McCarthy: The Eurozone can be saved

Hoisted from the comments (ht Michael Hennigan), here’s Colm McCarthy in today’s Sunday Independent writing on the Eurozone crisis. It’s worthy of reproduction in its entirety on the site but I’m not sure the Indo editors would be happy about it. So head over and read it there, and head back to comment. This piece usefully advances the debate we’ve been having in another thread, so I’ll close that one and hope commenters will move up to this one. From the piece:

If the eurozone is to become a credible currency union for the long haul, assuming it survives the efforts of its rescuers, there will have to be treaty changes. It is foolish to dismiss the possibility that sensible treaty changes, worthy of support even from countries damaged by the bungling response to the crisis, cannot be envisaged.

These treaty changes could involve a loss of fiscal sovereignty for Ireland. But Ireland has lost its fiscal sovereignty already.

There is, in any event, no cost in accepting a regime of fiscal discipline to which any sensible country would willingly subscribe.

The real issue is whether Europe can create a proper central bank and accountable decision-making authority to go with its premature currency union. If this can be achieved, the euro is worthy of rescue.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

170 replies on “McCarthy: The Eurozone can be saved”

@ Stephen Kinsella

The problem is, of course, as you identify it. Merkel’s own council of economic advisers have put it in the spotlight. But the political conundrum is not unique to the EU. Washington has no intention of bailing out California. To expect Berlin to do so for Greece is unrealistic.

It is equally unrealistic to expect the ECB to take on a role which even the US Federal Reserve is unwilling to accept. Liquidity is the business of the central bank. The solvency of states and their banks is a matter for their governments.

Distinguishing between liquidity and solvency is, admittedly, almost impossible when in the middle of a crisis.

DOCM: Let’s grant your point about California. In a monetary union, do you really think individual governments should take responsibility for the solvency of banks? Should Delaware have bailed out Lehman?

Are we mature enough for fiscal union? We still have a bipolar mood disorder when it comes to our place in the world. When we’re in charge we’re full of self-loathing and when Johnny Foreigner comes along we hate him even more. Look at the transition from Staunton to Trap. Hate Staunton, hate Trap. Why hate Trap? Because he’s stifling our innate genius with his fussy old discipline. Never mind the fact that half our players can’t get a starting place in the Premier League. It was the same under Jack Charlton – somehow we convinced ourselves that if only Dunphy or Giles were in charge we’d win the World Cup.

“Washington has no intention of bailing out California. ”
Er, and all that fiscal stimulus to the states from the Federal government funded by the Federal Reserve’s ‘QE’ program (I doubt more and more that it is QE at all – it seems to me that the Fed are running the opposite program to the ECB, in the Fed’s world I suspect it is the Fed that will take the haircut on the debt they’ve bought, not private sector creditors or social security, this is as it should be if you want to retain the soundness of financial systems and the goldbugs will be delighted, though I remain unconvinced it will really be inflationary).

I think one major aspect in the next few weeks is the new 8-headed-Jack-in-the-box that emerged on the sidelines of the G20 meeting.

We now have The Frankfurt Group, a high caliber political-economic lobby, de facto a shadow government, a Soviet style Politburo that is composed of:

Angela Merkel
Nicolas Sarkozy
Jean-Claude Juncker
IMF’s Christine Lagarde (of course!)
José Manuel Barroso
Herman van Rompuy
Mario Draghi
Olli Rehn

Their first results are the two technocrats strategically placed in Greece and Italy.

Excellent ideas in this article on the outline shape of a federal europe along the lines of the USA. This idea will meet huge resistance in many quarters and will never be adopted unless the details of the alternative are made clear. I fear the alternative will only be made clear when the existing EU and Euro fall apart with disastrous consequences.
We also need to survive economically in he short term to allow calm and rational discussion of these ideas to take place. It looks to me as if the only short term solution is an immediate change (by treaty) in the ECB constitution to allow it to act as a normal central bank and buy unlimited quantities of sovereign bonds. This will get the Euro over the immediate crisis and allow the type of major constitutional changes required including allowing countries to leave both the Euro and the EU.


The Bank of North Dakota, which I consider a success story, might be worth a closer look.

The reluctance of Irish politicians to embrace the prospect of a referendum on treaty change is not a policy, it is an understandable gut reaction shared, no doubt, by electorates throughout Europe. But it makes no sense to reject treaty changes sight unseen, particularly if the seeds of the current turmoil can be found in the inadequacies of the existing treaties.
These treaty changes could involve a loss of fiscal sovereignty for Ireland. But Ireland has lost its fiscal sovereignty already.

Colm McCarthy is skirting around the very real political issue here. How can Ireland hand up more sovereignty to central european Great Powers who have so far been perfectly happy to impose austerity, scorn and 15% unemployment on Ireland in order to save their own banks?

How can out politicians responsibly lead us into such a union? We would be looking at a repeat of the Act of Union, where the Irish Parliament voted away what little sovereignty it had left.

And for what? To keep the ATMs working and midnight take-aways open? There’s more to this now than economics.

We can design and redesign, but when the internal incentives of the system remain, they end result will always be the same. In Europe, and indeed the US, the system is designed to benefit capital only. That is becoming clearer by the day. Unless that changes, it doesn’t matter what tweaks we put in the system, the end result is collapse and chaos.

The US will bail out California when it has to, because it bailed out Chrysler, AIG and a whole swathe of the financial system. And most of this was done by the Fed. What’s different about that? Arguments in Europe revolve around who does the bailing out, not about the bailouts themselves. Ireland got played and is bailing out it’s own banks (German banks in reality) , France used its weight in the EU better and gets help when the time comes to bail out it’s banks.

The campaign to rescue the Euro is potentially right because Europe’s capacity to compete in a world of mega states is damaged as a fragmented entity. It would be better to let it go, however if the incentives of the current system are maintained. It can be thrown away completely, IMO, if popular representation have to be sacrificed to save it.

The Sovereign governments of the eurozone are the source of funding for the ECB ,ESFS,etc.There is no direct taxing authority to backstop the euro.

In the US federal taxes are imposed on citizens no matter where they reside,even in States which have no income taxes themselves.

If the US Federal government refuses to bailout the state of Ca it does nt mean that Federal transfers such as welfare,social security payments for retirees etc are not made to residents of Ca.

This is a difference alluded to in some comments above ,between the US and the eurozone ;if eurozone countries arent bailed out their citizens starve whereas in the US this wont happen,just the State government apparatus will fold.

Therefore any treaty change will require direct democracy from the citizen to the EU and direct taxation of every EU citizen in addition to their own countries taxes.

The Sovereign governments of the eurozone are the source of funding for the ECB ,ESFS,etc.There is no direct taxing authority to backstop the euro.

In the US federal taxes are imposed on citizens no matter where they reside,even in States which have no income taxes themselves. If the US Federal government refuses to bailout the state of Ca it does nt mean that Federal transfers such as welfare,social security payments for retirees etc are not made to residents of Ca.

This is a difference alluded to in some comments above ,between the US and the eurozone ;if eurozone countries arent bailed out their citizens starve whereas in the US this wont happen,just the State government apparatus will fold.

Therefore any treaty change will require direct democracy from the citizen to the EU and direct taxation of every EU citizen in addition to their own countries taxes.

From Colm’s article

This is not the case in Ireland, which complied better with the fiscal rules than Germany did in the years leading up to the crisis.

Wasn’t Charlie McCreevy giving the two-fingered salute to the European Commission before it was cool (and in particular, before France and Germany did it)?

He was Frank. But Ireland breached neither the debt nor deficit ceilings in any year up to 2007. Which is not to say that budgetary policy was OK during those years. The point is that this is not just a fiscal crisis in a few rule-breaking peripheral countries, still the dominant German narrative.

Thanks Colm.

Also in the realm of quibble

German banks foolish enough to buy dud assets in the United States did not get compensated by the US taxpayers

There is a considerable overlap between the usual suspect list of Eurozone banks pressing the ECB for full recovery on bonds now (Deutsche Bank and SocGen especially) and the list of European banks that got full counterparty redemption from the AIG bailout in 2008 — which was US taxpayer financed.

Perhaps it’s even arguable that AIG — with the Squid et al getting full recovery on dud assets at taxpayer expense — was the disastrous template for everything that has followed.

It is notable that Colm McCarthy and Declan Ganly are both calling for fiscal union…..
But is it already too late for that?
If one is to believe the article linked by PR Guy on the EFSF buying up its own bonds (Telegraph) then I would suggest that the answer is yes.
Such a scheme is nothing more than a classic Ponzi scheme…using old money to sucker in new money. Surely this will destroy any credibility the EFSF had.

@ ObsessiveMathsFreak

“Colm McCarthy is skirting around the very real political issue here”

Exactly. Is the Euro really politically viable in the long term? Roubini’s a great economist, but hes not a political scientist or historian, and this inability to deal with political realities and attempt to resolve everything with a myopic technocratic solution is maddening.
As Robert Skidelsky correctly observed in an otherwise fawning NYRB review of Niall Fergusons mediocre ‘Ascent of money’

“A final reflection on Ferguson as a historian. He is overimpressed by economics. Many historians feel that history is in some way inferior to the more exact sciences; the thought that he can “do” economics gives the historian an expanding sense of mastery. I know the feeling, because I’ve lived through it myself. Economics, especially in its mathematicized form, purveys a peculiar vision of society. Society to the mathematicians is a market imperfection. Among other imperfections…..This delusive, but powerful, idea suggests that behind the imperfection lies perfection”

Thats not to say I have a notion on how to resolve this crisis, but its time to start thinking of alternatives.


Blaming Europeans for 15% unemployment is pathetic scapegoating on a grand scale.

As for treasured sovereignty, we don’t appear to have a problem begging American executives for jobs – even though the pickings are thin in that struggling economy.

And pray tell, should we blame the Europeans for our failure to develop markets in the single currency area?

Enterprise Ireland said two years ago that the markets Germany, France, Benelux, Italy and Spain collectively represent a GDP 3.9 times the size of the UK, yet the non-food exports by clients companies of the agency for these countries, is 40% of that of the UK.

