the fact that so many economists were operating off the flawed ‘efficient markets’ paradigm, or were simply mediocre. As the saying goes, the dogs on the streets know now that much of the ‘science’ was pure ideology.
The economics profession has been captured by financial vested interests, with a consquent deterioration in its integrity and scientific capacity. The revelations about the shenanigans in the banking sector have unprecedented institutional implications. These are of the same order as revelations of clerical sex abuse had for the Church. Nothing that bankers, including central bankers say can ever be taken at face value in future.
We have had a reality check, and one which shows no signs of abating domestically or internationally. The usual nostrums are not working, because the debt deleveraging process is simply too powerful. The EZ core banks are in deep trouble, and the EC political leadership is not up to the task. DOCM
has been a very acute observer, and his comment above says it all.
As Tony Owens, anonym and other well informed commentators point out, there has been a fantasy abroad about Ireland’s growth prospects. The relationships between our FDI sector and our domestic economy are shaky by any standards, and the global skies are darkening.
Your pessimism is therefore entirely justified. It is your confidence in ‘official funders’ and orthodox economic theory which seems naive, and, in view of your official status, potentially hazardous to our state.
Integrity is worth little if it is not accompanied by independence of thought. As Keynes famously put it ‘When the facts change, I change my mind. What do you do sir ?’
While you seem to view me as being in a majority position, I have to tell you that from where I sit I feel I am ploughing a a fairly lonely furrow in the public debate. I grant you that there is probably more agreement with my views in the financial sector, often for selfish reasons. Some significant sceptism is warranted in that regard (though there are important exceptions, not least our own regular thoughtful commenter Eoin Bond.) I don’t think that it is a good thing that non-financial sector economists rarely engage in the public debate any more. I listened to some of the Kilkenomics earlier (from the Pat Kenny Show), and whether you agree with the thrust or not, I think you would have to admit it is a bit of an echo chamber. Don’t you think that it is better that those who believe that our best course is, say, the “adjustment with financing” strategy, while recognising the weaknesses, are willing to lay out the case and allow people to air their disagreements? Or would you prefer that it is driven underground and leave the public stage to the critics?
As to the Keynes dictum, I am a strong believer. Although I don’t expect that people follow too closely the twists and turns in my views, if you did I think you would see that, athough my basic framework (which I know you strongly disagree with) has remained fairly constant, when the facts change I do change my mind and will continue to do so.
The views of other contributors (former?) to this site are interesting in the context of this debate…..
You bring up the “reputation” defence. This too doesn’t stand up to detailed scrutiny. Anyone investing a large amount of their clients’ money (markets) or large amounts of their companies’ money (FDI) is going to be able to distinguish between “money you owe” (sovereign) and “money somebody else owes” (unguaranteed). Americans in particular do not understand why the Irish sovereign is assuming someone else’s debts when there is no legal or moral obligation to do so. What concerns prospective FDI project managers is the rapid decline of Irish educational standards, as evidenced in OECD league tables, for example, and the shortage of skilled staff in the ICT sector. So do you think an initiative whereby the unguaranteed money was invested in better secondary and third-level STEM teaching would be regarded as a worse response to paying back somebody else’s debts, by the typical American company strategy board looking at where and when to make foreign investments?
Ireland has had a reputation of punching above its weight in world affairs, however the intellectual timidity on display by the government is diminishing this. Many outsiders expected better than that.
re when the facts change I do change my mind and will continue to do so.
The way things are going in Europe right now, you may even have to fasten to your ‘change’ seat belt.
“I don’t think anyone disagrees that we need to make significant post-bubble adjustments”
Yes, but the “we” here means people in Ireland, but to whatever extent possible, some one else or another group in Ireland. At some point all the easy stuff will be done and the authorities will have to decide to double up on the easier targets or start taking on the more obstinate and powerful / influential groups. If that is not done – and politicians will be politicians – then there will be implications for the future economic potential and social cohesion of the state. This is not a trivial matter and I for one find it disappointing that there is no acknowledgement of, let alone attempt to frame this as a policy choice into the public consciousness, by the public face of economics in Ireland.
“Although the nature of the post-bubble economy is such that we have no choice to make these adjustments, to limit the damage from austerity and bank deleveraging to living standards it is important to make these adjustments as gradually as is feasible.”
I think you need to be careful here. Are you not in danger of reinforcing the already problematic fact that every one wants to delay the point at which they make any further adjustments. We did at one point have many economic pundits who were effectively saying everyone – the state included – had a duty to drag their feet over adjustments because Paul Krugman said it was the wrong thing to do and like the US, Ireland should just borrow money and engage in counter-cyclical spending. The difference of the capacity to borrow now appears to have sunk in, but the instinct to delay is still looking for a rallying call.
“Deficit reduction today is not just a question of imposing hardship or not, but also how the burdens will be shared across generations”
Are you joining in with the fallacy that no questions should be asked about how those burdens should be shared across different sectors of society?
“Moreover, a critical element of regaining market funding is that potential future lenders believe that a credible official lender of last resort is in place to give them confidence they will get their money back. ”
I think most investors realise that in the EZ context the German influence currently means that for states there isn’t one. The Euro is a hard but brittle currency. If states (except Germany) get a bit too much risk then as a bond investor you have cliff risk; the currency will not be softened to avoid a binary analysis.
“It is important not to lose sight of what a sudden stop of both market and official funding would mean: it is hard to see how it could not result in massive austerity as we have to close (at least) the primary budget deficit immediately and a likely collapse of the banking system.”
OK but you don’t say why you put that in there. If Italy goes down the swanee then efsf funds are gone. We know there is no side letter to the MoU obliging the repayment of last week’s unguaranteed Anglo bond if thats what you are getting at there, so where does this halt in funding come from in the context of your post? To be balanced of course you might like to mention that any such withdrawal of credit line would via the balance plus you mention, also present the whole question of an obvious opportunity to default on a lot of the debt outstanding which would alleviate the problems you refer to earlier. Note I am not advocating that, just pointing out a question of possible objective imbalance in your presentation.
“Similarly, I find it hard to understand how people can make such strong statements about the desirability of not repaying the remaining unguaranteed senior bonds without showing an awareness of how close we came to a full scale bank run earlier this year.”
Let me try to explain. You can make simple statements about the desirability of repaying unguaranteed bonds in banks that went bust (effectively) because it is a question of right and wrong – not just in a moral sense but also in terms of the way markets are supposed to work. By going along with market fixing to prevent even a token loss for investments made at way too high a price, with way too low an estimation of risk, that made available way too much cheap credit to an overheating bubble, the state is an accessory, an accomplice in reinforcing that type of behavior in future cycles and bubbles. The least it should do is extract a public instruction – an order – from the ECB or whoever the party responsible for this irresponsible behavior is. Finger them properly so market participants who are not carrying books full of EZ sovereign bonds can do the job of shining a light on and questioning those responsible. The Irish government is acting (if it really is following orders or threats) as a front man and cover. Show us the instruction. Show us the explicit threat, without that how can the market apply pressure? Please don’t think that people who object to the bonds being repaid at 100% don’t understand how close Ireland came to a proper bank run. I spotted the potential for and expected a bank run months before Anglo was ‘guaranteed’. A run on SpivBank then should have been allowed to happen. Maybe we also have a sense of how indefensible liquidity pulling in response to last weeks bond being explicitly repaid under duress, or even not being paid, would have been – and I do mean absolutely indefensible.
For what it’s worth, I find the subtext of the OP to be profoundly depressing. Of course it would be better to honour our debts, but what if we can’t? And how much pain can ordinary people be expected to take? there is, again, no discussion of alternatives, just that we must pay up or bad things will happen. Will bad things happen if we repay the debt, and are they worse than the bad things that are likely if we default?
also, we are supposed to accept that debt NOT assumed by government must be rapid by taxpayers. Not only that, we are told that this is capitalism!!! We took on other people’s debt so that private sector, sophisticated actors could avoid suffering the negative effects of risk. Risk, incidentally, that they freely assessed and were paid to assume.
