WSJ on Irish and Portuguese situations

Charles Forelle writing in the WSJ points out some of the risks peripheral nations like Ireland and Portugal still pose for the Euro area, including the chances of our export-led growth strategy collapsing if the international economy begins to sputter, and the possibility of debt forgiveness and/or restructuring. From the piece:

Beside the government debt, Irish households are also heavily indebted—household debt hit €185 billion last year, or 119% of GDP. That’s down from the €203 billion peak in 2008, but it’s still more than twice household income.

“We are going to have to make a choice: What do we want to restructure”—government debt or household debt? asks Constantin Gurdgiev, an adjunct lecturer in finance at Trinity College Dublin and head of research for St. Columbanus AG, an asset manager.

Much of the debt is mortgage-related, and the government has faced intense pressure to craft a mortgage-relief program for homeowners, something it has resisted. Data show rising mortgage arrears and rising levels of negative equity among borrowers.

It’s a risky move. If too many borrowers with negative equity “strategically default,” the cost becomes huge for Irish banks, which would then have to turn to the government for more help—in effect, household debt would be transferred to the government.

“At a macro level, a debt-forgiveness scheme makes sense because people will be consuming rather than paying their debt,” says Philip Lane, professor of international macroeconomics at Trinity College Dublin. “But the scheme has to be surgically targeted so only the people most in need use it.”

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

25 replies on “WSJ on Irish and Portuguese situations”

‘surgically targetted’?

Essentially bank clerks will have the power to transfer a few hundred thousand in debt from an individual to the state with astroke of a pen. I guess it’s happening already.

This is Ireland. it will be a boon to fraudsters, farmers and all those already hiding money from the taxman. There will be a bank employee doing the needful in every Fianna Fail cumann.

It will be surgically targeted all right.

The risks posed by the so called peripheral nations still firmly centre on Greece if the following is accurate.”.
“Greece is proposing that the net present value of the new bonds be cut to just 25 percent of the value of those they replace, another source said. This is far worse than the figure “in the high 40s” that banks had expected.

The banks which the IIF is representing had agreed last month to a 50 percent haircut on the nominal value of Greek bonds, in a deal aimed at reducing the state’s debt to 120 percent of gross domestic product by 2020.

Reuters added that key details determining the cost for bondholders, such as the coupon and the discount rate, are still open, while Athens reserves the right to pass a law forcing reluctant creditors to accept the haircut.”

So the net effect is a fully fledged default by a Eurozone nation. This has to trigger CDS contracts with unknown consequences. But more importantly, it sets the precedent for For a default on Euro debt. Eurobonds will not save the day in this situation as the pricing and rating will likely diminish.
It could yet be Greece that brings the house of cards tumbling down and our problems on household debt will take a back seat. If they pass a law, as suggested, is it likely that the ECB will shut down their banks overnight.
Who was it that said..this is a game of chess…I think some high ranking Eu official. The reality is its more like high stakes poker.

The gov’t is on the horns of a dilemma. One prong the bailout of banks and bondholders has already been implemented. The second prong, the bailout of mortgage holders is being shied away from. The first rule of recovery from an economic setback is to keep the sovereign solvent. The second rule of recovery is to spread the pain evenly. Bailing out mortgage holders is replete with moral hazard while bailing out banks and bondholders is honourable and patriotic. How long do you think that argument will hold up particularly if the export led recovery becomes derailed.

@Mickey Hickey

There is every probability that the export-led recovery will be derailed. It follows that the goverment will soon be presented with exactly the dilemma that you describe. It’s a real head-melter.

Even if bankers want to do what Tim O’Halloran fears, they won’t be able because the state could not take the additional hit. I’d say that bank management are already in an outright funk.

This is terra incognita, but it’s hard to see how capital controls can be avoided.

“But the scheme has to be surgically targeted” Just as it was surgically targeted to those in NAMA who saw 58% of their loan worries float off with banks subsequently being recapitalised by the Program. Then, there was that lovely piece of carpet bombing called the blanket guarantee? Precision? We don’t do precision, this is Ireland. I have just being pouring over the doc’s leading up to the guarantee and the advice given by Goldman, by JPM, Merill our own DoF and CB was nothing short of disgraceful. I suppose the precision interventions will again be based on this expert advice when the adjunct professor has already provided it for free!

Re:185 BN private debt last year down from 203 BN in 2008.

One of the frustrating things I ( and probably most other people ) find about these figures are the “time lags”.

Since we know that lending in Ireland is very tight and loan amortisation is far in excess of new loans it would probably be better to presume that private debt may now be 175BN or less.

Private individuals (as they did in Scandinavia over the las t two decades) have also changed their attitude towards credit which may also be currently impacting demand.

Re : “surgically targetted” debt forgiveness.