It isn’t about blame or viewing ‘sovereignty’ as some irrelevant political abstract, but dealing with the world as it is rather than as we want it to be. We know that simply policing deficits and debts isn’t enough so what are we looking at, a more intrusive role for Europe to identify structural problems and push reform on members states? Why would a central European authority be better placed to do this than a national Government? Will it not just remove responsibility from national governments and undermine any potential reform? Does anyone really believe that national populations will accept this and what does that mean for democracy and even the long term survival of the EU? Has the last three years not taught us that although it is easy to feign ‘consensus and co-operation’ during the good times, when they turn bad national interests and domestic politics takes over? Let’s at least acknowledge such a reality if we insist on relying on it for future prosperity?
Look at the manner in which this is being sold, not as something anyone actually wants but as a resolution to a short term problem. We are merely reinforcing the contradictions at the heart of the Euro and leaving it for the next generation to resolve.

If we really are in an endgame situation for the euro, I repeat my question from some threads ago:

Has the Irish Central Bank printed a supply of notes in an alternative currency, and if not why not? It would be shockingly imprudent not to be prepared for any catastrophic outcomes at this late hour.


I find it embarrassing but necessary to come to the defense of the deliberately irritating yet insightful Ferguson. Love him or loath him, the one thing he’s not shy about is the big narrative.

Ferguson’s books start and end arbitrarily, but the bits in the middle are often brilliant. He is brave — a neocon who tells American’s they’re running an empire and an imperialist who doesn’t need to whitewash the jingoism, racism and exploitation from history. He can grind out so much copy because he uses his ideological framework as a generative mechanism, making sense of new areas of history as he encounters them and unifying them into a cohesive whole.

If you could lock Marx, von Hayek, Keynes, Churchill and Stalin in a room together, you’d be certain to produce something that was illuminating no matter how flawed. Ideology can be used defensively to construct rationales for the protection of fixed positions, or creatively refined by testing against reality. I’ll leave it to individual judgement which variety the figures on the list actually preferred, but at least they attempted to make sense of the world. Ferguson and his buddy Kissinger would be decent additions to that team.

By contrast, Bismarck, Lincoln, Deng Xiaoping or Truman would be more inclined to respond to the particular circumstances in a situationalist manner. These are hardly undistinguished figures, but a serious problem arises when the world becomes completely dominated by technocratic perspectives: each ends up following his own nose, behaviour strongly associated with lemmings.

It’s not by accident that the so-called Austrian school, the neo-imperialists like Ferguson and the socialists have offered the most penetrating insights into the recent disaster. They offer pictures of the world that are comprehensive.

It’s a fool’s errand to try to reduce human affairs to science. Testing an ideology against history and those fragments of data the social sciences throw up is a useful and pragmatic alternative, but this will never be a scientific process, and has almost vanished in a world dominated by experts of ever-narrowing specialisation who fear nothing so much as professional embarrassment.

There isn’t a reason in the world not to try to match or supercede Marx, Von Hayek etc in the present day. Achieving any practical effect requires the experts be taken on in their own fiefs, however — to expose the limitations of their perspectives, the foolishness of extrapolating general rules from the very particular circumstances the social sciences can investigate, the drift inherent in technocratic governance and the fact that the myriad of evidence-based policies currently pursued amount in aggregate to an incoherent worldview that is deliberately myopic about human psychology, culture and history. Experts in various human affairs need that deliberate myopia to make their pictures of reality both tractable and scientific, but it’s high time the rest of us pointed out the inadequate and splintered view they present.

Glad to know you have moved on from the “its mostly fiscal” crowd.

Anyway I do not know what fiscal discipline really means in a free floating currency world – we were levered 40 to 1 in the mid noughties boom if you look at central goverment funds as a % of GNP.
IF we still have a currency union with “sovergin states” & great structual imbalances then only gold can settle the final differences to the satisfaction of all poltical units………….at the right price of course.

However if we get the dreaded Caligula like central treasury then all bets are off.

@ Colm McCarthy

In making my comment, I had several thoughts in mind. The first to try to puncture the illusion that a fully federal state will provide the solution. The second was to make the point that the distinction between liquidity and solvency is one that simply has to be adhered to as otherwise no banking system can function. The third relates to the mutual dependency between states and their banks. This has tipped too much in the direction of the banks. States have now recognised this by establishing a list of systemically important banks internationally.

As the experience with AIG shows, and as adverted to by some bloggers above, when push comes to shove banks, irrespective of their domicile, will be bailed out by the state whose entire domestic banking system – and economy – is at risk if it does not.

Reuters are reporting today that Angela Merkel wants limited treaty changes by the end of 2012.

It seems she has backed off seeking the right for the Eu to meddle in national budgets but seeks the right to refer countries to the ECJ to have budgets declared void.

At first glance this would seem likely fall foul of our own constitutional order and could lead us into a head on collision with the ECJ. And what are the chances of getting such treaty changes through our electorate?

It strikes me as another ill judged compromise that unlikely to achieve much.
Any thoughts?

“Surely this will destroy any credibility the EFSF had.”
Yes, it seems to me that the EFSF in its current form is dead in the water and perhaps actually sinking.

“It strikes me as another ill judged compromise that unlikely to achieve much.”
Indeed and just look at the timings – another year of prevarication for something that is insufficient and misdirected. The search for a legalistic solution to an immediate financial problem is madness.

In contrast to the Dork, I believe it is solely a fiscal problem – monetarism has failed totally, by buying assets semi-directly and targeting the long-term yield curve the Fed has acknowledged this. The Fed, though, is operating in an economy where the state comprises a much smaller proportion of the economy than in Europe. Even in the open economy that is Ireland the state spends more as a percentage of GDP (and over 50% in terms of GNP) than the US. From a high of 52.8% (France) down to a low of 41.1% (Spain), the major economies in Europe are dependent on state spending.

In short, you can provide all the liquidity you want, but all the fiscal authorities of Europe are living beyond their tax income (barring the tiny ones). Even the 3% limit implies real growth of 3% which has been seen where on average over the last ten years?

@Stephen K & Colm McC.

“The Eurozone Can Be Saved”

I think not. Evidence for my asertion? I’ll start with everything they have done, and not done, over the past two years. And finish with Monday’s (tomorrow) FT interview with Jens Weidman, President of the Bundesbank. He says lots of things, including the usual nonsense about the ECB not being a lender of last resort (so if it is not a central bank, what is it exactly – oh for some decent questions from journalists)

But the killer (of the euro) statement is his assertion that only Italy can solve it’s problems.

Germany has a 183bn current acount surplus with PIGS.

There is a genuinely held belief amongt serious people that this is a one sided issue – its all the borrowers fault.

Because these people belive this, the euro cannot, and will not, be saved.

@Gavin Kostick (when you read this thread)

Yes, it was supposed to be a different link in the last thread. Unfortunately, I can’t find it now.

Suffice to say you can expect to see major PR battles over the coming days between Germans telling you that the ECB must not become a lolr and everyone else pushing a major PR campaign to say it should. There’s a fault line running right through the centre of the EZ at the moment and unless someone does something about building a ruddy bridge across it we are all going to fall down the crack.

You are looking at GDP ratios again – they are completly spurious.

Its all about the ratio of goverment money relative to credit money in the banking sector.
When I take my money out of a credit bank and stick it in the post office that money is essentially destroyed as it cannot be leveraged.
The banking system over they years replaced goverment money on their asset side with assets (property and the like) that have essentially no real net return.
The worldwide banking system is seriously dysfunctional – their balance sheets are completely divorced from rational investment allocations.
That is why worldwide debt has risen relative to GDP growth – their investments are net negative due to the fundamental change in the banking system since the 60s.
It (Debt / GDP) is just a metric of failure – it by itself means nothing really – so therefore you are attacking the wrong problem and will just make it worse if you try to reduce goverment money creation.

The creation of much more high powered money is the only mechanism in the current monetory system to reverse the now very serious distortions in Global trade.
The Feds & BoE actions have been a failure so far because even now credit dwarfs money by a gigantic margin.

@ Adrian Kelleher

That’s a very persuasive defence of Niall Ferguson, and I agree on the benefits of ‘the grand narrative’ or approaching the world from an explicitly ideological perspective. My problem with Ferguson is partly personal, (politically I don’t agree with him, I find him borderline unreadable and imagine I would dislike him intensely), but also feel he can be lazy, contrarian just for the sake of it and tends to use facts too selectively when supporting his positions. (Look at Colossus or Empire; his supposed recognition of Imperial crimes consisted primarily of well known ‘big ticket’ events, ignoring or underplaying most recent, specialized scholarship) Unfortunately he appears to be getting worse with time, having apparently become so embittered over the past decade that he’s incapable of reasoned or intellectually honest analysis. That seems to be a problem facing neo-conservatism in general, which would be better served by a Fukuyama or a Hobsbawm than a Ferguson. But that’s a personal position so is neither here nor there.
As for the content of your post, I agree fully and you put it better than I ever could.


My instinct tells me we are definitely in an endgame here which means we have to prioritse the the Europen Project over the currency. “Orderly currency liquidation” will be a lot more preferable than a disorderly political collapse.


Re article by Thomas Klau in Irish Times ( apparently Stephen closed that thread and referred comments to this one).

According to Thomas Klau:

“European credibility on the world stage would be destroyed for a very long time indeed”.

With all due respect to Thomas Klau IMHO that cannot be considered as a Political, Economic, Historical or Business argument and carries a pungent scent of desperation mixed in with fear.

Just because European leaders “risk” looking like a bunch of clowns to people in Figi or wherever will not effect how the rest of the world trades with Europe. That will only happen if we start tearing each other to shreds which risks occuring if discussions about “transfer of sovereignty” remain on the table.

It is only a few centuries since China believed (probably with some good reason) that we were a bunch of barbarians and the USA was established by people who had given up on Europe.

After 1929 we witnessed two opposing ideological attempts to unite Europe which failed abysmally and horribly.

The third attempt was the EEC/EU which “cycled along quite nicely” until the Euro currency along with “expansion max” was introduced and certain parts of Europe started referring to other parts of Europe as “PI(I)GS” in an attempt to conceal that various forms of contagious disease were spreading throughout the entire European body politic.

I hope that it is not too late to realise that the Euro (and not European Unity) in its present form is the illness and not the doctor .

In Ireland we witnessed enough half baked “doom mongering ” which promised all sorts of “plagues” if we did not vote in favour of Lisbon II.

Many Irish voters (I am glad to say I was not one of them) believed the “horsesh-t” that our future would be horrible if we did not vote in favour of it. Lisbon II was forced on us and forced through. Despite a yes vote the future immediately turned into excrement.

If we want to preserve European Unity we need to step back to the late 90`s and not take a leap into an uncertain future which will be manipulated by all sorts of opportunists.

