Ireland and Europe: the IMF menu

The IMF report on Ireland provides a menu of the different ways in which Ireland can be assisted by its European partners (point 42 on pages 26-27).  The IMF points out that such help would additionally benefit the wider eurozone by “enhancing the robustness of Ireland’s program, these and other potential steps would also provide a firewall protecting the euro area against potential shocks.”

I have enumerated the menu below.  While I imagine all of these are under discussion, I invite the readership to rank these options in order of importance.

1.  Underpinning growth and job creation

1A.  Enhanced support for appropriate public investment
1B.  Enhanced support for SME lending

2. Banks:  regaining market access and return to private ownership

2A.   Guarantees for term funding
2B.  conversion of short-term Eurosystem liquidity support into medium-term funding
2C.  capital support for vehicles designed to reduce deleveraging costs and spillovers
2D.  temporary equity participation in banks by European partners

3. Debt Sustainability

3A.  see 2D
3B.  refinancing prior recapitalization of banks
3C.  enhanced EFSF flexibility to facilitate Ireland regaining market access at reasonable cost

22 thoughts on “Ireland and Europe: the IMF menu”

  1. Debt sustainability has to be Number #1

    Need deal on debt.

    Otherwise, default inevitable in a never ending depressing economy/society …

  2. “temporary equity participation in banks by European partners”

    Commerzbank and Lloyds and a lot of other big hitters would be very interested in this scheme

  3. 3B is the one, ‘refinancing prior recapitalisation of banks’.

    Say 90% of the €62 bill in the form of a zero coupon consol.

    By the way, nice to see three-year money available to banks in a spot of liquidity trouble. Anyone remember how impossible this was just twelve months ago?

  4. The IMF staff are obviously impressed with the Government’s ability to apply fiscal retrenchment without provoking widespread popular unrest. So impressed in fact that they are prepared not only to turn a blind eye to the Government’s watering down of the original actions on non-financial structural reforms so that are now no more than window-dressing or the optical illusions the Government originally intended them to be, but to co-operate wholeheartedly in the crafting of this up-dated ‘green begging bowl’.

    JFK’s much-quoted inauguration speech aphorism has been turned on its head: “Ask not what you can do to help yourself, but ask what others can do to help you”.

    Ireland has a good case to seek solidarity and support from the rest of the EU and its institutions, but far, far more needs to be done to make it a convincing case. I expect it’s doubles all round at the Xmas parties of the pampered in the sheltered sectors.

  5. @Colm mcc

    Yes, and can anyone remember how all those senior unsecured bonds had to be paid because to do otherwise would irresponsibly risk the unsecured funding market?

    Remember how everyone that questioned this was a dangerous anarchist?

  6. @Colm McCarthy,

    It’s politics, pure and simple. What economics applies is being practised by some bond market participants – and even among them there is an irrational and excessive perception of risk that contrasts with its unjustified absence a few years ago. Chancellor Merkel has brought her voters a little closer to the edge of the abyss – and it has come closer to them as its sides fall away – so that they can peer into it. They are now a little more willing to consent to what is required. This has been signalled to Senor Draghi who is now prepared to exercise his discretion. This limited and grudging political support was not there 12 months ago. Indeed, there was outright opposition.

  7. @Paul h

    “Ireland has a good case to seek solidarity and support from the rest of the EU and its institutions, but far, far more needs to be done to make it a convincing case.”

    It shot itself in the foot bigtime by failing to make a stand at source of dilemma. By not mastering the arguments over bonds in bust banks and resolution, it is seen as the Irish state looking for concessions rather than concessions being sought to prop up the EZ banking system – at a time when thew EZ mistakenly thought it was a much cheaper problem to address than they now do.

    I keep asking for someone to use this blog to practice putting forward the evidence (rather than opinion or assertion that it is obvious) that Ireland was ordered to do this and that and / or threatened with something specific if it did not.

  8. @ CMC and Grumpy

    Paul Hunt has put his finger on it. That was then, this is now. It ‘s politics!