The most depressing of all is the passivity of Ireland’s political classes. We wandered, or were pressured, into a full on bank guarantee, we went cap in hand to Europe and ACCEPTED a punitive interest rate as if our government had done something wrong, and now, we sit by while France gets access to funding that Ireland doesn’t have (it can recap its banks with EFSF funds apparently) and STILL they refuse to open a discussion on default.
We have to regain the upper hand. Greece HAS the upper hand because it is threatening to blow the whole thing apart if it doesn’t get some leeway. The Americans were told to take a hike when Geitner tried to influence the finance ministers’ meeting in Warsaw and it was ONLY when the US threatened to cancel US swap lines to the ECB (effectively destroying EU banks’ ability to offer trade finance) that they caved in. This is a big boys game but our politicians act like sheep. It’s tragic and infuriating
Two interesting examiner articles there. Haven’t seen comments from either author here for a very long time either echoing some comments earlier.
Can you explain the Anglo thing -I thought the bonds were unsecured. Irish Life brought their unsecured bondholders to the cleaners in august – did they get 20% ? And did I read last week that they raised some money somewhere afterwards.
So why did anglo not go the ILPM route on the unsecured?
The issue of why there was no buy-back of Anglo bonds is a good one to raise. It was raised in the Dail last week and here’s the answer from Enda Kenny himself:
This doesn’t make much sense to me, since Anglo is now just a government sub-entity, and the government as a whole does have the money, and stood to make a net gain. Buy-backs were part of the July 21 Greek deal, so procedures to achieve this had already been discussed and analyzed at EU level. For some bizarre reason, the government appears to position the ECB as the final arbiter of any and all debt reduction agreements, instead of ECOFIN/EU Council. The EU Council did not seek “permission” from the ECB for the Oct 26 Greek agreement, who were adamantly opposed to it. The Irish government appears to have acquiesced to the agenda setting strategy of the ECB, and accepted without question the ECB view of what role the ECB should have.
On your willingness to change your mind if circumstances change, I wonder would recent events and pronouncements alter your view….for instance, I note that Angela Merkel has claimed today that it is going to take a decade to fix the euro problems…
“German Chancellor Merkel said there was a lot of work to be done to solve the crisis and it could take a decade before the euro zone was in a better situation.
“(It will) certainly take a decade until we are in a better position again,” Merkel said in her weekly podcast on Saturday. “We have a whole chunk of work ahead of us, I’ve got to say.”
Firstly, a crucial change since we signed the MOU is the fact that the ECB and the major political players have accepted the need to haircut sovereign bonds in certain circumstances and secondly, it is apparent that the ECB threat to turn off the Emergency liguidity supply is not credible , a point,I think, Brian Lucey makes in the article linked above. This threat has not been made to Greece and it is only in recent days that a threat to eject them from the eurozone has arisen.
If Dr Merkel is correct, is it not the case that a lost decade awaits us and it would be wise to rethink our national strategy in the light of the deteriorating
Would those Ameticans be the same guys who lobbied for no default on seniors so as to protect their banks.
The policy of the Irish govt has little to do with reputation & all to do with realpolitik. When u owe the ECB what we owe and depend on the Trioka for on going funding, it tends to govern your behaviour. You try to pick your spots to renegotiate a rotten deal.
What other defence is there? No one owes us a living! The penny has even dropped with the French.
The idea of Ireland punching above its weight is the construct of those involved and has no basis in reality. The country is broke! If we were capable of punching above our weight, it would not be.
There is one simple equation that needs to be addressed by everyone paid from the public purse e.g. in education. You can have fewer staff at the same salary or the same number of staff paid lower salaries in order to match the available funds to needs.
I consistently make the point that Ireland’s situation needs to be set in a wider European and global context. We cannot dine à la carte and pick out individual elements for technocratic debate. One would believe from the level of public discourse that we were inhabitents of a South Sea island and believers in a cargo cult. This attitude could be summed up in the phrase “keep the grants coming!”.
P.S. Other German papers are now picking up the Die Welt story. Another interesting weekend in store with every bolt shot and nothing left but to await the reaction of the markets!
Merkel’s position is described as “ambiguous”!
Sure Sarko is telling les francais to adopt l’austerite but where is it all going ?
The IMF don’t agree with the strategy of the ECB. Neither do the markets. Yes it is a cruel world out there but players have interests to defend too.
Barclays are warning of a major bank collpase if things get much worse. I can see more than a few insurers going to the wall if that happens. Have you ever read “the March of Folly” by Tuchman ?
Only a decade? At least Merkel is predicting stagnation rather than collapse? But she has been wrong on every count hitherto and there is little reason to believe that she is not wrong on this.
@ John McHale
Fair enough. I recently read Michael D’s collection of speeches, one of which concerns the role of public representatives. The integrity of our state is gravely damaged, and we are in dire need of people who are willing to acccept meaningful responsibility. Paul Hunt is a shining light on this board.
Our media are mainly in private hands. The moguls made a bomb from puffing up the property boom and the celebritry culture. They plan to make another packet from sellling resentment, jealously and hatred to those who feel betrayed by the crash. These are cynica b******s, who need to be recognised for the serious threat that they represent to democracy.
Kilkenomics has its place, but this is going to be a long haul. Ireland has fundamental development problems, and a dual economy. If we want to escape our fate as a supplier of emigrant labour, we need to get our critical, and constructive, capacities going on all four cylinders.
If you can promote that spirit in your public work, you will do the state some service.
Germany can bury plenty of gold in the black forest to recover it intact in years to come.
If you bury a Mercedes or BMW because you can’ t sell it anywhere, there will not be any recovery value.
Merkel does not seem to understand that. Neither do the Frankfurt/ECB fundementalists.
re Bond buying. There are suggestions elsewhere in the thread (@BEB), that ‘Ireland’ may not be at the full loss of the bonds. Who knows. Its all very exasperating.
What would stagnation for a decade do for our plan. Surely we would end up with a lot more than a 118% projected debt GDP ratio. Maybe Dr.Merkel is wrong, if she is,then I can only mean a worse outcome. The new austerity plan for France does not auger well. I get the feeling that we are in for a very rough ride.
You are harsh on Angela, however, I think she is doing a good job protecting her national interests. I suppose it’s all down to the golden rule…..
Ominous warning to Silvio?
Can’t you feel it…that’s confidence falling away from the Euro.
It’s fatally damaged now. Only a matter of time….
This is the end game! Hope it happens in Spring when we won’t need so much oil.
It will be messy. A bank run or two or three. Countries will have to start printing currency piecemeal (or start with an IMF printed currency (there’s a thought)). Ironically we might be one of the last countries to leave the Euro (we’ll prolly do it when our competitiveness is slashed by our liberated neighbors.
So the world will change – anythings possible
If Geithner blocked the IMF recommendation last year then this should have been exposed and highlighted at the time, on the basis of “documenting the disagreement”. Of course Geithner has done a U-turn in the meantime, but through passivity and lack of initiative Ireland was not in any position to benefit from the new circumstances that apply today.
Yes perhaps there is a stealth buyback program in operation. Maybe the 10yr 14% to 8% yield drop was as a consequence of buy-orders originating in Government Buildings?
ILP took their subordinated bondholders to the cleaners in August, not their senior bondholders.
Eoin bond / John mchale
Will you accept that there is NO threat of funding withdrawal of we let Anglo go? If you wot, it’s up to you to show evidence, not surmise, that the ecb has a credible threat.
You urged in the fiscal council a faster adjustment than the govt have now suggested. Would you not see the 3.8b being augmented to 5b by the state not paying the January 1.25b next unguaranteed unsecured Anglo bond? Eoin bond?