If Europe takes a step back to a more recent and sane time we can then figure out how to go forward and take another look at how a common currency could actually work in Europe. After all we now have plenty of examples of how it does not work. We even have a ready made “think tank” called the ECB.

If Ireland cannot persuade Europe haw serious this is (and I am not sure we can although it may be worth one more brief effort) than IMHO Ireland better come clean about the fact that we have actually been printing a supply of notes in an alternative currency for the last few months.

Europe needs to step back to 1998 (when we had finally pacified the Balkans and knew what to do when Kosovo erupted) not “forward” to 1932.

By the way I dont mean to derail the thread with the above rant against Niall Ferguson, so Ill gently retire that hobby horse.

I’m afraid you are right. If the EFSF cannot raise 3b in a postponed sale then it doesn’t auger well for leveraging it up to a trillion. If nobody wants the plain vanilla version it is going to be difficult,if not impossible, to sell the version with bells and whistles.

In the meantime Germany is getting prepared (apparently, unlike ourselves)… A preview of study on Greek default to be published on Monday by Der Spiegal…

The German government is preparing for Greece’s possible exit from the euro zone in the event that the country’s new government decides not to continue with the previously agreed austerity programs. Experts at the German Finance Ministry have been simulating a variety of scenarios based on different assumptions, SPIEGEL has learned.

A so-called baseline scenario is based on the expectation that the situation does not get too bad. Under this scenario, Greece’s exit from the monetary union could even contribute to the strengthening of the euro zone in the long term, following an initial period of turbulence. The thinking goes that the currency union could be more stable without its weakest member.
Admittedly, peripheral euro-zone members like Spain and Italy would still face challenges, but the assumption is that they would be better able to tackle their problems without the additional burden of the Greek crisis. According to the assessment of German government experts, these countries may currently be struggling to get access to money, but unlike Greece they are not close to insolvency.

Under the Finance Ministry experts’ worst-case scenario, developments in the euro zone would be less favorable. In this case, Italy and Spain would find themselves in the crosshairs of the global financial markets, and their borrowing costs would rise. In this simulation, the European backstop fund, the European Financial Stability Facility (EFSF) would be forced to supply those countries with fresh money. For this to succeed, the experts argue, the EFSF should be expanded as quickly as possible so that it has an effective lending capacity of €1 trillion ($1.4 trillion).
Vicious Circle

In addition, the government experts also looked at a so-called worst-worst-case scenario. In this model, Greece’s new currency would dramatically devalue against the euro. That would have the positive effect of making the country’s exports cheaper, but the negative effects would outweigh the benefits. The country’s national debt would rise despite a haircut, because Greece’s debts would still be denominated in euros. The country’s credit rating would be immediately downgraded again, and Greek companies would struggle to get access to money because the country’s banks would also be cut off from international capital markets.

Many firms would go bankrupt because their debts would also be denominated in euros, with the result that many more workers would lose their jobs. Domestic consumption would collapse, aggravating the downturn. The country could take decades to free itself from this vicious circle, and other nations might also be drawn into the vortex. The German government experts do not, however, consider this scenario to be the most likely one.

@ PR Guy

Thanks. I think I read the article you were thinking of anyway.

More related Sunday reading, Heather Stewart in The Observer:

“These bailouts aren’t democracy. What’s worse, they aren’t even a rescue”

“Now, there’s no doubt that Silvio Berlusconi is both odious and ineffectual; but for Italy’s neighbours to be demanding the departure of its democratically elected leader was hardly a shining moment for European democracy.

“Of course, the fig leaf is that Berlusconi’s Yale-trained successor, Mario Monti, will lead a “technocratic” government that will implement drastic spending cuts and necessary structural reforms to nurse the economy back to health. Exactly the same story is being told about ex-central banker Lucas Papademos in Greece. But there are two major flaws in this argument. First, there’s no such thing as a harmless, neutral technocrat; and second, the plan they are toting won’t work.

“The recipe of privatisation, deregulation and welfare cuts that is being presented as the only solution to Italy’s woes is a deeply contentious one. Decisions on how the professions should be regulated, how easy it should be to fire staff, and how much of the national infrastructure should be owned by the state, for example, will be fiercely contested, and have profound implications for the distribution of resources in society.”

“The Central Fund is the amount standing to the credit of the EXCHEQUER ACCOUNT which is kept at the CB & FSA of Ireland.
The banking transactions of the fund are effected through the exchequer account” – extracted from the Irish Public fiance procedures document.

I believe this is the mark of true leverage in the domestic financial system – Karl can jump in and correct me if I am wrong.
Up until 1987 it was in the 10% to 12 % + GNP range so therefore we had a 8 to 10 leverage in the system.
It declined to 8% in 1995 and then began a more dramatic decrease to level off at 2.4% / 2.8% between 2002 & 2008 – it then increased during the economic crisis towards 5.7% in 2011.
We have a long way to go before we get back to the more rational leverage of the pre IMF in blueshirt / crony soldier of destiny clothing that was the 1987 Tallaght strategy.


These EU politicos never were great fans of democracy to begin with, the dodgy way they implemented Lisbon is evidence enough. I am most concerned for the social peace that is left in Europe, these people have the hallmarks of fanatics or captured politicians, staying this course against all the evidence that is out there.

At the end, the objective of Germany’s reunification was to create a European Germany, and not a German Europe.

What this EU wide political default results in at the extreme right and left fringes is another aspect that contributes to more social problems, while the real problems were never tackled, and only lip services were given as early as 2008 by Merkel and Co. and none of it was implemented.

“Under the Finance Ministry experts’ worst-case scenario, developments in the euro zone would be less favorable. In this case, Italy and Spain would find themselves in the crosshairs of the global financial markets…”
The German experts are idiots. Even their worst-worse case scenario is ridiculous. To deal with it first – there is no point in Greece leaving the eurozone if all private sectors are not redenominated in new drachma too. ‘Saving’ the sovereign at the expense of the private sector would be as incomprehensible as saving the private sector (banks) at the expense of the sovereign. Expect to see instead a fast-track examinership process whereby the companies get to rise phoenix-like from the ashes.

The worst case for Germany is that the markets take a close look at who loaned the money around Europe and then look at the German state’s capacity to support those banks when their assets go bad. That is the worst case for Germany – Germany moving from the strongest economy to the most bust.

@rf@Adrian Kelleher

Re Niall Ferguson(apologies to everyone else for straying back to Niall Ferguson but hopefully some readers,( especially those who cling to the hope that “one last effort” might save the Euro) may find my comment indirectley relevant to the to the thread topic.

I have enjoyed reading some of Niall Fegusonś history writings. Unfortunately I tend to instinctively disagree with many of his political views and his currrent affairs analyses (although he communicates them very well).

Around 2-3 years ago Professor Ferguson seemed to be a”go to guy” when everybody was panicking. Recently he has also emerged as “a go to guy” possibly because we are all panicking again.

Despite disagreeing with many of Professor Ferguson`s political views I feel it is not excessively partisan to caution people about some of his predictions.

A good economic historian (and Mr Ferguson is definitely one) is not infallible.

At the beginning of 2009 Professor Ferguson was critical of the US stimulus. However after some time he appeared to go very quiet about it on the media outlets that I follow.

I believe the reason why Professor Ferguson went quiet was that I remember him writing in 2009 words to the effect that if unemployment in the US managed to stay below 11% the Obama administration would hail the stimulus as a success.

These days the US administration do not claim the stimulus was a great success even though unemployment remained well below 11% during the stimulus period and currently stands at 9% (despite an increasing population and more discouraged unemployed people being “encouraged” to seek work)

The pro stimulus people claim that if the the stimulus had been 1.3trillion dollars instead of 780 Bn dollars it would have been a “success”.

Given that 780 BN dollars in 2009 and 2010 ensured unemployment is at 9% (well below Mr Fergusons 11% “success measurement” point) it is worth wondering what would US unemployment be if the stimulus had been 60% bigger. IMHO a conservative guess would be that US unemployment would not currently be 9% but would be 6%.

In fairness to Professor Ferguson I have not yet heard him claim (on any media outlets that I follow) that the US stimulus was a complete failure. However, I wonder if he felt confident about making that claim would he be glad to oblige?. 🙂

I don’t agree that the Germans are idiots, they are playing a game of brinksmanship that is not too different to that of the creditor bank when the bankrupt debtor goes in to seek debt forgiveness. When the debtor countries say ” austerity is barbaric and won’t work” it’s equivalent to the individual going into his bank and saying, I can’t pay that much, I just don’t have the means. And when Germany says “this plan will work” it is equivalent to the local bank manager saying, well, there’s no reason you can’t feed a couple and four kids on, what, 50 a week. The 50 being, of course the amount left after debt interest. The point is the Germans are basically running the system to the edge to make absolutely sure that it’s message as a creditor, is rammed home.

The EFSF is a joke, it always was. How can European politicians claim on one hand that the Chinese must buy the debt, but then on the other that Europe is self funding when looked at as an entity. it’s clear that the ONLY reason the Mythical Chinese buyer was brought up was to make sure nobody asked the whereabouts of the German, Dutch, Finish money.

The danger is that this game goes too far. The debtors are fighting back hard and as the whole of the anglo world is in the debtor camp, the narrative we are most amenable to hearing is that austerity is dangerous. It is, but so is moral hazard.

Are we all ignoring the reality that there’s virtually zero chance of any referendum giving more power to Europe being passed in Ireland or several other countries.

I suppose people can argue that it’s about ‘getting the message out’ and ‘running a good campaign’, but it seems clear that people’s trust in these institutions is so low that (in Ireland anyway), I can’t imagine a referendum passing.

I can see the ‘No’ camp already – the argument runs “You said ‘Yes to Lison, Yes to jobs’; you got your ‘yes’ but there are still no jobs”.

Simple and pretty convincing to many voters.

the related question that I would love answered seriously is: Can the Euro be saved within the current legal structures of Europe, or at any rate without a transfer of powers that requires a referendum, and if so how?

I think the Government might be equally interested in the answer to this question…

Are we all ignoring the reality that there’s virtually zero chance of any referendum giving more power to Europe being passed in Ireland or several other countries?

I suppose people can argue that it’s about ‘getting the message out’ and ‘running a good campaign’, but it seems clear that people’s trust in these institutions is so low that (in Ireland anyway), I can’t imagine a referendum passing.

