Endgame?

In relation to the ECB they really don’t have a choice (back to their role in the treaties needing some serious work).

If the SMP was legal at the time, based on the analysis that it was facilitating monetary policy transmission and not assuming Greek debts or monetary financing, then involvement in any default (or euphemism of choice) would be illegal involving either monetary financing or the assumption of Greece’s liabilities – the ECB can chose its poison here.

The Bundesbank thought that the purchase was illegal hence they can now suggest that the ECB should take a loss, but the ECB as a whole took the view that the purchase was legal so only not being repaid would be the problem.

If anyone had paid attention to the ECB position (and contrasting BuBa position) on SMP it should have flagged that this issue could arise (but let’s ignore EU law again) in any negotiated settlement on Greek debt.

On an aside have you tried to fix Greece?

http://crookedtimber.org/2012/02/16/so-what-would-your-plan-for-greece-be/

I ended up at 5 – revising the treaties and the role of the ECB in a manner which could actually help isn’t an option.

@Aisling

Law is subservient to Democracy.

Assuming, of course (and assumptions are always dangerous), that Europe may be considered ‘Democratic’ at the mo? Open question! Who is really pulling the strings?

@DO’D Who’s democracy? That of Greece, or that of Germany?

The EU is all about tempering nationalistic tendencies within Europe and thus tempering democracy in its most undiluted forms, and I for one, think that is a good thing.

The endgame is taking on more players.

Ignazio Visco, governor of Italy’s Central Bank, gave a very pessimistic account of the state of the Italian economy and its banks on Friday. There was an extraordinary drop in deposits between November and end of December, coupled with a contraction in business loans. Visco made the point, and this ties into comments on SMP, that Italian banks are still on their feet due the the ECB. I think the ECB may be backstopping the banks to the tune of 250 billion currently, but open to correction.

Visco is Draghi’s replacement.

Is it a coincidence that this information was presented now, while the decision over Greece is balanced on a knife edge? Could it tip the balance against a further bailout? Would it be make more sense to reserve firepower to bailout countries with a history of industrial production and exports?

@ Colm McCarthy

The Telegraph, and this correspondent in Brussels in particular, has been predicting the end of the world as we know it for as long as I can remember.

cf. what Schaeuble had to say (Bloomberg) on the DSA.

http://www.bloomberg.com/news/2012-02-18/greece-identifies-eu325-million-in-budget-cuts-papademos-says.html

@ Aisling

The statement by the Bundesbank that the ECB was acting illegaly was an extraordinary one by any measure and on a par with similar statements from Bafin. It simply demonstrates the struggle for control in Berlin which has been hiding in full view for months.

I know the blog is filled with those who say we shouldn’t default, that Greece shouldn’t exit the euro or default.that Armageddon would ensue. There are those, such as I, who argue instead that the euro is Armageddon in the making and that it is already a horror story.

http://www.acting-man.com/blog/media/2012/02/February-2012-Eurozone-Breakup.pdf

The prospects for Greece, Ireland, Portugal, Spain would be improved outside the euro. There is plenty of Research to back this up.

Unfortunately, there is distinct lack of support from Irish economists for this position, who provide counter advice to our politicians on the merits of default and euro exit, but just to show I’m not alone in my own views, there is the link above 🙂

The experience of emerging market countries shows that the pain of devaluation would be brief and rapid growth and recovery would follow – Countries that have defaulted and devalued have experienced short, sharp contractions followed by very steep, protracted periods of growth. Orderly defaults and debt rescheduling, coupled with devaluations are inevitable and should be embraced. The European periphery would emerge with de-levered balance sheets. The European periphery could then grow again quickly, much like many emerging markets after defaults and devaluations (Asia 1997, Russia 1998, Argentina 2002, etc). In almost all cases, real GDP declined for only two to four quarters. Furthermore, real GDP levels rebounded to precrisis levels within two to three years and most countries were able to access international debt markets quickly.

“Finally, we will look at previous emerging market crisis analogues, and why this leads us to end on an optimistic note. Almost all economic analysts argued that dire consequences would follow for previous defaults and devaluations (Asia 1997, Russia 1998, Argentina 2002, and Iceland 2008). However, history shows that following defaults and devaluations, countries experienced two to four quarters of economic contraction, but then real GDP grew at a high, sustained pace for years. The best way to promote growth in the periphery, then, is to exit the euro, default and devalue.”

We should ignore the siren calls to pay unconscionable debt destructive of employment, the economy, public services, the Irish constitution, to support the relatively small number in the financial sector benefitting from what ought to be illegal transfers of wealth to support their debts and losses.

This rack and ruin is further falsified by lies that the Irish economy far from tumbling over a waterfall of debt, is instead on the cusp of great boom brought about by the magicking out of nothing of jobs in their 100’s thousands!

Richard Bruton TD Minister for Jobs, Enterprise and Innovation Richard Bruton TD will spend another week opening a few promised jobs here a few jobs there; but week by week real jobs are being lost such as Dublin’s famous Tubs & Tiles or Brooks Thomas keystone employers that are being plunged towards Davy Jones Locker almost on a daily basis.