The articles in the German newspapers on the Bundesbank gold reserves remind me of the British gutter press. Knowing that the German middle class are outraged at the fraud, deception and corruption practiced by the Greek Gov’t in order to gain entry to the EZ. The newspapers are now simply stoking the fires of outrage so as to sell newspapers. This is a tempest in a teapot that will not move markets.
Since I think most people on here know who you are, why not use you real name?
As you know, I am not on here representing the fiscal council. But, on a technical point, there is a world of a difference between lowering the deficit (a flow) and a once off reduction in the debt (a stock). At a five percent interest rate, a €1.2 billion reduction in the debt has a permanent flow value of €60 million. To think about it another way, we got the news last week that the debt is actually €3.5 billion less than previously measured — about the amount of unguaranteed unsecured debt left in Anglo/INBS. This is a huge amount of money, but scale of our fiscal challenge still did not look much different in the morning. Now if we could have magically knocked €3.5 billion off the deficit . . .
Apologies, I missed your first post. To be honest, I am not really sure how to respond. Unlike you I have very few certainties about the future. I have said before that my guess is that the ECB would not withdraw support, but I do know I am not the only one who would have doubts — and that is enough to do serious damage. I also don’t have to tell you that there are other ways that the ECB could impose a cost in the future, including the interest rate that is sanctioned for ELA.
“Ominous warning to Silvio?”
We can expect more negative comment about Silvio being played out in public over the coming days (rather than the threats made in backrooms up until the point where Merkozy laughed when asked a question about him at a press conference – they realised from the media response that it might be a means to an end).
The Frankfurt Group want rid of both George and Silvio and they don’t much care how they achieve it.
John: I don’t know who you think I am but if it’s whom I think you think your incorrect.
As I have said Before I’m not spartacus
To your point. Knocking down the flow (deficit) now faster will reduce the later stock. A permanent cut of 1.2b extra in the deficit would be more useful than a windfall to bond holders I’m sure we will all agree. So…
NYTimes on Greek Denial
Increasing the ela rate from its (at present ) cheap rate , to “punish” Ireland for not paying a private debt would, in effect, lock down the banks as well as cutting it off. You know that and you know it won’t happen.
@ Phillip II
It’s disingenuous to suggest that ECB funding removal or the implosion of the bank funding system are the only issues we have ‘warned’ about, though life is not so simple or black and white as to be able to put a % on it’s probability, but it certainly would nit be zero. As we saw this week, Germany and France threatened outright that Greece would be forced to leave the Eurozone if it held a referendum and voted no to it, the whole charade turning out to be nothing like the democratic endeavour you first were getting so excitable about. It therefore would be somewhat heroic to completely rule out the ECB turning ugly on us given the reaction this week to events in Greece. In fact, in one of the lengthier responses to your repeated child-like demands that I answer your inane questions, after stating quite clearly that it was unlikely that the ECB would pursue the nuclear option, I pointed out that bank funding would simply get more expensive and difficult to source, and flexibility shown by the EU/ECB on other issues would likely become much more restrictive. For instance, we’ve already saved c.€10bn on EFSF/EFSM funding costs as the result of ‘playing ball’, something which may not have been as forthcoming if we were continually lobbing grenades at an already creaking Eurozone banking system. We can further reduce the impact of the promissory note by a similar figure by restructuring it into a longer tenor at a lower rate. Further, Noonan & Co are looking at other ways in which the EFSF can be used to ease the burden of recapping AIB. I’m sure we may be granted some flexibility over the pace of deleveraging the banking system if it is required a year or so from now if we are still hitting other fiscal targets and generally keeping to our side of the deal elsewhere, which such flexibility having the potential to save us a significant amount of money given the scale of asset sales that has been demanded of us. Again, making our banking system a constant area of instability will not help with such endeavours.
But let’s even look at the cost of funding our banking system – it’s still got a nominal balance sheet of €525bn+ within the covered bond group, and is still gonna be over €400bn post-deleveraging. Do you think that defaulting on Anglo Irish debt may cause some sort of ‘Irish premium’ above and beyond what’s there already, on a semi permanent basis? Like let’s even say something small like 25bps. That equates to roughly €1bn in increased funding costs per annum for the Irish banking system. Some of this will remain in Ireland, but will still represent a transfer from people with debt to people with savings, something we need less of and not more of. Much of it will flow out of the country.
For goodness sake. Surely it’s time to stop blaming the banking and financial sectors for making out like bandits as they pushed against the open door of light to non-existent supervision and regulation and of governments demanding growing volumes of apparently risk-free credit to finance their policy ambitions and their voters’ desires.
The configuration of EU national politics means that the ECB is neither willing nor permitted to use its balance sheet to address national bank system insolvency or threatened national insolvency. It can only provide bank system liquidity – as it is providing for Ireland – and, in association with the EU and the IMF. some sovereign funding support.
It is unfortunate and unfair, but there is no point moaning about it. And it makes it all the more pressing to pursue meaningful structural reforms to boost economic activity and future economic performance.
But it is a lot easier and much more comforting to ignore these and to behave like Harry Enfield’s much put-upon teenager character- “It’s sooo unfair”.
The FT say Anglo and TAFKA IrishNationwide have another EUR 2.7bn in senior unsecured nonguaranteed bonds maturing next year
So is that all going to be repaid in full ? Have prices on these moved in the last week ?
@ PR guy
It all comes down to values.
@Minister Michael Noonan
Deputy Noonan said in the Dail last December:
“What legal or moral compulsion is there on Ireland to honour in full debt incurred by Irish banks when there was no State involvement in the arrangements? These loans were entered into freely by willing lenders and borrowers with absolutely no State participation. The interest rate charged represented the risk at the time and there never was a State liability. It is obscene that the liability for these loans is now being transferred to the Irish taxpayer, in many respects to the poorest of the Irish taxpayers… What a disaster and an obscenity… The position has now become indefensible that the Irish taxpayer, even the poorest taxpayers, should be required to underpin the speculation of hedge fund investors. There must be transparent, open, negotiated burden sharing of bank debt.”
[h/t Stephen Donnelly, Independent TD]
Time for a memo to Tim_een G Michael? Tim_een Hedgie pals are the only ones still smiling after Cannes, other than Tim_een that is.
I haven’t a clue who you are; anonymous with a bit of substance or even salt is ok with me: are you either?
Waiting for the onslaught on the Gauls, post the barbarians sacking of Rome yet again, at which time the leaders of Germania might see sense and release the power of the Ferengi in Frankfurt. Bad ol days for the Federation when we need to rely on the Ferengi ….
@ Mickey Hickey
The FAZ could hardly be considered part of the German gutter press and its coverage in its Sunday edition is the most comprehensive (see link below). What is certain is that the wall-to-wall coverage is part of deliberate leaking the source being almost certainly the Bundesbank. Target 2 balances and Professor Sinn also get a mention.
And wages are still falling in Germany. The policy giving rise to this phenomenon could best be describe as demented.
The 1.25bn Anglo January 12’s are at 93.5 cents right now, they been gradually moving up over the last two months after a big spike at the start of Sept, but no real movement this week, the redemption had been fully priced in since the middle of Sept.
@ Paul Hunt
“But it is a lot easier and much more comforting to ignore these and to behave like Harry Enfield’s much put-upon teenager character- “It’s sooo unfair”.”
The Greeks were essentially given a lesson in this this week – far from actually wanting a referendum, they were horrified at the thought. They were content to complain about the unfairness of it all until they were asked to vote for the alternative.
Not seafood obviously!! Damned iPad autocorrect…
C. McCarthy on Sunday Morning
The resources to deal with the financial panic in Europe are already available to the European leadership. When sovereign bonds cannot be sold and banks will not lend to one another, decisive intervention means that Europe must deploy the central bank balance sheet, not the balance sheet of the Chinese, the Brazilians, the IMF or Oxfam.