I can see the ‘No’ camp already – the argument runs “You said ‘Yes to Lison, Yes to jobs’; you got your ‘yes’ but there are still no jobs”.

Simple and pretty convincing to many voters.

the related question that I would love answered seriously is: Can the Euro be saved within the current legal structures of Europe, or at any rate without a transfer of powers that requires a referendum, and if so how?

I think the Government might be equally interested in the answer to this question…

@Georg R Baumann

…these people have the hallmarks of fanatics or captured politicians, staying this course against all the evidence that is out there.

At the end, the objective of Germany’s reunification was to create a European Germany, and not a German Europe.

It is a question of trust. And after the experience of the last three years would trust a German Europe or indeed a French and German Europe to be a Europe of equals.


Good point that it would be better to go back to 1998 than to darker places. But ever since Merkel came in she started to turn the German focus towards Eastern Europe and Russia.
She appears to have completely sidelined the Commission and has pursued a German/BUBU/ECB solution from the outset. A solution that has failed visibly at every turn but that did not bother her as the German economy was doing fine.
Merkel pursued a national solution to a European problem, regardless of the consequences. The conseqeunces are now the impending collapse of the EZ but are far more serious than that.
Merkel drove a stake through the ‘solidarity’ principle in the EU treaty.
It is doubtful if the fallout can be contained to a 1998 backstop.
Merkozy, Trichet and the ECB have too much damage done to hope for that.


re worst-worst case scenario.
… because Greece’s debts would still be denominated in euros.

How about a worst-worst-worst case (for the creditors that is) where Greece says whatever debts will be paid back (post default of 80%), will now be in Drachmas.
Or even a worst-worst-worst-worst case. 100% default and back to Drachma.

Surely the question is, as a whole has the Euro been good for us? (Impossible to answer due to the counterfactual nature of the question I know and the multitude of ways you can interpret the question) Specifically what would our economy have looked like in 2008 if we had stayed outside of the single currency? What policy options would we have had to deal with the crisis post 2008?
Its something I know little to nothing about so if anyone has any expertise or reading recommendations it would be much appreciated.

@ Livonian
As far as I could tell ‘the stimulus will never work’ quietly became ‘US debt is unsustainable’. Perhaps thats unfair, and hes undoubtedly an excellent economic historian, its just a pity to see him develop the worst characteristics of US punditry. (To give the man his due hes on to something on the use of counterfactuals however)

“I don’t agree that the Germans are idiots…”
Not the Germans, per se, the “German experts” in the Spiegel piece that Ceterisparibus refers to. The inability to even perceive of really bad events is what got us into this mess, it has sustained the mess all the way through and it is going to be the undoing of the euro and with it the EU at the rate things are progressing.

@ Colm McCarthy

“But Ireland breached neither the debt nor deficit ceilings in any year up to 2007.”

Funny though the way our banks were breaching any and every rule of “prudential lending. Sowing the seeds for loss of sovereignty and massive wealth destruction. BoI 222 years to reach 100bn then 4 years later 200bn and the government coffers awash with money swishing around from the mad building boom. No wonder they did not have to breach the deficit ceiling. They had all this money pouring in through the back door.

In the sense that the German experts are ignoring the festering well of bitterness that their behaviour is creating, I would agree and the comments on trust with respect to European institutions ring very true.

There may be an element of Hubris in Germany’s behaviour, but up until now, at least, the Germans believe that they are still in control of events. They seem to be weighing the politics well, hold firm on a policy until it has well and truly exhausted it’s usefulness and then decide based on events. So they held tough on Greece until it looked as if it would fail and then they acted. Granted it came with a lot of noise and bluster, but they gave it another line of cash. Then when the Greeks exploded with the referendum decision, they stood back and considered, a full cave in or a double down. They chose double down, because for the first time, they openly stated that default meant expulsion from the euro and the EU.

I also don’t fully get the manner in which the market is behaving. In my experience, a market panic is an unseemly rush for the exit. All bonds collapse together or they all stabilize together, I have never seen a series of market mini panics such as this before. For instance, everyone knows that Italy has some 350bn of debt roll overs next year and everyone knows that the Caixa’s in Spain have been a toxic dump for bad debt for years. Yet, some bonds stabilize and the panic rolls on one country at a time. Why is that? A conspiracy theorist would say it’s because the ONLY buyer in the market is the ECB, and French/German banks. We are in a crisis, that is not faked, but we are in a managed crisis today. That may change, but it hasn’t yet. When it does, the question will be whether Germany will, by then, have succeeded in getting it’s message home (we are not resetting the debt machine) or not. If it has, then Germany will step up and start bailing, if not, they let the whole thing go. Today, all power is with Germany. The Brits are scared that the Germans will succeed in making a stronger union with transfer capabilities and a tamed financial system, because that would destroy their only remaining industry. This game has a long long way to run, IMO.

@Frank Galton
I did preface my remarks with …if it is true….the denial you linked looks pretty weak. Obviously, it is being taken very seriously…denials on a Sunday.
The Telegraph is not noted for being sloppy…certainly Euro sceptic but then sources can be wrong.
It will be interesting to see the full report published by Der Spiegal on Monday.
The inability to even perceive really bad events could apply to our lot….no game plan appears to exist.

Ambrose is in full flight…

A sample…

“In Italy, the European Central Bank has engineered the downfall of Silvio Berlusconi by playing the bond markets, switching purchases on and off to enforce compliance with its written dictates (“La Lettera”), and ultimately allowing 10-year yields to spike to 7.45pc to drive him out.

Europe’s president Herman Van Rompuy swooped in to Rome to clinch the Putsch. “Italy needs reforms not elections,” he said.”

We are not that far from use of EU judicial coercion, and then EU police power, and ultimately EU “border troops” – for those old enough to remember Soviet methods of fraternal assistance.

@Livonian, rf

Krugman and Ferguson each dressed up his arguments in technical terms but, IMO, there was a more fundamental difference between the two that remained unstated.

Krugman doesn’t believe it’s worth it to preserve the dollar as the world’s reserve currency if it means decades of hardship for its unemployed and working poor. Ferguson likewise understands perfectly well the severe (and, in a country like the US enjoying basically limitless monetary freedom, avoidable) social consequences that must result if bond rates and the preservation of reserve currency status become the be-all-and-end-all of government policy.

The real difference between the two men is simply that this is a price Ferguson is willing to pay, or at any rate to have US citizens pay, to secure American strategic dominance into the mid-century period. This sort of reasoning might be expected of a man who metaphorically speaking spends a lot of his time in the company of the Committee of Imperial Defence.

I agree wholeheartedly with Krugman because I share his value judgement. OTOH, I haven’t looked in to the matter closely enough to decide whose claims were more accurate technically. I’d guess Ferguson would claim that even if the figures don’t support his viewpoint today it’s too soon to judge as his arguments cover a 20-30 year timeframe.

“You think too much about the French and not enough about France,” Pétain’s ADC once told him. Turned around, it applies well to Ferguson: “You think too much about America and not enough about the Americans”.

Re Monti – it’s hard to say how this will go? The optimistic side of me says that he has that grandfatherly appeal to pacify the people.
The pessimistic side says that he lacks charisma and charm and will become a very very easy figure to hate. But the measures announced so far are no where near enought to bring him down. Give him til June 2012 and then see what happens.
From the Irish point of view we just have to stand back a little and see how things evolve. Very important for us to start on contingency planning right now. There is so much beyond us. To be honest I think that Italy was never the weak point that people made it out to be. The markets have eyed out Spain and just wanted Italy stabilized before moving onto it.
The focus will shortly move to Spain – and that’s when the show will really start

“very important for us to start on contingency planning right now”

Very true…but will we just sit back and wait for it to happen?

Apparently the Americans are ramping up efforts to limit the exposure of their banks and estimates suggest that it could be up to 4 trillion.
If all this retrenchment takes place it is going to bring down the European banking system anyway.


“As the experience with AIG shows, and as adverted to by some bloggers above, when push comes to shove banks, irrespective of their domicile, will be bailed out by the state whose entire domestic banking system – and economy – is at risk if it does not.”

There is ‘bailed out’ and there is ‘BAILED OUT!’.

The state should aim to take the depositor business over – or arrange for it to be. All liabilities to old funding and old employees should be dumped in a resolution or liquidation with compensation. Just stuffing money in (sucked from the future in the case of promissory notes) so the retirees with the free golf club memberships, bonused-up executives and stale bondholders can party-on is a ‘BAIL OUT!

We continue to have many commenters blaming Brussels, Frankfurt, Berlin and Paris for the parlous state of our economy. There was no gun held to the head of a single Irish politician or bureaucrat. Of their own volition our politicians and bureaucrats, when asked, agreed to backstop our corrupt and bankrupt banks. Ir was a move that stunned the financial world, a government of a “sovereign” country bailing out privately owned banks. Unlimited guarantees, no terms or conditions, just take our taxpayers money and carry on your merry way.

If an agency of the EU had forcefully imposed the burden on us there would have been blood on the streets. Now there are many of us quite incapable of facing the facts, who carry on concocting victim scenarios because what has happened is so incredibly asinine that surely we could not have done this to ourselves. Well we did and since we cannot conduct the Auto de Fe of the Spanish Inquisition as in Toledo Aug. 16th 1846 we are reduced to whining about the European instititions that are our sole means of support.

Fiscal union of the 17 eurozone countries and later the 27 EU countries though the creation of a common ‘federal’ treasury is the best way for the following reasons
1. Assymetric shocks. In a fiscal union the ‘shocked country’ would be helped by fiscal transfers to help it deal with the ‘shock’. It would need this beacuse the typical route to recover – devaluation is not available to it.
2.The Stability and Growth pact already made a limit of 3% deficit yet wasn’t enforced. JCT has signalled this lack of enforcement was a major cause of the crisis and pointed the finger at Germnay and France. A federal treaury would help enforce whatever debt brakes agreed that countries don’t have in their constitution. If countries don’t comply federal funding could be delayed. Krugman of course would argue that debt brakes have been negative for many U.S. states during the recession, any debt brake system, an obvious nessecity of a monetary union, would have to be designed carefully to allow room to manouver in a crisis.
3. Income growth in ‘disadvantaged’ or perhiperhal areas – new Mexicos growth in income is largely due to Federal aid transfers.

Of course its not easy to get this to happen. Not easy and impossible are different things and the negativity surronding the possibility of this option surprises.

Of course many people would argue against a fiscal union. The usual is ‘we could never get it passed’. It would be interesting to read why people think the current situation or breaking up the monetary union are preferable, apart from the usual.

