Optimism and Pessimism

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’.

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.

http://www.irishtimes.com/newspaper/world/2011/1104/1224307039877.html

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.

Sterile debate – its pointless , the Irish Borg just follow orders.

@tonicforthetroops

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.

@DOCM
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.

@John McHale

“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.

@ BEB

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.

Its the ecology stupid….

Have a look at the scale on the left hand side of the photographs in the link below:

http://earthobservatory.nasa.gov/Features/WorldOfChange/larsenb.php?all=y

Then have a look at the chart on page 2 of the following document
http://earth.esa.int/workshops/salzburg04/papers_posters/4A5_riedl_192.pdf

Note the relatively sudden collapse in the area of both Larsen A and Larsen B
ice shelfs

How many IMF loans would it take to “bail” all the resulting water out?

@John McHale

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.

@ 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.

@Mickey Hickey

Good link. Well worth watching. Thanks. Probably spot on. Scary.

MICHAEL HUDSON: Well, you’ve asked about three questions there. Obama is here to represent the interests of the American banks. And the Europeans are very angry that a few weeks ago Tim Geithner, the bank lobbyist, came over and insisted that Europe not forgive Greece’s bank loans, not let Greece write down the loans, and indeed that it not even claim that Greece should do what Argentina is and write down the loans as a premise. Mr. Geithner explained to the Europeans that the largest insurers of the Greek debt are American money market funds and hedge funds. And he said American hedge funds and banks would lose money and actually would crash the U.S. economy, if Europe made a concession to Greece to bring debts down to the ability to pay. So, instead of a debt write-down or a haircut, the banks said, “OK, we will agree with what the Americans are insisting on, and we will ask for a voluntary write-down by the banks on the Greek debt they hold.” Obviously, European banks who are not part of the credit default swaps have disagreed with this. So the Americans are putting immense pressure on Europe, saying, “We will wreck your economy, if you don’t wreck Greece’s economy.”

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 ………

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”.

Billions of Euros for Job creation and growth or billions of Euro for people who funded a proerty bubble?

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?

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..:)

@ 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.

@BEB

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?

@ 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.

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:

Ireland 51.5
Germany 50.6
France 44.6
Italy 43.9
Spain 41.8

http://www.finfacts.ie/irishfinancenews/article_1023436.shtml

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.

@ Tonicforthetroops

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.

“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.

McHale:…there are certain things we can’t control and they can’t go too badly.

Right!

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.

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.

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.

Hi John,

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.

http://namawinelake.wordpress.com/2011/10/28/flight-of-private-sector-deposits-from-covered-irish-banks-seems-to-be-slowing/

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.

@ Tull

Think bigger

@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.

+1

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.

@Michael Hennigan

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.”

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
i
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.

@ Tull

Eh? Ok, think smaller and simpler than supra-national.

@ All

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?

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.

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.

@ 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.

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

@ 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 ?’

The views of other contributors (former?) to this site are interesting in the context of this debate…..
http://www.examiner.ie/features/greeces-silver-lining-172486.html

http://www.examiner.ie/business/ecbs-demands-on-ireland-are-unreasonable-172952.html

@John McHale
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.

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

@ BEB

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?

@John McHale
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
sentiment.

@ BryanG

What other defence is there? No one owes us a living! The penny has even dropped with the French.

http://online.wsj.com/article/SB10001424052970203716204577019861947835548.html

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!

http://www.sueddeutsche.de/geld/berichte-ueber-euro-rettungs-plaene-angriff-auf-goldreserven-der-bundesbank-1.1181633

Merkel’s position is described as “ambiguous”!

@ Ceterisparibus

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.

@DCOM

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.

@Bryan G.

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.

Ominous warning to Silvio?

http://www.reuters.com/article/2011/11/05/us-ecb-mersch-italy-idUSTRE7A426720111105

@Tullmacadoo

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.

@ seafoid

ILP took their subordinated bondholders to the cleaners in August, not their senior bondholders.

John
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?

@Phillip II

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 . . .

@Ceterisparibus

“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.

NYTimes on Greek Denial

http://www.nytimes.com/2011/11/06/business/global/europes-two-years-of-denials-trapped-greece.html?_r=1&hpw

@ 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.

@ BEB

Thanks

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 ?

@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]

http://www.independent.ie/opinion/analysis/uturn-on-bondholders-has-hurt-our-democracy-2927025.html

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.

@Phillip II

I haven’t a clue who you are; anonymous with a bit of substance or even salt is ok with me: are you either?

@all

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 ….

@ seafood

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.

@ seafoid

Not seafood obviously!! Damned iPad autocorrect…

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.

@BEB

The Greeks were essentially given a lesson in this this week – far from actually wanting a referendum, they were horrified at the thought.

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.

@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 …

@all
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 …

Eoin
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.

@ BEB

cheers

This was good :

http://www.ft.com/intl/cms/s/0/0d16aec2-03df-11e1-98bc-00144feabdc0.html#axzz1cvD6yg5k

and has a link to this

http://bondwatchireland.blogspot.com/

“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 ?

@Joseph Ryan

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.

@David O’Donnell

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.

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…
http://www.nytimes.com/2011/11/06/business/global/europes-two-years-of-denials-trapped-greece.html?hpw

@seafóid

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 ….

@Shay Begorrah

Apologies for that Shay … fair sickening alrite …

@ christy

Where to put the comma in the Nicene Creed?

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.
____

@Ceterisparibus

“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.

@PR Guy
Can’t get it. What’s the gist…

@John McHale

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.

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.

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”.

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 .

@ All

It seems appropriate to insert Colm McCarthy’s excellent piece in the Sindo at this juncture.

http://www.independent.ie/opinion/analysis/european-indecision-is-taking-us-all-to-the-brink-2927020.html

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!

@ All

FYI

http://www.telegraph.co.uk/news/worldnews/europe/greece/8873105/Euro-debt-crisis-Greek-PM-George-Papandreou-to-resign-when-new-coalition-government-formed.html

@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)?

@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.

@Ceterisparibus

“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.

@PRGuy, All

Lets be rational about this for a mo and think about this weeks market strategy meetings and their potential conclusions.

Premise:
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.

Question:
Are any of these likely to happen without a lot of pressure from the financial markets?

Conclusion:
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?

@DOCM
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.

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”

@ Ceterisparibus

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.

@Paul Hunt

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”.

@Grumpy
“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.

http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND

Getting v close to an Italian lockout. In which case….

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.

@John
“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?

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.

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

@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’.

@ Bond

What is ‘LCH’ of you have a mo?

Also, similarly @grumpy, what is ‘BUBA’?

@ Gav

LCH = London Clearing House, which clears a lot of the repo trades that Italian bonds are part of.

BUBA = Bundesbank

@Eoin

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.

@seafoid

I suspect less than people generally think. Who is going to have a popular mandate?

@ Grumpy

“Who is going to have a popular mandate?”

http://www.baglioni.it/

He can sing Questo Piccolo Grande Amore which is how so many people think about the Euro.

@ Gavin

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 .

http://www.irisheconomy.ie/index.php/2010/11/10/honohan-speech-at-ifss2010-event/#comment-90891