The design weaknesses in the eurozone which have helped create the crisis are now inhibiting its resolution. The principal design weakness is the absence of a proper central bank with explicit obligations to ensure financial stability.
Ferengi Time …
Just in case Marc Coleman of the Sunday Independent looks in on these pages, he might like to note that PASOK came back to power in 2009.
New Democracy, our version of FF/PD, came to power in 2004 and lasted 2004-2009, being relected in 2007. Like our own FF, the proceeded to bust the country, and cook the books.
Blaming Papandreaou for the current Greek crisis is wide of the mark.
The Greeks were given a lesson all right. Your reading of the lesson may be not be the way history views the lesson.
History may say that it was a lesson in imperialism. A lesson will not be lost on other Europeans.
It appears Pap never intended on there being a referendum, it was all a ruse to get the opposition to sign up. He is not the democratic hero that many on here had lauded him to be, he’s simply a pragmatic politicians trying to push through an unpopular deal whilst giving himself some political cover so that his legacy cannot be destroyed completely. You can argue whether this makes him a ‘good’ or a ‘bad’ guy, I’d suggest something in between.
It should also be noted the PASOK was in power for a ling period before 2004, when a lot of the debt problems began to be baked in, including the cooking of the books to get them into the Euro. That’s why many people would suggest that a large element of Greek society, of differing political persuasions, was fundamentally crooked.
@Bond Eoin Bond
Aw c’mon Eoin … ‘… it was all a ruse to get the opposition to sign up.’ You have to admire the political tactic and the balls to pull it off …..
The key secondary effect was to highlight the dictatorship of MerKozy and the further financialization of EU democracy – the frankfurter allegemeine put it well – democracy downgraded to ‘junk’.
In many ways the response of Merkel/Sarkozy similar, in procedural terms, to the rabid local establishmentarian partitionist response, led by the dinnyob press and the sindo, to the entry of Martin McGuinness to the Presidential race.
One could continue with the timing of the poltroon of A-Generals’ entry to the referendum debate and the secondary effect to highlight that the primary purpose of the system of law/justice around here is to protect the upper_echelon establishment at all costs. I could go on, and on …
text from Blind Biddy: On the way out of Cannes, after sorting out the middle east, I saw something very shiny dumped inside a ditch – stopped to explore: a beautiful butter-box gilded in solid gold with the initials “N. S. Saviour of the Free World” – strange … popped it in the boot. Home soon … picking up a few dispatches from Patricia the Irish_Sovereign_in-exile …
neat graphic on values – looks like we need more protestants – Weber might have been onto something – very foolish of us to lose our own ..
… on point above re values of many in Irish partitionist establishment: a classic of the genre from A Professor Emeritus of Modern History at University College Dublin
Political Economy has a long way to go ….
Tog go bog e..!
Now…you “seem” to me to have moved from: ECB will cut us off to ECB will charge is more to markets will charge Irish banks more because one bank failed. I think I and many others would love to see what th reality is.
You state ”
Do you think that defaulting on Anglo Irish debt may cause some sort of ‘Irish premium’ above and beyond what’s there already, on a semi permanent basis? Like let’s even say something small like 25bps.”
The issue is do you! You either do, in which case the question is why can you not, you as in a market participant, distinguish between solvent and failed banks without a geographic overlay, or you don’t in hich case….
I submit that if the market cannot distinguish between a covered guaranteed bond by BOI and something issued by INBRC/anglo Then we are all in thrall to fools.
On pasok….the Greek debt/GDP ratio, from what I can see, exploded from about 100 in 2004 (when pasok lost power) to 130 region by 2009 when they gained it back. Yes, they have a lot to answer fro but the collapse took place off their watch.
Btw Eoin, your market participant perspective us very valuable so keep it up!
This was good :
and has a link to this
“The money can be found to pay this bond, however, and the next eleven on this list, and the €20bn due in 2012, the €17bn in 2013, the €25bn in 2014 – who from?”
Just wondering what the masterplan is for all these bank bond redemptions, assuming it is accepted that they have to be met. Are the banks supposed to deleverage? By when? What is the best estimate of the size of the total required Irish banking balance sheet post crisis – ie how much would be sufficient in any new equibrium if the bloated boom size was say EUR 500bn ? EUR 300bn ?
I thought Ireland was a bit far south on the map and was wondering if the Boom hadn’t made it a bit more Weber style Protestant in outlook .
The Greeks were given a lesson all right. Your reading of the lesson may be not be the way history views the lesson.
History may say that it was a lesson in imperialism. A lesson will not be lost on other Europeans.
Just so, there is now important work to be done in making sure that Irish politicians and civil servants become less confused about the division of their interests between Ireland the the institutions of the EU.
Why did you have to ruin my Sunday by making me read one of the many mini Niall Fergusons filling out the belly of Irish history departments?
We took Irish historians out of the British conservative establishment, but we never took the British conservative establishment out of Irish historians.
Not sure if this really belongs here, but the Observer has a report today about the ‘G-Sifi’ list – “global systemic important financial institution”.
“Some banks will be disappointed not to be on the G-Sifi list for regulation”
A quick bit of googling finds the report here:
And the list of institutions here:
For which the resolution-related requirements will need to be met by end-2012
Bank of America
Bank of China
Bank of New York Mellon
Banque Populaire CdE
Group Crédit Agricole
JP Morgan Chase
Lloyds Banking Group
Mitsubishi UFJ FG
Royal Bank of Scotland
Sumitomo Mitsui FG
With a note at the bottom:
This initial list is based on the methodology set out in the BCBS document Global systemically important banks: Assessment methodology and the additional loss absorbency requirement, using data as of end-2009. The list of G-SIFIs will be updated annually and published in November every year. Therefore, the list will not be fixed – there can be new entries and exits every year and the number of G-SIFIs may change. The BCBS methodology will be reviewed every three years to capture changes in the banking system and progress in measuring systemic importance. The present list contains global systemically important banking groups; future lists may also contain G-SIFIs that are not banking groups. As from November 2012, the published list of global systemically important banking groups will show the allocations to buckets corresponding to the level of additional loss absorbency they would be required to meet had the requirements been in effect. The additional loss absorbency requirements will begin to apply from 2016, initially to those banks identified in November 2014 as globally systemically important using the allocation to buckets at that date.”
I’d be very interested in opinion on this development.
I suppose in particular about how this means our globally non-systemic banks to be treated.
Richard Portes of the LSE …”in good faith, the authorities believed that Greece could grow out of its problems. They were wrong.”
Could they be wrong about us?
It also appears that Trichet did threaten the Greeks with withdrawal of liquidity support for their banks.
Alice in Wonderland?
From NYT article…
We’ll probably never know Pap’s thinking. He is entitled to panic and make up reasons afterwards. He’s in a desperate situation.
Psychologically a dreadful image and undermines the Euro’s credibility completely. that meeting between him and Merkozy will be one of those defining moments in history. Nothing showed up their weakness quite like that attempt to appear strong.
Body language at G20 bad too. A lot of worried faces. The angloamericans are cutting loose from the Eurozone. China will give it a wide berth. I think they’re trying to force the position where the German taxpayer will have to pay up. They won’t.
naw – the so called boom was more of a throwback to the atavistic land-grabbers of the mid to late 19th C who morhped to the gombeen grabbers of the mid 20th C and their upper_echleon offspring [e.g. certain emeritius profs of history and poltroons of a-generals] who reverted to the even more atavistic land grabbers of the early 19th who dumped all their debts by clearing the peasants and the spalpeens from the wheat fields in favour of cattle ….
Apologies for that Shay … fair sickening alrite …
“FROM the beginning, Mr. Trichet of the European Central Bank privately warned Greek officials that the European Union would cut off funds to Greek banks unless the nation agreed to austerity measures.
“You are not getting any help unless you implement your cuts,” Mr. Trichet told them bluntly, according to a witness to the discussions. Rather than help matters, the stance fed a broader panic in the financial markets.”