@Frank Galton

“EFSF says Telegraph story that it bought its own bonds not true”

That’s what I would say if I were officially denying it.

There aren’t enough smart journalists around these institutions (they end up becoming institutionalised themselves and take whatever pap they’re given by PR Guys so they can file their copy quickly and get back to the restaurant in Paris/Frankfurt/etc.) who can ask questions like: “Can you show us tangible evidence to back up that statement?”

@Mickey Hickey
“There was no gun held to the head of a single Irish politician or bureaucrat.
If an agency of the EU had forcefully imposed the burden on us there would have been blood on the streets. Now there are many of us quite incapable of facing the facts,..”

So its ok then to tell the bondholders in IBRC to get take their losses at this point?.
Or to the the unsecured in AIB/BOI/Ir Life to swop the bonds for the State capital in those banks?

Ireland has been robbed blind. First by its own greedy and incompetent bankers and politicians. Then by the ECB who said tough. Now that you have backed yourself into a corner, we are going to pulverise you.
The reason is that our friends, the big banks, tell us they do not want to take their losses and they want their losses back and they do not care how we get it for them. Or how much destruction is caused in the process.
And PS, the solidarity clause in the EU treaties was just for optics. You really did not believe it, did you.

@Mickey Hickey
“We continue to have many commenters blaming Brussels, Frankfurt, Berlin and Paris for the parlous state of our economy. ”
Erm, I think on this thread they are being blamed for the parlous state of european governance and so the european economy, not the Irish one.

I am not sure that the US is much of a role model.

November 2011
California and Bust
The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops—the local level, where the likes of San Jose mayor Chuck Reed and Vallejo fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society.

Is it time to put pressure on Germany to leave the euro? Pros: 1.they’re not willing to pick up the tab. 2.Refusing QE. 3.They dead set against a bit of inflation. Cons: 1. A lot of countries need a kick up the ass, a bit of german discipline wouldn’t go astray. 2. they’re the most credible country in the euro.

I think that ‘the Germans’ might believe the introduction of parallel currencies to be the worst case scenario. These currencies would then presumably be under national political control & the sovereigns issuing them as payment would then guarantee an exchange-rate with the euro. The guaranteed exchange rate when paying taxes would presumably be 1:1. Then there would be no need to change over credits or debits into new currency but the ones who are dependent on state-funding would then be paid partly in the new currency.

‘Liquidity-starved’ nations could then print themselves billions, that is, if they wanted and believed it to be a good idea.

Anyone considering bribing a tax-collector or hiring a tax-lawyer/accountant to minimise the tax-liability would then have an interesting choice: Pay taxes in a soft currency or pay a hard currency to reduce taxes…

I would be more inclined to join the USA than an EU Fiscal Union after witnessing the narrow self interest displayed by the main players. At least in the USA there is a genuine cultural unity and full mobility for jobs. Some say language is superior to consciousness itself. Language differences in Europe are all but insurmountable imho.

“At least in the USA there is a genuine cultural unity and full mobility for jobs.”

Depends on the religious/secular split. Also, the housing crash means labour mobility is constrained. I

An open question: if the answer is that the ECB ends up printing billions (if not trillions) of Euros in order to save the day for the EZ, does evidence from recent examples of QE (e.g. UK, USA, Japan) provide us with sufficient evidence (and that warm feeling) to tell us that it will actually work?

An aside: are Spanish 10 years going to break 6% today/tomorrow? I see they were edging up this morning.

The rule of law is what applies. There is no European law that forces a government to bail out bankrupt or about to become bankrupt private companies. Ireland had every right to put Anglo Irish into receivership and then deal with the wreckage after the fact. Instead the panic stricken gov’t spread rumours in the Public Service that their pensions could not be paid unless the govt’ bailed out Anglo Irish. Similar propaganda was used on the general public to instill fear and anxiety, leaving the gov’t free to act irresponsibly. At the time I calmed some of the PSs’m down by telling them that a solvent Irish gov’t was their best guarantee of being paid with minimal losses. No they said the word from the top is if AI goes under the Gov’t goes under and the country will be wrecked. Unadulterated balderdash says I the road to ruin is paved with guarantees without terms or conditions limiting the gov’ts losses.

Even I a hard bitten product of Kerry politics who saw at an early age that the system was rotten to the core could not believe that the Irish Gov’t did not know that it was more important to protect the State than it was to protect the banks.

Now it is all water under the bridge as the Irish Gov’t digs itself in deeper with every transfer of funds it receives from the ECB/IMF.

AIBRC now IBRC is a millstone around the taxpayers necks that the gov’t has legally cemented in place, just because T Geithner wants you to do something does not mean that is how it must be done. As a matter of fact that is the first clue as to how it should not be done.

@ PR Guy,

“does evidence from recent examples of QE (e.g. UK, USA, Japan) provide us with sufficient evidence (and that warm feeling) to tell us that it will actually work?”

Turn the question on its head. What would have happened the UK and US if they had not engaged in QE?

@PR Guy
As Ahura Mazda says, you need to define what you mean by ‘work’. The question you should be asking about, e.g. Japan, is “what if the japanese did actually make all the right choices?”

It would imply that a decade of near-stagnation is inevitable, that deflation is baked in and that as long as you can fund domestically, you can ease the adjustment of debt-deflation.

I suspect one of the essential elements would be that death duties would need to be quite high – the embedded debt owed to savers would be haircut on their death by the tax on their estates.

Only read the Thomas Klau article, quite an argument he has developed. It brought to mind this Tony Judt description written a decade and a half ago:

“What is Brussels, after all, if not a renewal of the goal of efficient, universal administration, shorn of particularisms and driven by rational calculation and the rule of law, which the great eighteenth century monarchs strove unsuccessfully to institute in their ramshackle lands? Indeed it is the very rationality of the European Community ideal which has made it appealing to many European intellectuals..which sees in Brussels an escape from hidebound practices and particularisms, much as eighteenth century lawyers, traders and writers appealed to enlightened monarchs over the heads of reactionary parliaments and diets.”

A decade later Judt continued this theme:

“For if we look to European Union as a catchall solution, chanting “Europe” like a mantra, and waving the banner of “Europe” in the face of recalcitrant “nationalist” heretics, we may wake up one day to find that far from solving the problems of our continent, the myth of “Europe” has become an impediment to recognizing them. We shall discover that it has become little more than the politically correct way to paper over local difficulties, as though the mere invocation of the promise of a united Europe could substitute for solving problems and crises in the present. To be sure, there is a certain self-fulfilling advantage in speaking of Europe as though it already existed in some stronger, collective sense. But there are some things it cannot do, some problems it does not address. “Europe” is more than a geographical notion but less than an answer.”

Perhaps this thread should be titled “should the Eurozone be saved?”

@ Grumpy

In fairness it is more than just an EZ problem. The Great Moderation is banjaxed.

You could also throw up the STG/CHF chart over the last 15 years.


Good points.

It would be interesting to see a couple of likely scenarios painted (by an economist who knows what they’re talking about) if the EZ went one way or the other at, say, 6, 12 and 24 months points in the future e.g. the impact on different things such as inflation, employment, growth, debt, social/political factors, etc. with as much quantification thrown in as possible.

The arguments currently put forward by both sides seem to be somewhat limited in their descriptions of the consequences if we do or don’t – damned if you do, damned if you don’t… it would be nice to hear a few more specifics instead of generalisations. Maybe I could live with, say, higher inflation/interest rates/Germany leaving the Euro if I knew how much by and that there were some benefits on the other side of the coin too, etc.

Increased death duties? Isn’t that a form of wealth tax? I thought we weren’t allowed to do that? That would be as bad as taking money from bondholders! 😉

Hold the front page! (HT Telegraph)

“Italian bank UniCredit to launch €7.5bn rights offer and will not pay a dividend in 2011. Third-quarter net loss €10.64bn, analysts expected €7.4m profit.. ”

And Angela is now telling us that Europe faces it’s toughest hour since the war. Her timescales are getting shorter. Something’s up.

The day after the FT post quoted in Colm McCarthys article and seafoids link above, Roubini appeared to become more pessimistic:

“With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.”

@ PR Guy,

“(by an economist who knows what they’re talking about), if the EZ went one way or the other at, say, 6, 12 and 24 months points in the future”

good luck with that; too many variables – the conclusions would be based more on assumptions as much as anything else. “by an economist who knows what they’re talking about” – how would you define that – I guess you’d want to filter out those who didn’t foresee the current crisis. Dr Doom perhaps?

Re unicredit: their takeover of HVB is a nice example of interdependencies. I wonder if German savers will get nervous.

@ seafóid,

oops! I didn’t refresh page and hadn’t seen you’d linked to the same Roubini article as me.


You might recall the extremely odd trading in Unicredit about 3 months ago., That looked odd.

They are very quick out of the gate.

Coincidentally, of course, just after Silvio resigned.

Wonder how much of an accurate reflection the accounts will turn out to be?


That graph gives you the remarkable history of politically manufactured spread compression, which directly led to the excesses that are being exposed now. The left hand side is the LTCM trade (a correction to which blew them up). The right hand side can be thought of as analogous to a coiled spring.

It is a classic demonstration of the argument that politics at the end of the day, is largely macroeconomics, but the actors don’t realise that and have little appreciation of the subject.

@ Grumpy/PR

the Uncredit losses are all down to a more or less complete writedown of the goodwill on their Soviet businesses.

QE is usually the first step in a multistep process. When individuals and businesses are over indebted as they are in Ireland QE is like an Aspirin in that it reduces the symptoms (reduced demand) in the short term but does nothing to alleviate the disease. The broad spectrum disease fighting drug is inflation which reduces the income to debt ratio and has never failed in the medium term. Even in Weimar Germany hyperinflation worked as people spent income within minutes of receiving it. The problem arises when inflation gets out of control and the inflation carousel has to be slowed enough to allow people to get off without injury. The introduction of the good as gold Dmark was what killed the Weimar republic economy. Sudden shocks even in the right direction are often catastrophic.

While we are in the EZ we do not have to worry about hyperinflation but we could fervently wish for inflation of 3-4% for a decade or so. On the other hand if we exited the EZ we could have 15-20% inflation in the first year followed by high inflation for as many years as we wanted. We would be much worse off in the medium to long term as Italy has demonstrated many times since 1861.


“wonder how much of an accurate reflection the accounts will turn out to be?”