    The extent to which circumstances have changed can be gauged from the preparations in France for the loss of the country’s triple A status, the burning question being whether the pain will be alleviated by Germany finding herself in the same boat. A really big call by the rating agencies! Fitch has already indicated that any change will impact on the EFSF (and the cost of loans to Ireland).

    We had no leverage last year. We can have none now if any assessment is based on an unrealistic view of the overall political situation. Such an assessment requires recognition that the ECB is not going to turn into a central bank of the classic type with a single sovereign responsible for it. What will happen, and is now happening, belatedly, is collective action by core governments to fill that lacuna.

  9. So this extra liquidity allows for short term funding and greater bank solvency I guess. How does this solve the bad debts and systemic failure that is the root of this crisis – more lending?
    Expansionary monetary policy only substitutes for the loose lending illness responsible for the inflated retail/services sector.
    Unlike previous recessionary set backs to western growth, this time the level of lending has to fall in the West. Inflation will only result in reciprocal deflation as loose liquidity eventually gives way to the radicaly reduced levels of borrowing that has to happen
    This is just another tile on the Willie Coyote bridge – let nature take its course

  10. For a while there I could not understand why they did not give us near Interest free Euros on condition we buy Continental stuff such as a Luas for Cork.
    We could reduce our oil dependency and they get to keep their Industrial base – everybody wins.

    Then it clicked ( I am very slow)
    Everybody inside thinks we are going to do a hardish default – anything else such as going to punts and paying old debt via Euros is worse then pointless.

    I guess once all the insider Bank bond holders escape (all gone nearly ?) it will be time.
    Its such as sick world out there.

  11. DoD
    from the link
    “MR. BEAUMONT: At this late stage we’re not going to reopen the issue of senior bank debt. Now that the banking system has been restructured, the focus is on regaining market access, restoring lending and supporting the recovery.”

    and a wendy house

  12. @seafóid

    It’s the ECB_undesbank agenda. Time to nail a littel Hibernian Treatise to its front door! Blind Biddy figured that one out a while ago …

    QUESTIONER: I have three questions. The first one is whether this bailout can be considered a success without the additional financial help from Europe that you’ve suggested? The second is, can you quantify the cost of this potential additional financial support to Europe? Finally, you mentioned a range of different measures, guarantees, possible equity stakes. To your mind, what would be the most important support that Europe could offer Ireland? Thank you.

    MR. BEAUMONT: European support has been enormously helpful to the program already, which includes the substantial reduction in European interest rates agreed in July this year. What we arere saying is that additional support would reinforce the program and improve the prospects for success. In terms of the cost of this financial support, we indicate a range of options that could be explored, but a lot of technical work that would need to be done on any of those options so it’s too early to talk about the cost. The main thing that would be desirable would be to break the link between the sovereign and the financial system more effectively than has been done so far.

  13. @The Dork of Cork

    “I guess once all the insider Bank bond holders escape (all gone nearly ?) it will be time.”

    I think that is correct and the original architect of that ‘plan’ was J C Trichet. The bondholders had friends in high places for sure (though Vega clearly don’t think so – but they’re a hedge fund and politicians are trying to blame all their crap decisions on them as best they can!).

    But hey, wasn’t it always so? Nothing short of a revolution is going to change that and even then, the scum still end up eventually rise back to the top (witness Russia 1917-2011).

    I’m bearish about where things stand today vis Ireland, IMF, ECB, EZ, exits, defaults, etc.

    If France – and maybe others – gets the long awaited AAA downgrade soon and the EFSF swiftly follows suit, it (along with all the other problems like paying too much for our debt) sure won’t do us any favours in terms of our debt sustainability, general depression in the country and potential to default and/or possibly leave the Euro. I have a feeling that more downgrades in Europe could be the trigger to a lot bigger troubles.

    I also think Europe is already in a recession and when recovery does eventually come, it will be a jobless one and we will have consigned a generation (and more) to the bin. There’s also a whole pile of trouble still to break out in (2012 I’m sure will see it come to a head) Ireland around mortgage arrears/defaults, accelerating retail (and other small) business collapse, further job losses, further house price falls, further forced austerity and so on. Lots of medium-sized problems (for want of a better way of putting it) all coming to the boil around the same time as the more powerful countries in Europe continue engineering things in their own self-interests.