To what extent is the ECB allowed to demand FISCAL measures as a prerequisite to providing liquidity support to private banks.
This seems a terrible mixture of public and private
Where to put the comma in the Nicene Creed?
Coup d’état in Europe…..
It gets more chaotic…..from an AP report
“Government spokesman Elias Mossialos told state television Sunday that talks have begun and the name of the new prime minister should be known by Monday, in which case Papandreou would resign. Mossialos later told The Associated Press that his remarks regarding a new premier expressed “a personal wish” and were not an official announcement.
Samaras’ party denied any talks were taking place “either in the open or behind the scenes.”
The socialists and the main opposition New Democracy differ on the duration of such a caretaker government, with the opposition demanding elections within a few weeks and the government saying the coalition Cabinet should last through the end of February.
I read this blog daily when it was started but stopped because I was too busy. The quality of the debate has declined precipitously since then. It is possible to set up a comment system in which only “promoted commentators” who have previously made useful comment can be seen. Normal comments you have to choose to see them. I miss people making well reasoned arguments backed up with facts
“It all began with a blazing row at the Old Opera House in Frankfurt on October 19 that spoiled Jean-Claude Trichet’s farewell party after eight years as president of the ECB.”
I have to differ with the author of this article in one area.
The idea (to form this group and ‘save’ northern-central Europe) was Trichet’s and on member of the Frankfurt Group described it as his ‘Parthian arrow’. The idea was mooted before the opera house meeting – to be discussed there – and is one of the reasons Sarkozy was there rather than with his wife as she was giving birth. The report about them wearing security passes with the words ‘Frankfurt Group’ on them at the G20 when Obama/Geithner were present is true.
Getting back on thread – If you want some pessimism have a read of CG in the Sunday Times today.
Can’t get it. What’s the gist…
“The main reason for the increase in the size of this year’s adjustment is the fall-off in economic growth in Ireland’s main trading partners over the past few months, leading the Government to revise down its estimate of growth next year from 2.5% to 1.6%. It has also lowered its average growth forecast for the following three years from 3% to 2.8%. ”
2.8% sounds as likely as Kilkenny winning Sam if Merkel reckons it’s going to take 10 years to clear up the mess.
At the risk of belabouring my point: that Ireland is a small, open economy etc. is understood by everyone in this country, from the ESRI to Joe’s callers. I can’t imagine anyone blaming you for not reminding us of that (and in fact I’m sure you probably did). What some people could indeed have done with was a timely reminder of just how much this specific plan raises the stakes on a very favourable outcome globally. Under normal circumstances, after all, the openness of Ireland’s economy means that when the world economy is weak, Ireland’s economy is weak. Under Plan A, if the world economy goes weak, Ireland death-spirals. (I admit that the Irish economy being in a normal state is something of a hypothetical concept…) But what really cried out for some timely attention was the question of how likely we were to get the strong global growth required for Plan A. The answer to that question was of prime importance; not obvious; not apparently obvious; not uncontroversial; and not some great imponderable about which nothing much could be said. We needed the loose equivalent of financial advice or financial analysis facing into this “business decision” – which is not the same thing as the equivalent of “prices may go down as well as up” boilerplate.
Have to agree…it’s a bit of Alice in Wonderland.
With the Fed lowering expectations, Europe in chaos and Asia slowing down we will be lucky to see 1% growth.
But then we can live in hope…a bit of the “keep her going Patsy” mentality.
Just watched Pat Rabbitt saying we were going to get back some of the private losses “imposed” on us. He didn’t say how or when.
More live horse and you’ll get grass attitude I suppose.
Breaking news IT
““It was a requirement of the European Central Bank. The Minister for Finance did his best to get out from under that.”
“The ECB was trenchant. It is providing the blood transfusion that is maintaining our economy.
He said the concession may come through renegotiation of the promissory note of €30.8 billion for Anglo Irish Bank and the interest on that sum which will rise to an additional €17 billion.
“What would have been gained from a haircut in this particular bond would have been negligible in the context of ECB funding and in terms of our expectation of what we can achieve in our ongoing negotiations,” Mr Rabbitte told RTÉ Radio today.
He said given the burden of private debt that had been imposed on the public purse, it would be reasonable for the Government to have an expectation of a quid pro quo in the short or medium term.
Asked what kind of reductions the Government would seek, he did not specify a sum but said: “There’s €30.8 billion committed to promissory notes.
“That’s about €3.2 billion per annum for 10 years. That’s a horrific burden on top of
fiscal adjustment. The Minister for Finance is focused on that. He has put proposals to institutions in Europe; Frankfurt [where the ECB has its HQ] is well aware.”
“With the burden of private debt imposed on us, it is not unreasonable to expect that there will be an alleviation coming elsewhere,” he said.”
I’d prefer more than a “reasonable expectation”.
@Ceteris/ PR Guy
re Cout d’etat, the reuters article.
Coup d’union, without doubt.
Surely Draghi did not wear one of those Frankfurt Club badges. If he did, then he is no longer independent.
Still to get back to the thread and despite all the pessisism in the air, there are some grounds for optimism. Having read the NYT article it is clear just how much damage Trichet has done to Europe.
Trichet is now gone. That is the best news of the year. There is now hope that the new man will try to fix the problem instead of making it worse.
Trichet proclaimed independence while acting as an enforcer for the French and German banks.
Draghi hopefully will be different.
How do you decipher that quote
“I have a great admiration for the tradition of the Bundesbank”.
Not a ringing endorsement I would say.
Not online but Markus Städeli in the NZZ, the house paper of Zurich banking , says the austerity cure is threatening to kill the patient, that it has had 2 years to work and 14 summits- and that all failed and the Germans have to cop on and let the ECB print money.
“In order to solve the crisis Europe needs a massive dose of pragmatism. The time for discipline and reform comes afterwards. ”
Good man yourself, Markus .
re Markus Stadeli.
Perhaps-‘even the bankers are bleeding’.
It seems appropriate to insert Colm McCarthy’s excellent piece in the Sindo at this juncture.
One quibble in relation to the following.
“The package was also driven by the over-riding objective of minimising bank recapitalisation costs for the French and German treasuries and included use of European funds to mitigate those costs”.
This ignores who the major contributors are to the EFSF, as I have pointed out in an earlier comment with a link to the EFSF Q & A. The real explanation lies in the haircut being imposed on Greek private creditors which will inevitably require recapitalisation – the 30 billion – of Greek banks. We know the impact this has on the existing shareholders of banks when this happens.
No wonder there are high jinks in Athens!
@ Disgruntled Observer
“Destroying the domestic economy is not a solution. Unfortunately too many, John McHale being one of the most vocal and influential advocates, think that it is. It is this that causes him to ignore the unemployment crisis. The unemployed are, lets face it, expendable.”
We are 3 years into the unemployment crisis and it is difficult to find any serious discussion of how it will be solved. There is a tacit acceptance of high unemployment and emigration by the political class which is as old as the State.
Appaling weakness here
“With the burden of private debt imposed on us, it is not unreasonable to expect that there will be an alleviation coming elsewhere,” he said.”
He not being Michael noon an mind, but ‘demiwble’ pat rabbit..
Pet rabbit more like
@Markus Städeli (h/t seafoid)
Great to see Kantian Pragmatism alive and well in German Banking – Professor Habermas will be pleased; Herr Professor Sinn, as usual, will have some difficulty distinguishing the wood from the trees; little wonder Professor Weber now teaches in the U.S and chairs a bank in Switzerland.
Now if we could only witness an outbreak of Kantian Pragmatism in the political class across the EU, and in the ECB, as in Walter Hallstein’s views while first President of the EU Commission and a signatory to The Treaty of Rome, we might escape all this Guallist Franco_German nonsense and Europe might find its powerful democratic centre and the periphery would surely hold.