I haven’t seen any comment on provisions for sovereign debt, it seems only goodwill etc. was written down.
Also interesting that the capital raising doesn’t even cover the 10.4b.

Is this the “big one”.

Sometimes I wonder if I am living on the same planet as some of these reporters.
As for Chancellor Merkel.

Speaking to her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig today, Merkel said leaders must create a “new Europe” by deepening ties in the 27-nation EU. At the same time, she repeated Germany’s rejection of jointly sold euro bonds.

We are all team supporters, but you can your own ***cking lift to the match. You are not coming in my Mercedes!

If the troika are so sure that their plan saves Ireland and it’s banks, why don’t they borrow at 2% and deposit in AIB at 4%?????


That graph suggests the politics can be the determining factor for quite a while, but the economics is only repressed. Eventually, if the economics is at odds with the politics, the politics has to be ‘reformed’.

From Blackrock
“Debt restructuring in Greece, Portugal and Ireland with write-downs for private creditors of 75 percent to 80 percent are needed to help stop Europe’s debt crisis turning into a global meltdown, said BlackRock, one of the world’s largest asset managers.”

This seems similar to what Colm McCarthy was suggesting last week in the indo. But they are explicitly including Ireland and Portugal and the haircuts are blade 1 all over.

@ CP

I aint an equity specialist, but Unicredit claiming the writedown does not affect cash or regulatory capital ratio’s. Think its just an accounting thing and an admission that they have massively overpaid or overinflated for the perceived value in their ex-Soviet investments.

@ Grumpy

Taking the longer view politics can also come on top. Did you ever see Brideshead Revisited ?

@Eamon Moran

That Blackrock report confirms what others have been saying for some time. Buiter of Citi has said that Greece needed an 85% discount to make their debt sustainable. But the inclusion of Ireland must raise alarm bells, particularly as we hired Blackrock to gain credibility with markets on the bank restructuring .
We cannot now rubbish their prognosis.
I have been banging on about our so called programme which is projected to lead to a debt GDP ratio of 118%..exactly where Italy found itself last week. With prospective growth falling rapidly..this is clearly unsustainable and this seems to be borne out by what Blackrock states.
It also now appears that we have a low key run on European assets and this may accelerate as markets digest this new information.
It’s looking grim.

@ grumpy

As I have often confessed in the past, I am not an expert in the financial arena but anyone with eyes to see can identify the fundamental problem. Sovereign states in Europe and their banks are locked in a dance of death and until they recognise that this is the case and make some arrangement to break this deadly embrace there will be no solution to the crisis.

As far as states are concerned, there must be a variety of methods, including the creation of safe bonds, to spread the reduction of debt over a longer period. As regards banks, being both too big to save and to fail, is an impossible situation and must also be corrected, the only viable means being to break them up into more manageable units.

Herewith a more authoritative voice than mine.

By the way, I was struck by the fact that there has been little discussion of one very significant element in the Weidmann contribution to the FT viz. his criticism of PSI or, rather, Germany’s (Merkel’s?) insistence upon it in the case of Greece. A 90% threshold of acceptance by free agents is nigh on impossible. Maybe the rich Greeks still hope to get off the hook! There can be no other explanation, in my opinion, for the behaviour of Samaras.

How about this for cheek?.

From IT
“Irish Central Bank regulation of the interest rates charged by lenders “would not be a good policy outcome”, Jonathan McMahon, the bank’s assistant director general for financial institutions, has said.

“We can think of lots of very good reasons why regulation of interest rates would not be a good policy outcome,” said Mr McMahon said today. “Much better could be done through the process of supervisory interventions.”

He was speaking on the fringes of a conference on ethics and compliance in the management of financial services firms hosted by the Association of Compliance Officers in Ireland.

I thought that lack of compliance got us into this bloody mess. Supervisory interventions…just look at how the banks treated government intervention.
Are these people for real.

Bought my first FRNs today – although the Physical Western European economy is much more capitalised then the Anglo world (it did not have its 80s thingy until the 90s) , its monetory structure is just too delicate with a still tiny base backing now flawed neoliberal “investments”.

Although elements of the French civil service are fighting valiently they have a US agent in the Palace and a Eastern German possibly Russian operative in Berlin while the Bundesbank was always a CIA operation in my opinion.

The Euro is Junk – the lack of fiscal defecit spending over these past 2 decades has wrecked & striped the real economy creating huge profits for the speculators (that was probally its function and not a Gaullist mechanism to take on the FRN).
It has nowhere to go now – it has served its function.


re “Irish Central Bank regulation of the interest rates charged by lenders “would not be a good policy outcome”.

It looks like we have another Mr Neary. We have appointed a Governor who would prefer to leave governing to the banks. What a country.

So if banks increase mortgage rates to 15% in the morning, our governor does not want the power to stop them! Or 25%, or 55%.

“Much better could be done through the process of supervisory interventions.”

Much better?. For the banks, no doubt. A friendly game of golf with the Taoiseach of the day should allow the banks to get their way.

We are back at square one. Except this time we rae already bust arriving at square one.

@ All

The only thing worse than unsupervised bankers running unsupervised banks would be to have governments – that lack all supervision – running them.

A bank has to make money, otherwise it ceases to be a bank. Governments live in an obligate symbiotic relationship with banks. If the latter are deprived of their freedom of action in relation to their essential tasks, the relationship breaks down, whether the taxpayer owns them or not.

@ All

Are Irish spreads widening when others are narrowing? Is this a reflection of the fact that the Irish government has revealed that it does not understand the consequences of its populist actions?

Previous day
This Morning








Bund Yield


Both your argument and that of John McManus are very unconvincing.

This is not a question of this particular interest rate reduction. This is a question of giving an independent Central Bank or Regulator the power to prevent banks from gouging.

Of course a Regulator, if given powers, will come under pressure from both banks and public. It is his job to make a responsible decision.

PS I do not agree that AIB should reduce all mortgage rates. It could have, if it had been smart enough, which it wasn’t, proposed to introduce the reduction for mortgages on the brink while retaining other rates.

I see no benefit in allowing multimillionaire PS retirees the benefit of interest rate reductions while continuing to stand on the necks of those about to expire from lack of funds.


Eh, you probably need to update that to this afternoon – Ireland was actually the best performer on the day pretty much, and Italy has blown out again, Spain too, and even Finland and Holland coming under pressure this time.

As regards gouging. AIB had the lowest SVR at 3% so last week’s political stunt just pushes the day when we get our money back further away.
About two thirds of the mortgage book are trackers so the cuts get passed on. Another 10-15% are fixed.
PS retirees have probably paid off most of their debts so the rate reductions have no impact unless you count the negative impact on their alleged wads of cash.


Thank you for this information it is always very helpful when people take the time to anlyse and present information. As you may gather I never operate on the basis that anyone is “operating” to an agenda. 🙂

However facts included in your data should lay any fears you may have to rest.

Your data presents a comparison between eight countries :

two countries (Italy and Greece) have just experienced a “transfer of power” which is questionable by any democratic standards,
one country(Belgium) has no Government at all,
one country(Portugal) is in the clutches of the Troika,
one country(Spain) is heading into elections on Sunday,
one country(France) is teetering on the crest of a credit downgrade so is doing everything it can to appease the markets,
one Country(Germany) is actually the DM currently calling its currency the Euro..

Finally: one country (Ireland) is the oldest continuous democracy in the EuroZone and is , ironically, also the one country currently most prepared and willing to exit the Euro Zone if the currency implodes in the very near future.

Unfortunately most member states of the EZ confuse democracy with “populism”. This is understandable because many those countries are either comparatively new to democracy or have no patience with it. Three of the most democratic members of the EU 15 (Denmark, Sweden and UK) are not members of the currency.

@Joseph Ryan @Ceteris

Under present conditions (ownership and legislation) the Finance Minister can order the most relevant banks to reduce the interest rates. People within the Irish Central bank can have opinions and nothing they say will ever be as catastrophic as what was said on the airwaves this time last year without, reportedly, consulting the finance minister.

The three main domestic banks are neutered any way so if they “want to throw shapes” let them. If the government tells them to dance they will have no choice.

I am guessing that the “charade” over interest rates is actually a reflection of the fact that the Irish Government does not know whether the Euro will survive and this charade is just a reflection of the “wait and see approach”.


AIB got caught on the wrong side this time.
I have just seen on RTE news AIB at 3% (as you say) BOI 3.9%, Ulster Bank and PTSB ~5.3%.

If this were in the remit of the Regulator he could allow a range of ~1% differential or a weighted cost of funds markup.
The question still stands. When down to two or three players what is a govt to do if a bank increases its rates to 10%.
Wring its hands?
[There is price regulation in other industries. Electricity for example. I concede it has not managed to keep the either the cost of electricity or payroll costs at anywhere near reasonable levels.]

As for trackers? If the banks had been put into liquidation, the trackers could have been cancelled.

In fact I do wonder if the NPV of projected tracker losses were factored into the bank stress tests. Or are other bank customers going to have to continue to subsidise tracker losses until they are old and grey.

@ CP

It’s war and Portugal, Greece and Ireland will have to be thrown to the dogs . Hopefully that will do the trick.


“thrown to the dogs”.

That was already tried and did not work. Second time around I suspect Ireland wont be around to let itself be “thrown” anywhere.

The last major war in Europe was just an “emergency” in Ireland.


I posed it as a genuine not a rhetorical question to test the accuracy of this particular point made by John McManus and I am suitably relieved by the news that you convey. Unfortunately, it may be due to the corrective actions taken yesterday and today by those unlikely to be swayed by electoral considerations.

If we followed your 1 pct margin, banks would not earn an acceptable return to attract private capital. Even Japanese banks make higher margins than that at around 1.3%. Bof I business plan envisages a 2% margin.
No risk capital and no return on capital means no credit growth.
Also I fail to see how liquidating a bank means all trackers go away. What are you going to fo? Insist on full payment now or just change the terms to suit you. We have contracts you know.

“The Swiss bank Pictet said Europe is sliding into a catastrophic slump with its policy mix of fiscal austerity, a credit crunch, and the lack of any lender of last resort. “The German recipe for solving the crisis is geared towards deleveraging all economic agents simultaneously. This is utopian. This policy will brutally depress aggregated demand. It is the route that led towards the Depression of the 1930s,” it said.
Mr Weidmann is unrelenting. He said that the ECB is prohibited by treaty law from acting as a lender-of-last resort for states, whether directly or covertly through the International Monetary Fund.
What chilled markets most was his comment that Italy’s bond yields are “no big deal” and that the country must sort out its own problems. “Monetary financing will set the wrong incentives. Fixing an interest rate for a country is certainly not compatible with our mandate,” he said.”