The lenders and financial interests who will lose in the coming default will send out a fog of innuendo and propaganda to brainwash anyone who might think they should lose out rather than the schools, hospitals and public services they are currently looting.

But whats new? its still fun to point out the ECB emperor accompanied by the Troika plus entourage of Irish economists, is wearing no clothes 🙂

Perhaps the ECB might consider deferring the PN’s must have been inspired by the banks’ interest only mortgages debt trap…lol.

On the mechanics of Endgame, say involving a number of peripheral countries acting together. (Off topic, don’t know why we do not have ongoing discussions with Greece, Portugal, Spain on our common experiences in dealing with eg ECB/Troika) From link earlier post:

“AUSTRO-HUNGARY MONETARY BREAKUP 1919: QUICK, SIMPLE AND PAINLESS The closest historical analogy in terms of heterogeneity of members and indeed geography to the euro is the currency dissolution of the Austro-Hungarian Empire. Peter Garber and Michael Spencer produced an extremely detailed account of the breakup that is highly worth reading to understand the mechanics of dissolution. Garber and Spencer conclude that historical episode of the Austro-Hungarian currency breakup in 1919 provide many lessons for current policymakers: This episode suggests five lessons for currency reform elsewhere. First, currency separation can be accomplished relatively quickly. It involves little more than marking banknotes circulating within the breakaway state with a stamp. This initial operation will necessarily be followed by an exchange of stamped notes for new national currency, but it buys time for the authorities to plan the second stage carefully. Second, the exchange of old notes for new provides an opportunity for the authorities to eliminate any “monetary overhang” by imposing a tax on notes exchanged. Such a tax was imposed in the SerboCroat-Slovene State, Czechoslovakia, and Hungary. Third, if currency reforms are not conducted simultaneously throughout the former currency union, differential conversion rates for the old currency will create incentives for individuals to spend or exchange their old notes in the region where they are most valuable. The imposition of a tax, or differential expected rates of inflation, creates another incentive to move notes to escape the tax. Thus old notes will flow into those countries with the most favourable tax-inclusive real conversion rate. Fourth, states that are late in breaking away from the currency union may find more than their share of the stock of old notes dumped on them. Breakaway reforms elsewhere may cause people to sell their old notes for goods and assets in those states where they are still legal tender. The last to convert the old notes will then absorb both the notes originally circulating in its territories and many of the notes previously circulating elsewhere. A liquidation of old central bank assets prorated on the amount of currency collected will only partially compensate for lost goods. Finally, currency reform will succeed in creating a stable medium of exchange only if it is accompanied by sound fiscal and monetary policies. In this respect it is not necessary for fiscal restraint to precede currency reform if the new monetary authorities are constrained in their ability to extend credit to the state. In each of the Successor States, fiscal equilibrium was attained as a consequence of the currency reform, rather than as a precondition of it.”

One distinct advantage to us is that we have already travelled the road of austerity and budget deficit reform; but we need to take the final step of monetary reform, that’s not one others can make for us. By the looks of it, its not a step we’re prepared to take; its FG/LB happy, growth ‘hide the mess’ pills instead.

Media wishful thinking from the Telegraph? If you wish it hard enough you will get that long running shock horror Greece-in-disorderly-default sky-caves-in-on-chicken-licken story that will sell more papers? I (unfortunately) have to read the Telegraph every day – goes with the territory – and it doesn’t sound any different to stories about Greece they’ve been punting for the past six months.

More fun can be had reading the comments of right-wing nutters at the end of the story text.

Note this is my preferred option, but note these folks suggest this course for Greece and Portugal only, but strongly suggest this course for Ireland and some other EMU members

To understand some of the mechanics involved in breakup: Also from http://www.acting-man.com/blog/media/2012/02/February-2012-Eurozone-Breakup.pdf

“Breaking up the euro: recommendations based on historical precedents

In this section we will examine the timing of exits, capital controls, the re-denomination of existing debts, the restructuring of private and sovereign debt, the recapitalization of the central banks, and the legal and institutional aspects of euro exit. These recommendations are based on historical currency exits as well as the experience of emerging market devaluations.

We recommend that any country exiting the euro should take the following steps:

1. Convene a special session of Parliament on a Saturday, passing a law governing all the particular details of exit: currency stamping, demonetization of old notes, capital controls, redenomination of debts, etc. These new provisions would all take effect over the weekend.

2. Create a new currency (ideally named after the pre-euro currency) that would become legal tender, and all money, deposits and debts within the borders of the country would be redenominated into the new currency. This could be done, for example, at a 1:1 basis, eg 1
euro = 1 new drachma. All debts or deposits held by locals outside of the borders would not be subject to the law.

3. Make the national central bank solely charged, as before the introduction of the euro, with all monetary policy, payments systems, reserve management, etc. In order to promote its credibility and lead towards lower interest rates and lower inflation, it should be prohibited from directly monetizing fiscal liabilities, but this is not essential to exiting the euro.