Wonder are there any Kantian Pragmatists in Mayo? or Limerick? or Belfast? or Dublin? Or the modern history department in UCD (Margaret McCurtain Emeritus excepted of course – a true Kantian Pragmatist)?
I think the situation is crying out for someone who can address the Germans auf Deutsch and tell them that he or she hears their righteous pain but that for the greater good of Deutschland there is going to have to be a departure from the script. The German lesson from the great depression is you don’t allow inflation. The lesson everyone else has is that you throw whatever you can at the situation in time. It would be such a pity if the Germans brought on another Götterdämmerung.
@Tony, Disgruntled Observer, avatar, and others
I see the latest thing I am being acused of is indifference to the unemployed. Politicians in every country that I have lived in are careful to pepper their pronouncements about the economy with mentions of employment: “jobs, jobs, jobs” is the mantra drilled into them by their PR people. Of course, they know that employment growth is overwhelmingly driven by output growth, and especially growth in domestic demand.
I am an economist not a politician, and I don’t intend to start talking like a politician. I take it that the economics-savy readership of this blog know that that it is economic growth that drives employment growth. The post was about a prudent adjustment strategy that puts us back on a secure growth path while trying to minimise the risks to financing that allow us to spread the adjustment over time.
I am well aware that a critical challenge will be the high level of structural unemployment that will a legacy of the bubble economy even if we can return the economy solid potential growth path. Liam Delaney’s excellent video post provides some useful perspectives on policy in this area. Policies in the areas of active labour market policies (job search assistance, public employment policies, apprenticeship programmes, training programmes, etc.) are important, although the available evaluation evidence shows that there are no silver bullets. This does require more attention than it is getting, but it was not what the post beginning this thread was about.
None of the current policies are going to bring any sort of decent growth. And the markets know that. And unemployment is tied in with that. And once everyone starts adopting austerity the game is up. But can the car be steered away from the cliff in time?
“Can’t get it. What’s the gist…”
Reality is there’s no way growth we will see over next few years will help us grow our way out of our debt problems, we are bollixed. The EFSF is bollixed tool. Everything’s bollixed.
FYI … follow up to DCM in Telegraph
St. Georges gets what he wanted …
Leaders Reach Outline of Deal to Resolve Greece’s Debt Crisis
After crisis talks on Sunday night, Prime Minister George Papandreou and the Greek opposition leader agreed to create a new unity government that will not be led by Mr. Papandreou, according to a statement released Sunday night by the Greek president, who mediated the talks.
Mr. Papandreou and the opposition leader, Antonis Samaras, agreed to meet again on Monday to hammer out the details of the agreement. The name of the new prime minister is not expected until then.
Lets be rational about this for a mo and think about this weeks market strategy meetings and their potential conclusions.
No effective credit facility for Italy without
1. New Italian gov with mandate and determination for real reforms, German style, or
2. German BUBA climbdown on funding via increased IOMF funding or ECB leverage, or
3. ECB involvement, either credit easing or unsterilised bond purchases, following BUBA climbdown, or
4. Euro breakup becomes close to inevitable.
Are any of these likely to happen without a lot of pressure from the financial markets?
Is the % play to expect there is inevitably going to be a lot more pressure from the markets in the next few weeks or months?
@ John McHa;e
‘I am well aware that a critical challenge will be the high level of structural unemployment that will a legacy of the bubble economy even if we can return the economy solid potential growth path’
And what about the additional structural unemployment which results from the fact that
1 Our export sector is dominated by capital intensive, tax-arbitraging FDI enterprises
2 our SMEs are tiny by UK standards
3 We have a credit crunch for the foreseeable
The Irish economy is a very strange beast.
And at the risk of boring everyone to death…..
From the article by Colm McCarthy..
“The package offered to Greece requires acceptance by its government of a 10-year horizon, leading, if all goes well, not to solvency but to a monster debt ratio around 120 per cent of GDP in 2020.
Under the present programme we will get to “a monster debt ratio around 120% of GDP” a lot faster.
Is this where we need to go?
BTW, I see Buiter of Citi says that Greece needs an 85% haircut to get to sustainability.
Poor old Paddy will have debt down to his knees before he gets a haircut if the present “wisdom” is followed. And Enda said that “Paddy needs to know the truth” or words to that effect.
“1 Our export sector is dominated by capital intensive, tax-arbitraging FDI enterprises”
Just read something in the WSJ on Pharma which may be good news for our pharma exports….apparently so much pain medication is being prescribed in the US this year sufficient to render every man, woman and child in the country comatose for a month. Hope we are not only manufacturing Viagra. On the downside a few big blockbuster drugs are losing patent protection imminently, so that could have an effect.
Oh, hold on a mo; forgot this option so ignore the above!
“A businessman has become an unlikely national hero after urging Italians to buy up government bonds to help drag the country back from the brink of an economic meltdown.
As the prime minister, Silvio Berlusconi, scrambles to deliver key reforms, the Tuscan financial services entrepreneur Giuliano Melani announced his appeal with a full-page ad in the leading daily Corriere della Sera, complete with his telephone number and email address.
Melani says the bill for Italian government bonds expiring annually is €260-270bn (£223-232bn), a sum which would be taken care of if every Italian paid €4,500”
I see some suggestions that the markets will surge am on the basis that crafty George has reached an agreement in principle with Samaras. However,
Such agreements are not worth much, as we have recently seen.
The real action would appear to concern Italy and Ambrose has a good piece on it tonight…
Fastest growing addiction in the US is prescription drug abuse. Unemployment, mortgage streses and falling real wages have lots of adverse consequences.
No blockbusters though. Just a lot of old fashioned opiates and benzodiazepine ‘sleepers’ mostly. Cheap as chips in EM manufacturing plants.
I cheerfully concede that Mr. Papandreou’s referendum gambit, as you correctly identified, was a naked attempt to retain power, but I would still assert that it was inspired as it would have allowed Greek voters (and all other observing) a few weeks to assess the precise nature of the choice facing them. This is the choice between an immediate ‘disorderly’ default and a half default leading to 8 years of pain to end up with a debt/GDP ratio of 120%.
The risk of having this revealed in glorious technicolour detail is the principal reason is that Merkozy read the riot act to Papandreou. You don’t want voters having an opportunity to examine the nonsense being purveyed and having an opportunity to exercise their ultimate authority.
Voters everywhere will have an opportunity to punish those who have fooled them and lied to them, but they may not elect those who who will provide solutions.
IMHO not a ‘naked attempt to retain power’ for “himself” – but to force the hand of the opposition New Democracy into backing the most recent bailout/austerity – hence saving PASOK from total wipeout, the party of his grandaddy and daddy, who cannot now be blamed by Greek citizenry for totality of Greek collapse and truly horrendous consequences. Expect a neuPapNua to emerge in due course.
Of course, this bailout, designed to protect Timmy Geithner’s Hedgie buddies on Wall Street and their dodgy_cubed exposure to CDSs, is insufficient – hence Greece will be bankrupt again in the medium term; and the prospect of a military takeover has not diminished due to expected increasing social unrest.
St. Georges will be back in his old haunts in the US for XMass – he never really wanted to leave it in the first place, simply very reluctantly responding to the force of family traditions and obligations. He has ‘done his bit’ to borrow a phrase from David Trimble.
On a higher level, he has made a contribution to European Democracry by drawing that response from Sarkozy and Merkel which has severely damaged the ‘solidarity bond’ …. since their Deauville_Tango European Democracy has been downgraded to “Junk”.
Don’t confuse credit with equity, nor directional bias (which you can sometimes anticipate) with short term moves, which exist in a world of their own.
Also, remember that if too many people hold the same seemingly rational view, there will be a crowded trade and the market will do exactly what they think it shouldn’t.
When everyone has copped on to how dire the EZ situation is, then you will have a market bottom.
Has that happened yet?
“When everyone has copped on to how dire the EZ situation is, then you will have a market bottom.