From an article by Ambrose Evans Prichard

I think that Swiss bank have it about right?

Italy is in as good a shape or better than Japan. Individuals and businesses in Italy are wealthy by any standard. It is only the Italian government that is over indebted and much less than the Japanese government (<1/2). The panic about Italy seems overdone to me since Italy is self supporting domestically as is Japan. The worst that can happen in Italy is a wealth tax spread over 5 to 10 years and the problem is solved.

Currency movement restrictions are easier to impose in this highly automated environment. Equeally easy to acquire is a snap shot of liquid assets. Unpleasant, unwanted but doable. Confiscation is the new game. It is a pity our developers and bankers have bled themselves dry or FG would be on the horns of a dilemma.


Also I fail to see how liquidating a bank means all trackers go away. What are you going to fo? …

In liquidation all onerous contracts can be cancelled by the liquidator. Onerous (per a well know liquidator) means onerous at the time of liquidation, not at the time of initiation.

Trackers would probably be put on variable immediately on liquidation.


Were the full expected lifetime losses of trackers provided for in the stress tests / capitalization?

@ Joseph

given that the banks can fund themselves at the ECB i’m not sure you could necessarily describe tracker mortgages as “onerous”, I’d just say they probably break even (on a pure cashflow basis) on most of them after costs etc are included.

Also, there is a big difference between putting a bank into resolution and putting one into liquidation. Lehmans went the liquidation route, which is generally seen as the main reason why no one in their right mind has tried that again. I don’t disagree with your point about tracker-holders being effectively bailed out btw, something that has often been missed in this debate.


fair points there. Trackers are being cross subsidised by other borrowers and are undoubtedly unprofitable for the banks but so was lending to developers and they have not been successful at unwinding that.

BTW if you “cancel” trackers and reprice to SVR the banks would be happier but I doubt if many struggling homeowners/voters would be ecstatic. Would arrears increase?

The sub par net margins on trackers are included in estimates of pre provision profits as are the cost of selling some of this stuff at a loss.

@ Tull

“Would arrears increase?”

I suppose you’d have to ask where SVR rates would set if everyone was on them and there was no need for cross-subsidisation, and how this would tie in with where the average ‘pain’ point becomes on mortgage rates for the average mortgagee, ie if tracker arrears rose, would SVR arrears decrease, and what would the net impact be? Do people on tracker mortages have tiny levels of arrears relative to those on SVR’s?


65% of the book is on trackers at say a margin of 50-125bp over the Refi-call it 2.25% on average. It would seem to me that this would go up by 50-100bps as banks reprice towards 150-180bps net interest margin. Arrears would rise on 65% book and fall on 15% of the book. Would the universe of borrowers be better off….not sure

I wonder where the debt crisis will go next. The UK, US and Japan have debt levels normally only seen in wartime. Will the vigilantes go after them once they are finished with France ?

Before the crisis gets to France it will go the traditional route through Belgium or possibly sneak through Luxembourg.


“Will the vigilantes go after them once they are finished with France ?”

I thought the UK/US/Japan were the vigilantes! They’re the ones doing most of the trading? Or is it those naughty Germans turning a quick buck? Or ‘turning a crisis into an opportunity’ as one likes to say.

Hard to say where France is really going… back to 3.8? Sarkozy seems to be keeping a fairly low profile today. It will be dogsville if it breaches 4. The ECB’s bond buying programme could really get stretched if it ends up having to fight a war on several fronts at the same time (i.e. Spain, France, Italy) – though to some extent I suppose it is already. History never seems to have been kind to those who stretched/diluted their firepower like that.

Imagine if the ECB were faced with a “Sophie’s Choice”… which one to support and which to let go under… Who would take the ultimate decision and who would they consult (or ‘be consulted by’) before taking their decision?

What are the known ‘wrong’ things that could happen over the next few days to exacerbate the situation? Greece not putting their commitment in writing (and not getting their next tranche)? Mario Monti failing to name his ministers or failing the confidence vote? What else? And what are the ‘unknown unknowns’ that could creep out of the woodwork this week I wonder? I already have the popcorn out, sitting here watching the show unfold (or is that ‘unravel’?).

@ Tull

there’s a pincer movement going on on Germany right now, yields higher on the day as follows:

Austria +30bps
Belgium +37bps
Holland +11bps
France +26bps
Finland +12bps
Italy +38bps

Meanwhile Portugal -5bps and Ireland +6bps are relative regions of calm…

ALSO: Irish consumer confidence at 18 month highs….

@PR Guy

“It will be dogsville if it breaches 4.”

4 isn’t even a Maginot line. The bond panzers can go through the woods and reach Paris by 5 .


that would be because most of the loose Irish bonds have been mopped up by the SMP, so no sellers. It now looks like a lot of the big bond funds which hold only the core are dumping everything. The crisis is getting crisisier or the Frog is being boiled now.

Ireland Q2 2011 only beaten by Lithuania, Latvia and Estonia. A good performance. When is Q3 released? Why isn’t Greece reporting its figures to eurostat?

@ Patrick

i think its not until mid-to-late December (Q2 was out 22nd Sept)

@ Tull

its true, the free float of Irish bonds are held by either (a) SMP, (b) domestic banks, (c) long term foreign holders, (d) eh someone else, so very little floating about out there at the moment. That said, most of the outstanding holders (and even without a-d above, there’s still a lot of bonds out there) seem happy enough to hold on to them at the moment, there is no panic selling of Irish amidst the rest of the mess out there.

@ All

Back to the matter in hand; saving the S.S. Euro.

Merkel continues to try and re-arrange the institutional deckchairs in order to please the first class (AAA) passengers.

Meanwhile, in the engine room, things are not going any better.

The S.S. Carpathia (torpoeded on 17 July 1918) i.e. the ECB, watches wondering what all those distress lights going up on the traders’ screens may mean!

@ Tull

Where is the money going if it is leaving EZ bonds?
And what will it mean for the banks ? Will Commerzbank go to bank heaven?

@ Seafoid

“Where is the money going if it is leaving EZ bonds”

2yr Germany @ 0.30%, 187bn in 1wk ECB deposits and 177bn with the ECB o/n i would suggest are the answers…

@ All

An idea floated on Der Spiegel (German edition) by Sebastien Dullien (N.B. of the European Council on Foreign Relations) is that the ECB would announce that to prevent a disorderly market, bond rates would not be allowed to rise above a particular level. Any takers?

Meanwhile, in the deck chair re-arranging department, the internal political debate in Germany continues apparently oblivious to what is going on elsewhere in Europe.,1518,797584,00.html

The impetus for constitutional change, as I have speculated earlier, is to be found in the series of institutional knots in which Merkel has succeeded in tying the European policy – or rather its capacity to implement one – of the German government.


“the ECB would announce that to prevent a disorderly market, bond rates would not be allowed to rise above a particular level.”

German ‘wiseman’ Bofinger suggested the same thing today too.

@ Seafoid

well, now that the SNB has said they’ll weaken the Franc forever if they have to, it seems like inflows have calmed down. Norges Bank kinda had the same impact on NOK too. Apparently a good bit of inflows into DKK has caused Danish Nationalsbanken to cut rates a couple of times in the last month or two, imagine SEK is seeing some similar flows too.


Having read this blog for sometime, the fact that there is no real argument on this thread is actually really worrisome!

What sort of Plan B can the Irish Government really have against what looks like like a tsunami?

@Colm McCarthy

‘The real issue is whether Europe can create a proper central bank and accountable decision-making authority to go with its premature currency union. If this can be achieved, the euro is worthy of rescue.


Blind Biddy is in Beijing.

A tsunami is something that occurs infrequently and cannot be predicted. The frog in water being heated is a good analogy. In our case l liken it to burying oneself in the beach up to the neck below the high water mark at Banna Strand or Ballybunion in the hope that the laws of nature will change before the next high tide.

A Government as indebted as ours is not a condition maker it is a condition taker. The ECB, IMF, European Commission will “advise” our gov’t on what to do and when to do it. In the meantime it is business as usual as our gov’t alternates between Kafkaesque, Orwellian and hallucinogenic statements intended to inspire confidence and give us the warm fuzzy feeling that our business is in good hands.

… and finally, Le Monde, begins to cop itself on and agree with McCarthy and Sinn Fein, Blind Biddy, and countless millions of stressed out European serfs …

There is a simple way to resolve the Eurozone crisis: the European Central Bank just has to state that it will be the lender of last resort for European states. But this solution, which has the support of many economists, is rejected by the ECB — a doctrinaire position, which a Le Monde columnist deplores.

Alain Frachon in Le Monde

Mersch said today that the ECB does not regard itself as competent to decide that the bond market has got its pricing wrong. This seems to be at odds with Lozza BS’s pronouncements that they were just being irrational.

I think some people think getting quoted in the press or on the TV is more important than having anything worthwhile to say.

Italy 10 year spreads back up at about the 4.5% level for repo margin again. Where is Mario’s popular mandate, and would it really matter that much anyway?

remarkable resilience in equity markets. There seems to be some forced selling in sovereign credit while equities are sitting there with no real selling because of the expectation of a rabbit exiting a hat.

@all Is Jens Weidmann more powerful than Mario Draghi?

Jens Weidmann, the new president of Germany’s Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It’s a lonely fight, however, and the pressure from Germany’s European partners is intense. Some warn that Weidmann’s course could end up destroying the euro. By SPIEGEL Staff.,1518,797666,00.html


The ECB is not allowed by enabling legislation to be a lender of last resort. Politicians have decided that a treaty has to be cobbled together before the ECB can act as lender of last resort. The survival of federations relies very much on consensus and the rule of law. One of the useful things our gov’t can do is to lobby for enabling legislation and as a goodwill gesture put it into law without a referendum.

In the meantime we are dependent on rolling over one year loans from the ECB. Look on the bright side, things could be worse. Do not forget that Italy has the resources to deal with its own problems.

@ All

We owe a debt of gratitude to Der Spiegel for providing a window to the debate in Germany.

@ Davd O’Donnell

Great article! But the question you pose is not the correct one. It should be; “is Weidmann right or wrong?”.

If we take the following extract as the key element, the answer is probably yes.