I recently watched a BBC interview of Australian Economist Steve Keen (I am reluctant to try and post a link after my recent experience with Enda Kennyś Adenauer speech ) who advocates the following:

“write off debt, bankrupt the banks, nationalise the banks and start off all over again”.

IMHO ordinarily this would have populist except for two reasons.

One: In Ireland (and possibly everywhere in Europe within the next 12 months) we have already done two of these things.

Two: The interview actually came across as quite sensible and well argued.

We may well be heading in this direction (albeit in a process unlike the “pleasure” of prolonged teeth extraction) and in twenty years time, as with the Great Depression, we might look back and wonder why we “fiddled” around for four years before doing the blindingly obvious.

If any reader can spare the time it may well be worth it to track down the interview 🙂

Re last post should have written:

IMHO ordinarily this would have sounded populist except for two reasons.

Re Philip Lane

“But the scheme has to be surgically targeted so only the people most in need use it.”

I wonder how much of an “ideological journey” would be involved to re- write that sentence in the following way:

“But the scheme has to be strictly regulated over two years starting with the people who most need it.”

And so we go back to the age old post bubble problem of deleveraging. We must forgive debt to get demand going again, but we can’t allow rampant strategic defaults, so we’ll only forgive debt for those who need it most i.e. those that can’t possibly pay it back.

But if you do that, you have to find some way of forestalling moral hazard. These needy cannot be allowed to repeat their mistake. so they can’t be allowed to borrow again. Where’s the benefit to growth in that?

Germany’s central dilemma is repeated at even the most local level.

@ Bklyn_rntr: “So they can’t be allowed to borrow again. Where’s the benefit to growth in that?”

None! But that’s the predicament. ‘Growth’ has a mandatory nutrient requirement of credit – which when digested is not absorbed, but is excreted as debt. We’re back in the s**t-house again!

Maybe that’s why a simplified form of personal banktuptcy is being resisted. Its sort of OK if only a small number of rich folk avail. But if lots of poor folk file, that’s a big KO!

The political conundrum is: let banks go and impose a regime where tax income = government spending (that’s the end of you as a political entity), or ‘save’ banks and impoverish your citizens by doing so (that’s the end of you as a political entity – just not for the while).

When sovereigns decide, as they will be obliged to do, that ‘borrowing for growth’ is a political negative, then some sanity may return. Maybe.

Though history tells us that political elites will tear down their society in order to cling onto power. They believe themselves to be in-destructible.


@Brian Woods

“Though history tells us that political elites will tear down their society in order to cling onto power”

+1 and amen to that statement

Portugal and Ireland have 2 advantages over that Belgium doesn’t- stable government and united polities.

Anyone seen this in the Observer online today…
“Analysts say the situation is complicated by calls in Ireland and Portugal for a Greek-style debt write-off. Dublin and Lisbon are expected to take their case to the finance ministers’ meeting on Tuesday, arguing that they should also enjoy the 50% reduction on their debts that was negotiated for Athens.”

New policy?

@ Ceterisparibus:

Have to re-read the european union stuff again about ‘side-agreements’. The EZ is a bolt-on arrangement, so its provisions may only apply to those actually in EZ. Frantic phone calls sums up the situation.

The last sentence of the piece: “Greece is the crucible of the crisis” ?????? Methinks its a tad wider than that, and that IS the predicament. The politicians need to create a ‘Lets all default together now’ situation that it is not a ‘default situation’, but is a ‘reduction’ or some such piece of PR spinola. Again, PR Guy will come to our assistance on this.


Here is a google translate version of a Welt on Sonntag article. A bit iffy but you can get the drift…Super Europeans

“Nicolas Sarkozy and Angela Merkel in secret negotiations on a new stability pact, which could be followed by countries in the euro zone already by early next year Germany and France are no longer willing to wait for a consensus of all EU countries. If necessary, they would be willing to go ahead with some countries and thus to establish within the currency zone is a kind of club of the super-Europeans, whose members are subject to strict savings requirements. Could proclaim their anti-crisis plan, Merkel and Sarkozy already in the course of next week, it was called in government circles”

If the Germans go down this road it leads to disaster. Neither Italy or Spain are likely to be in & none of the program countries would be in. That leaves 5 sovvy defaults which would bankrupt the core.

La Stampa is reporting a 600bn IMF loan to Italy. Betcha Spain follows if true.

Not sure. If Spain and Italy get massive IMF loans at a reported rate of 4/5%
Then they are sorted for the foreseeable. That should take the pressure off. What happens to the rump ( including us) is another matter. It’s looking like a two tier Europe but how that would work is difficult to envisage. Super Euro and Ordinary Euro?

@Brian Woods

“Though history tells us that political elites will tear down their society in order to cling onto power”

Sadly it also teaches that economist ideolgues will tear down their society in order to avoid admitting the beliefs of a lifetime are bogus.

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