Has that happened yet”
Don’t think so… That’s why I’m on the sidelines, though well positioned ( hopefully).
Nikkei down .3% but it’s early yet.
Don’t know if markets will apply pressure or simply react to what’s put in front of them I would have thought more likely… I’m gunning for Italian and Spanish banks at the moment.(too much real coordingation required for markets to apply pressure)
Getting v close to an Italian lockout. In which case….
geneuinely scary for Italy now. It has the scale to bring things crumbling down, Greece/Ireland/Portugal never had that. Somewhat surreal when you have a central bank essentially playing chicken with an elected government.
What most people seem to be missing here (and generally) is that the governance of the EU and of its institutions is subject to the rule of laws ultimately enacted by the parliamentary representatives of the EU citizens. We are in this mess because the laws enacted and the enforcement of these laws by banking and financial sector supervisors and regulators (coupled with the flawed economic policies of many governments) allowed and encouraged the banking and financial sectors to be greedy, stupid and reckless.
It began in the US, but spread rapidly to the UK and the rest of the EU. However, the US had retained suffcient of its governance architecture (and the benefit of the US Dollar as a reserve currency) to contain and remedy much of the damage. (Its failure to remedy effectively the subsequent damage to its real economy is very much due to the polarisation of its politics.)
In contrast, in the EU – and in particular in the EZ – the governance archictecture when the Euro wa launched was barely fit-for-purpose in the good times and relied on fiscal discipline and sound economic policy-making by all members. Now that the bad times are here, not surprisingly, any attempt to impose effective governance to remedy the problems that have arisen is foundering.
Much of this is due to the fact that the concept was developed and brought to fruition by an EU elite (comprising high-level officials and heads and members of elected national governments) and the enabling legislation was subseqently forced through national parliaments by these governments exercising thier executive dominance over their parliaments. The requirement to secure democratic consent was satisfied, but the failure to apply effective scrutiny of what was being proposed and the inability of most parliaments to exercise effective restraint over governments meant that genuine democratic legitimacy was not secured.
It is this lack of democratic legitimacy that is coming back to bite the Heads of State and Government (HoSG). Any solutions they attempt to craft must fit within the existing framework of law and governance and they increasingly are being compelled to regain the demcratic legitimacy they had previously treated so carelessly. So they are trapped between the proverbial rock and a hard place with the bond vigiliantes breathing down their necks.
This largely explains the stumbling, uncertain process we have witnessed and are witnessing. The current legal framwork does not permit them to apply the bold solutions that are required and, even if they could, many voters, having been treated with considerable contempt for so long, won’t allow them. They have been compelled to advance at a snail-like speed and in a crab-like fashion.
To secure some measure of popular consent from voters in the core EZ they have been compelled to impose harsh medicine on the perceived smaller delinquent economies. If the medicine is swallowed, it then becomes possible to sweeten the medicine. Ireland provides a perfect example. The interest rate on the initial support funding was excessive, but it was necessary to shore up some measure of popular consent in the core. Once Ireland conveyed a grudging willingness to deal with the medicine it was subsequently sweetened with a reduction in the cost of official funding. There seem to be indications that continued compliance by Ireland will be rewarded by further lightening of the load.
What most people fail to realise is that the imposition of long established democratic economic governance, where there was some contraints on the greed, stupidity and self-destructive recklessness of capitalism, was largely suspended from the late 1990s. The US was able to re-define and re-impose some restraint and to apply some remedies. The EU simply lacks such a comprehensive governance architecture and is painfully working to assemble it.
So the cries of ‘bond the bondholders’ or ‘default now’, while perfectly acceptable if the previous governance had not been suspended, or if appropriate governance were in place, are totally wrong-headed.
The first thing to recognise is that the inadequacy of the laws and governance was caused by excessive executive dominance and rule by elites and the second thing is that these must be rebuilt by securing genuine democratic legitimacy. In the meantime, any progress towards solutions will be slow, largely ad hoc (but compliant with the current legal framework) and reliant on regaining popular trust and consent.
This is the context in which John McHale’s mix of optimism and pessimism should be framed.
“I am well aware that a critical challenge will be the high level of structural unemployment that will a legacy of the bubble economy even if we can return the economy solid potential growth path.”
Being prepared to settle for this is precisely what is most wrong with the as-slow-as-can-be-financed approach to deficit reduction. Government spending of borrowed money is making a major contribution to propping up high price levels throughout the economy, choking off whatever chance we have of achieving serious levels of export-driven employment growth.
Given the will, the Government could accelerate sharply the process of gaining competitiveness by:
– cutting public sector pay
– preventing financial institutions from splitting the corporate welfare they receive with their employees (maintaining excessive numbers and excessive pay)
– cutting social welfare
– taking a much more aggressive approach to public procurement
– going nuclear on competition policy
– rooting regulatory capture out of public regulators and government departments, most importantly in energy
– ending subsidies, whether direct or supplied through market mechanisms
“The post was about a prudent adjustment strategy that puts us back on a secure growth path while trying to minimise the risks to financing that allow us to spread the adjustment over time.”
There are people on this list far better qualified than I to analyse the relative risk/benefit of various state strategies in dealing with national and private creditors. It may well be that the present ‘good boy’ approach is best in the medium term, I really don’t know. But I am increasingly convinced there is a global chaos developing and that attempts to deal with the financial angle over the last four years amount to sophistry. I am surprised there appears to be little recognition of this and discussion about provisioning for a much longer period of socio-economic chaos and contracting economies.
I think Ireland as a small inoffensive ex-colonial island can, like Iceland and New Zealand, should in principle be able to deal with its problems better than most. Fast forwarding past the daily diet of disintegrating federal and national socio-economic structures and resisting the tempation to be mesmerised by this, what should Ireland be doing?
@BCT & Tony Owens,
I agree with much of what you say (though, to BCT, there is a requirement for some sequencing, and modification of the intensity, of your prescriptions). But it appears we are fated to be voices crying in the wilderness at the margins of this blog.
But we can’t ignore the current pressure on Italy. Chancellor Merkel may find that, irrespective of her doubts about being able to secure the consent of her voters, it is time to wheel out the ‘big bazooka’ of the ECB’s balance sheet.
I agree entirely withe the views expressed above and, indeed, the FAC, in recommending more front-loading of the austerity seems to share them, to some extent at least.
The “sudden stop” scenario no longer seems as far-fetched as it once appeared and some thought must surely be devoted to it; a plan B, in other words.
According to my scribblings, Italy 10y is now at 4.9% spread over bunds, at the point where we might expect LCH to ask for additional margin.
Interesting IT op-ed by John McHale 24 August 09 . It is behind a paywall now.
I think he is far too professional to say it but Ireland has been let down by the ECB and its own vested interests in the meantime and the price is paid by the long term unemployed.
Far greater co-operation may be cure for our crisis
Economy’s lifeblood: international evidence shows that even small improvements in business cash flow could pay significant dividends in seeding the turnaround
ANALYSIS: A commitment to economic stimulus and co-operative policymaking must be made a priority, writes JOHN McHALE
FUTURE HISTORIANS looking back over the sweep of Irish economic growth are likely to stare at the numbers for 2009 with astonishment. Between 1950 and the current recession, there were only three years of outright real gross domestic product (GDP) decline: 1956 (1.2 per cent), 1958 (2.2 per cent), and 1983 (0.2 per cent). The International Monetary Fun (IMF) projects Irish real GDP will fall by 8.5 per cent this year alone. Late in the 1950s and the 1980s, the governments of the day faced down vested interests to forge a new policy consensus. They also managed to break through cycles of self-fulfilling pessimism.It is distressing to see we now appear bent on the opposite course, with mechanisms for nationally focused co-operation breaking down just when most needed to avoid a self-defeating battle over shares of a shrinking economic pie.With investor confidence in the Irish economy slipping fast last year, the Government had no alternative but to begin a large fiscal adjustment. Combining the measures taken since summer 2008, the discretionary deficit-cutting measures have amounted to 5 per cent of GDP.