“Weidmann feels that these interventions are completely unnecessary. Italy, unlike Greece, is not bankrupt, he says. On the contrary, the country is very prosperous and could easily raise money by, for example, increasing taxes”.

On the other hand, there is the possibility that Weidmann could, paradoxically, like Andrew Mellon (“liquidate, liquidate, liquidate”), be both right and wrong. cf.

“We owe a debt of gratitude to Der Spiegel for providing a window to the debate in Germany.”

Or even ,perhaps, a mirror !!!

I always read Das Fenster to get a window on what is going on in Germany.

@ Grumpy

Mersch said today that the ECB does not regard itself as competent

was sufficient , frankly


You are not being fair there. Surely the disparate tones, contradictory views and tendency to parade half baked attempts at novel concepts of logic in public, make it competent as a media circus at least.

“Weidmann right or wrong?”

Weidman was picked by Merkel to do a job. Debt Collector.
The wealth of a continent continues to flow towards Germany despite the crisis. Weidman’s job is to hold the line ‘for as long as it takes’.

The logic of the German position and actions to date would suggest that by torpedoing all other solutions, Germany would happy to have a managed collapse of the Euro and that they would be first out the door and back to the Dmark.

People should not be taken in by Merkel’s ‘we will do what it takes’.
I believe she has been extremely duplicitous all along.
‘Watch what I do, not what I say’, should be maxim for judging Merkel and Germany.


Fair point. I suspect that Merkel, Weidmann, Stark, Weber, et al have all come to terms with Schrodinger’s Cat at some stage in their careers … but with the lunacy of the no-bank bondholder left behind policy now recent history, and no bank to be failed or a CDS to be triggered, and the Big Big Black Hole in the EZ banking system accelerating to keep pace with the expansion of the universe while simultaneously killing off all sovereigns in sight – it doesn’t take the genius of a Bohr to figure out that if Schrodinger’s unopenable box is opened up that the cat is both half-dead and half-alive and that nothing short of another Big Bang will restore the critter to some sort of life …. Time is the missing element – Weidmann, presently, is now correct on the past but wrong on the future. Thus far, we haven’t figured out how to turn the clock back …. not even on this blog

The header “the eurozone can be saved” reminds me of that old GAA joke.

Manager – “Pat- We’re taking you off”
Corner forward – “But boss we only have 13 players”
Manager – “Come off anyway”

@ David O’Donnell

Whatever about Schrodinger’s cat, I do not subscribe to any views that are of the black or white variety. Life is not that simple. The debate on this blog may be being unfair to Weidmann. cf. his views on PSI in his recent FT interview.

“FT: Was it a mistake to change the terms of the Greek private sector involvement in October?

JW: The Bundesbank has pointed out from the start, that one of the dangers of these PSI negotiations is that PSI might appear an easy way out of self-inflicted problems. If this is the case, you achieve the opposite of what you wanted to achieve. You will have more contagion instead of containment of the crisis because it’s seen as a potential model for other countries.

Once decided, reliability and trust in agreements is very important, especially in a crisis like this one – which is basically a confidence crisis. One of the effects of the renegotiation of the PSI is that the perception of sovereign risk in the market has further changed. There is now substantial private sector involvement that will apparently not trigger the credit insurance of the Greek exposure. So at least for some countries, the risk profile of their sovereign bond markets has deteriorated”.

And contrast his views with the WSJ article I linked to above.

“Germany and the Netherlands want clauses that would force bondholders to take losses as the price of a bailout to stay in the ESM treaty, whereas France, Ireland and Portugal want them removed. Discussions are ongoing with neither side appearing to be prepared to compromise, according to two people familiar with the negotiations.

The first group want to retain the option of private-sector involvement in future sovereign-debt restructurings, whereas the second group fears the market reaction that would follow—given previous official statements that insisted private-sector losses would be exclusive to Greece”.

A game of extraordinarily high stakes politics is being played between central bankers and politicians not just in Europe but globally with the game being at its most intense and most likely to cause the roof to fall in in Europe. But on the issue of PSI (AKA burning bondholders), logic is on the side of the bankers. You may burn bondholders from whom you no longer hope to borrow but not those to whom you are beholden for future funding. One does not need to be a genius like Bohr to grasp this point. Which raises a question as to the level of intelligence of certain German political leaders.

@ seafóid

Yves Mersch is a Luxembourg lawyer who did his studies in Paris. Have you considered the possibility that when he used the word competent he did so in terms of its legal – and, indeed, most common – meaning in French which is to have jurisdiction with regard to deciding a particular matter?


When it comes to systems – I’m more of a Santa Fe Complex Adaptive System man meself and in such systems, as a democrat, I grant precedence to sovereigns over banking systems. The Sovereign bond market in Ireland has been destroyed by the idiocy of socializing banking system private debt [where Weber, and I’m sure Weidmann, would prefer to have seen the norms of the market take its course; and acknowledging PD/FF lunacy locally] ….. Greece and Portugal, on the other hand, are genuine run-away sovereigns – where JW certainly has a point. And I tend to continuously repeat myself on the distinctions on both ‘debt’ and ‘bondholders’ – the former into sovereign and banking system – the latter into sovereign and banking system (to say nothing of real corporate in real economy) – otherwise we are into Ideological Conflationist Fallacy which will bring most of EU down – as it has brought Irish Sovereign down.

The Global Financial System is out of control and in a death spiral …


That’s a great Der Spiegal article.

This piece I found compelling and worth reprinting…..

Calls for the Big Bazooka

Only recently, a group of analysts from London were sitting in the black visitors’ chairs in his office. They were the same analysts who, a few months earlier, had assured him that Italy was solvent and had no financial problems. Now they were urging him to fight the euro crisis with the central bank’s “big bazooka.” And he is supposed to take advice from these people, these so-called financial experts, who, in actuality, base their assessments on nothing but the breathlessly fast pace of the markets?

Weidmann has opened his office window, which offers a view of the Frankfurt skyline with its bank skyscrapers. The ECB tower, however, is hidden in the fog. “We at the Bundesbank,” he says, closing the window with a smile, “are easier to see.”

Experts!!!! Was it Warren Buffet who said…”when the tide goes out you see who was swimming naked”…. Or something to that effect.


Yes – I find Der Spiegel International very informative …. especially when they are silent ….

Blind Biddy, on the other hand, is considering a copyright challenge to the German Constitutional Court, but having had a scan at the recent shennagins of the ‘precious’ poltroon of local 8*AGs – she has decided to hold her powder dry for the mo and to quietly polish her own bazooka.

@Mickey Hick
“The panic about Italy seems overdone to me since Italy is self supporting domestically as is Japan.”

I see this over and over again, but it’s false. At least, it’s absolutely foolish to compare Italy to Japan in terms of how much they fund domestically.

More than 95% of the Japanese government debt is financed domestically. Look up the Italian number. There is simply no comparison. I don’t know where that myth came from.

The comparison between Japan and Italy starts with their horrific demographics (with Italy being the lesser of two evils) and ends there. There is a massive gap in general productivity and a gap in competitiveness, even with the uber-strong yen taken into consideration. And Japan has its own currency, an overvalued one.

Looking at Japan gives you nothing regarding Italy.

I just came across this article – a conversation involving the fragrant Gillian Tett and the BBC’s Paul Mason. I thought this statement was particularly interesting:

“PM: Just because the cost of breakup is so great doesn’t mean it won’t happen. I was leaked some bank research and the sliding scale of banks that went bust was so frightening I decided it was impossible to report without causing panic.”

And this:

“SR: Do you think the euro will break up?

GT: I think it’s a possibility.

PM: It’s inevitable Greece will default and exit. I think Ireland will be saved because there’s too much riding on it as a big version of Monaco. Portugal doesn’t really matter, it’s not systemic, and so it all comes down to Italy.”

About 70% is the figure I see bandied about. 30% of the third largest debt market in the world is a fair sum and I agree with you.

@ PR Guy

“and so it all comes down to Italy.”

That was last week. Now the Alps have been crossed and France is ripe
The markets are like a dog that needs the leg of a table. And once the grip is secure you can’t stop a dog.

Remember what Sarko said in June

“I wasn’t elected so that France would experience the agony of Greece, Ireland and Portugal.”

The similarity between Italy and Japan is that in both countries the Gov’ts’ are heavily indebted. The population as a whole and businesses in both countries are wealthy. The Italians are indebted to foreigners and the Japanese are indebted to themselves. In my opinion the nationality of the creditor is not important apart from currency exchange risk. Too much is being made of demographics as a risk factor. When Ireland was churning out at the rate of 7 to 8 as opposed the present 2 to 2.2 we were living in abject poverty. Italy and Greece are awash in cheap labour courtesy of the refugee conveyor from North Africa. In the EU no country is an island and goods, people and money stream across borders continuously.

In Greece, Ireland and Portugal the public, businesses and government are all in very poor condition. It is not possible for the government of these three countries to squeeze funds out of turnips. In Italy thanks to their innate conservatism and distrust of government the public and business have amassed impressive rainy day buffers. Government in Italy has to tap that mother lode first before coming cap in hand to the ECB/IMF.

Germany which became a country in 1869 and inherited more than a dozen currencies in the process has a wider perspective on the uses and abuses of power and money than most people. For example a currency based on Rye markets and other agricultural markets was one of those inherited. Gold, silver and other metals were all in play. For many years there was a two tier system one informal and localised and the other formal, national and sometimes known as the Rentenmark. Built into the German psyche is this two tier value system, one as good as gold and the other which can be eaten by mice and rats. Today the Euro which replaced the Dmark is the good as gold standard, in German eyes it cannot be debased under any circumstances.

I would not be surprised if a two tier currency system emerges to take care of the needs of Greece, Ireland, Portugal while allowing the rest of the EZ to carry on as usual. That means the Euro would continue to circulate freely but the gov’ts would accept GIPs. All that is required to have a functioning and accepted currency is that the government accepts it as payment for taxes, fees etc.. It goes without saying that the Punt, Drachma, Escudo could also be employed.

As the crisis evolves methods of dealing with it will also evolve.

The situation is serious enough to cause great minds to focus.

@ Mickey Hickey

“I would not be surprised if a two tier currency system emerges to take care of the needs of Greece, Ireland, Portugal while allowing the rest of the EZ to carry on as usual. ”

Germany may not want a debased currency but it won’t want a rebased one either. Any carving out of the PIIGS will drive the German exchange rate north. No good for the Wirtschaftswunder.

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