    It’s also hard to believe that there won’t be some European sovereign or bank casualties in 2012 and that will exacerbate the situation. The way I see it, there are more things that could go wrong than go right over the next few months and I am definitely ‘risk off’ (except for the odd short spreadbet) for the forseeable future. As of yesterday, I am now totally liquid and have spread my currency holdings widely and I even bought some gold and silver coins for the first time in my life (tip: they seem to be a lot cheaper if you get a mate in the US to buy them for you). I just need to finish clearing the remaining debt now and get rid of that mortgage. I have vowed never to borrow money again (and I grow my own veggies too and on the advice of Eoin Bond I think it was, bought a baseball bat 😉
    ).

    Looking slightly further afield, a limited war with/armed strike on Iran and subsequent oil price hikes and the economic impact of that has to be a possibility sooner rather than later (what are all those US troops going to do now they’ve pulled out of Eye-raq?) but not until after the US elections you would have thought. Currency wars possible in 2012 (if they aren’t already going to some extent)? The ‘Arab Spring’ probably hasn’t come anywhere near closure yet and has the potential to cause further problems in places like Egypt and new problems in places like KSA. The terrorists certainly haven’t gone away (and I should include boardroom terrorists in that – God knows, I’ve certainly met one or two of them). I suspect there will also be a general, possibly marked, decline in the fortunes of the BRICs in 2012. More widespread social unrest is a given, even in police states like the USA (and it is).

    Global bank job losses are looming in 2012 (I’ve already seen a couple of drafts of the letters) and I still think there are timebombs somewhere in derivatives that could go off at any time. Intrest rates can’t stay as low as they are indefinitely either.

    So yes, I think you’re right….. we could well be on the default path and we probably won’t be lonely on that journey.

    And the climate is coughing and spluttering too.

    Now that I’ve completely depressed myself by thinking about all that, I think I will go hibernate for the rest of the winter. Merry Christmas. Hope to be down in your neck of the woods for the New Year. Long live the Republic and all that.

  14. 2D. temporary equity participation in banks by European partners
    3B. refinancing prior recapitalization of banks
    Z_E_1 Aggressive Personal Insolvency reform
    1A. Enhanced support for appropriate public investment
    1B. Enhanced support for SME lending

    This is how I rank the most important measures.

    We need to get the fear monkey off the state’s back so it can invest a little in different sectors, whether by investing in relevant infrastructure or investing in reforming how business is carried on. The added bit of confidence that would give people would help get things moving a bit. We would also show that we are an economy that is constantly adapting to the challenges of the 21st century which will help investment.

    I also think that personal insolvency legislation is key to a lot of things and will have a lot of very positive effects. For that reason it should be put on the list.

    Banks will not lend until they are satisfied there is safe money to be made, and borrowers will not borrow until they have some confidence in their prospects. That is the way of bankers (particularly after the mass extinction event that has hit Anglo Irish style banking). They will need a few things for this:

    1. Confidence in the local economy.
    2. Confidence in state finances.
    2. A functioning property market so they can have semi-liquid security.

  15. On an aside, as I was sweltering in my coat while walking to work this morning, it occured to me that the whole of Europe is reaping the reward of having an aging population that values wealth preservation above new beginnings. One could possibly frame the whole EZ crisis in terms of an intergenerational conflict.

  16. @all

    When British thieves and French thieves fall out – the Anglo-French governmental dispute in perspective
    By Michael Burke

    The French and British authorities are engaged in a war of words over which country will be first to be downgraded by the credit ratings agencies. At least the hostilities are purely verbal – these ‘heroes’ of Tripoli are prepared to use other methods when the odds are overwhelmingly in their favour.

    http://socialisteconomicbulletin.blogspot.com/

  17. BTW, I presume

    2D. temporary equity participation in banks by European partners

    means a debt for equity swap whereby we give our equity in the banks in return for what they are valued at as per John FitzGerald’s comments on morning Ireland yesterday?

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