And there is much more to come. In April, the Government announced its intention to shrink the deficit by €16.4 billion by 2013, with a significant start coming in the December budget. The recession-deepening effects of this adjustment look set to be made worse by deteriorating industrial relations. It is not too early to start thinking about whether a less contractionary course is feasible as part of a more co-operative response to the crisis. In considering the policy options, it is worth keeping in mind the international evidence and Ireland’s own experience with economic turnarounds. A number of lessons stand out. One critical lesson is that (current) expenditure-based adjustments have tended to be less contractionary than adjustments based on tax rises and capital programme cuts. They have also enhanced credibility in the Government’s capacity to stick with the adjustment for the long haul.
While cutting expenditure will be hugely painful, this form of adjustment could allow a more gradual stabilisation effort overall. This may be as close as Ireland can come to real economic “stimulus” in the current circumstances. A second lesson is that actual real wage demands will be brought into line one way or another when there is a fall in the level of real wages the economy can pay given its productivity and available external financing.
The most painful – and wasteful – mechanism for bringing wages into line is higher unemployment. High unemployment makes private-sector workers fearful of losing their jobs and puts a fiscal squeeze on public-sector pay. A more centralised system of wage determination allows the implications of unaffordable wage demands for unemployment to be taken into account more directly. The result is that rising unemployment does not have to do all the work of achieving consistent claims on national output.
Ireland’s social partnership model of tax relief in return for wage restraint served the economy well during the post-1987 adjustment. While it seems to have gone off course in recent years, becoming primarily a mechanism for raising public-sector pay, it would be much better to re-embrace the successful phase than to abandon partnership when it is most required. Finally, recent international crises – Japan’s “Lost Decade”, Mexico’s “Tequila” crisis, the Asian crisis, among others – show that unhealthy balance sheets and cash flows in the banking, business and household sectors are a huge drag on economic activity. On the other hand, apparently minor improvements in conditions have sometimes produced phoenix miracles, as countries have rebounded surprisingly quickly from output collapses. While attention has rightly focused on restoring the health of the banks, more attention needs to be put on improving the finances of businesses and households.
As outlined in the macroeconomic and fiscal framework accompanying April’s supplementary budget, the Government plans a cut of €4.8 billion in the (full-year) deficit for 2010, followed by a €4.6 billion cut in 2011.Some 51 per cent of the proposed adjustment is to come in the form of tax increases, primarily through broadening the tax base. These adjustments are to be followed by (as yet unallocated) cuts of €4 billion in 2012 and €3 billion in 2013. My reading of the international evidence and Ireland’s own experience is that confidence could be maintained with a less contractionary, though still painful, policy course.This alternative policy has four main elements.
First, pursue a comprehensive implementation of the recommendations of the McCarthy report over a two-year time frame. The total package of cuts promises to save €5.3 billion.
While one can reasonably argue over the details of McCarthy’s proposed cuts – and indeed each affected interest group has reacted angrily – the report does provide a useful focal point for shared sacrifice. The sum is more than the parts. It offers a chance to break through the political log-jam of vetoes from individual interest groups. Importantly, the front-loading of expenditure reduction should bring a credibility bonus that allows a more gradual and more stimulative policy package overall.
Second, the McCarthy cuts are supplemented by a 5 per cent cut in public sector pay phased in over a two-year time frame. This would save roughly an additional €0.7 billion. It would be part of a balanced reduction in wages and benefits in the economy, achieved through a renewed social partnership agreement.
Third, as part of the quid pro quo of a renewed agreement, there is a significant roll-back of the income and health levies. These levies have brought the marginal tax rates facing many workers to over 50 per cent. The Government was correct to put the burden on the better-off in the first phase of the adjustment. But continued increases in marginal tax rates will damage incentives and hold back growth.
The tax-cutting package should also include temporary reductions in employer PRSI to the extent affordable. International evidence shows that even small improvements in business cash flow could pay significant dividends in seeding the turnaround.
The total reduction in taxes for 2010 could be as large as €3 billion. The €4.6 billion in tax-base-broadening measures committed to in the April budget in anticipation of the Report of the Commission on Taxation are phased in, starting in 2012.
Fourth, proposed cuts in capital expenditure (€0.8 billion and €1 billion in 2010 and 2011 respectively) are delayed by two years. Cutting capital expenditure as the economy falls into a deep recession just continues the pattern of pro-cyclical fiscal policy.
Overall, the credibility bonus from the combination of an expenditure-based adjustment and renewed social partnership should allow the Government’s total proposed adjustment of €16.4 billion to be complete by 2015 rather than 2013. Even more importantly, under this illustrative alternative plan, the adjustment for 2010 would go from a contraction of €4.8 billion to a neutral budget.
From there, the path would be difficult, with deficit cuts of €3 billion, €4.5 billion, €4.4 billion, €2.8 billion, and €2 billion over the following five years. (This includes the additional unallocated cuts of €7 billion projected in the April budget.)
Together with the tentative signs of an international turnaround, this more stimulative policy would support a recovery in demand, cash flow and confidence. Is this alternative something the social partners could realistically sign on to? While I am not under any illusions about how difficult some of the elements would be to swallow, the commitment to stimulus and the re-establishment of co-operative policymaking could provide the necessary compensations.
The present path of rising unemployment and diminished policy influence must be a less attractive option. John McHale is established professor of economics at NUI, Galway. This article draws from his presentation at the Merriman Summer School’s symposium, Economy: Prospects and Possibilities
How much of that spread would be the Berlusconi premium?
Did you ever read “the Dark Heart of Italy” ?
@Bond. Eoin Bond
“Somewhat surreal when you have a central bank essentially playing chicken with an elected government.”
I can’t help but wonder if what we are witnessing (in Greece and Italy) is ‘regime change by other means’.
its the spread of a AAA-basket to Italy that is the issue, not Bunds. This has been misreported quite a bit so there’s a lot of confusion. There’s also a bit of leeway for LCH on this, ie they wont do it just cos it trades at +451bps for instance. Back of the envelope maths would suggest that they have another 25bps or so to go before they hit LCH-territory.
What is ‘LCH’ of you have a mo?
Also, similarly @grumpy, what is ‘BUBA’?
EFSF back in to issue that bond for Ireland. Currently pricing around ms+104bps, or roughly 87bps more expensive in relative terms than the previous 10yr issue in July.
LCH = London Clearing House, which clears a lot of the repo trades that Italian bonds are part of.
BUBA = Bundesbank
450 over the basket is what I estimated happens at about 490 over bunds.
You are evidently using a slightly differently sized scrap of paper to work it out on.
I don’t by the way anticipate quite the same reaction to margins going up that happened with other less liquid peripherals.
Just tuned to Bloomberg for a few mins (did I just say that?) – Italy at 6.6 etc … and EZ leadership becoming a joke (if it weren’t so serious) – such as Silvio postponing the release of his CD of Love Songs – JHC!
Must we wait for Nikki’s Index to be hit for 6 as well before calls for a Gov of Unity in Berlin ………. and sanity to be unleashed in Frankfurt?
And a bank going bankrupt over in the US. Strange event that – bank bankruptcy; while back here in the EZ No Banks to be let Go Down. Surreal does not describe it ……….
I suspect less than people generally think. Who is going to have a popular mandate?
Italy stabilising a bit now on the back of a suggestion that Silvio may step down “within hours”. Must mark a rare occurance where a government falling is considered a stabilising event.
“Who is going to have a popular mandate?”
He can sing Questo Piccolo Grande Amore which is how so many people think about the Euro.
Saturday’s FT had a feature on Germany’s Commerzbank which is on a shaky scraw
When people start talking about LCH margin calls the vortex is very close . Outfits have to put up more cash against repo-ed bonds and usually need to sell other bonds to get the cash which depresses the price which means more margin and so on .