4. Impose capital controls immediately over the weekend. Electronic transfers of old euros in the country would be prevented from being transferred to euro accounts outside the country. Capital controls would prevent old euros that are not stamped as new drachmas, pesetas, escudos or liras from leaving the country and being deposited elsewhere.

5. Declare a public bank holiday of a day or two to allow banks to stamp all their notes, prevent withdrawals of euros from banks and allow banks to make any necessary changes to their electronic payment systems.

6. Institute an immediate massive operation to stamp with ink or affix physical stamps to existing euro notes. Currency offices specifically tasked with this job would need to be set up around the exiting country.

7. Print new notes as quickly as possible in order to exchange them for old notes. Once enough new notes have been printed and exchanged, the old stamped notes would cease to be legal tender and would be de-monetized.

8. Allow the new currency to trade freely on foreign exchange markets and would float. This would contribute to the devaluation and regaining of lost competitiveness. This might lead towards a large devaluation, but the devaluation itself would be helpful to provide a strong
stimulus to the economy by making it competitive.

9. Expedited bankruptcy proceedings should be instituted and greater resources should be given to bankruptcy courts to deal with a spike in bankruptcies that would inevitably follow any currency exit.

10. Begin negotiations to re-structure and re-schedule sovereign debt subject to collective bargaining with the IMF and the Paris Club.

11. Notify the ECB and global central banks so they could put in place liquidity safety nets. In order to counteract the inevitable stresses in the financial system and interbank lending markets, central banks should coordinate to provide unlimited foreign exchange swap lines
to each other and expand existing discount lending facilities.

12. Begin post-facto negotiations with the ECB in order to determine how assets and liabilities should be resolved. The best solution is likely simply default and a reduction of existing liabilities in whole or in part.

13. Institute labor market reforms in order to make them more flexible and de-link wages from inflation and tie them to productivity. Inflation will be an inevitable consequence of devaluation. In order to avoid sustained higher rates of inflation, the country should accompany the devaluation with long term, structural reforms.

The previous steps are by no means exhaustive, and should be considered a minimum number of measures that countries would have to take to deal with the transition”

@ Colm Brazel

Thank you for bringing this quotation to my attention.

“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else.” President Lyndon B. Johnson.

@ DOCM,

Yes, he was fond of ‘pissing’ humour, also said it was better to have Hoover pissing out of the tent, than have him pissing into it.

http://workinghumor.com/quotes/lyndon_johnson.shtml#

But I wonder who he was directing the remark about economists to, or where he made that one 🙂

@ OMF

That is very liberal of you! I am afraid that I skipped through it but it was worth the effort for the LBJ quotation.

cf. an alternative and more realistic view.

http://www.ft.com/intl/cms/s/0/76d064c6-5992-11e1-8d36-00144feabdc0.html#axzz1mq6KVtto

@ DOCM

Come on DOCM, Its unscientific, unobjective, unempirical and plain bad research to make a comparison between two docs dismissing one with a skipping in favour of another. That link I’ve given now OMF as well gives plenty of research links you can follow as it cites the research it draws from, also you selectively left out their comment beneath the Johnson piece:

IMPORTANT NOTE TO THE READER “Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else.” President Lyndon B. Johnson It was with President Johnson’s salty humor in mind that the author decided to write this paper in plain English for the layperson in order to reach as wide an audience as possible. The paper is, however, based on a wide review of economic and legal academic and professional literature.

I would not attach much credence to what the conservative British media say about any Euro Zone member state. If I agreed with them I would have to re-examine my position.

Greece was under Ottoman (Turkish) control from the fall of the Byzantine Empire 1453 to 1828 and was recognised as being independent around 1832. They had similar experiences with the Ottoman Empire to what we had with the British Empire. In a nutshell it was equeally brutal. In much the same way as the Irish they blame their shortcomings on the occupier. This is most marked in the area of tax avoidance/evasion which they see as a patriotic duty. When I talk to Dimitri Michalopolous (fictitious) it was as if I was in a bar in rural Ireland talking to Paddy Moriarty (fictitious) about his tax exploits and the reasoning behind it.

Aisling:’The EU is all about tempering nationalistic tendencies within Europe and thus tempering democracy in its most undiluted forms, and I for one, think that is a good thing.’

I think you’re confusing what you call ‘undilted democracy’ with aggressive self interest on the part of a National community, to the detriment of it’s competitors/partners. I might be wrong.

But if not, it is another expression of a recurring cry that is made by those who would justify the road the EU always implied, and is now demanding, i.e. – the demotion of national democracy to the level of county council and the realignment of societies that is, to be frank, eugenics without the mono-racial ideolgy.
It is based on the presumption that harmonious co-operation can never occur with the direct democratic input of the governed, that assent should be conned if necessary, and on an inverted model where government & the economic framework of the community are their own justfication, and the community are the raw material.
There is in fact a recurring presence of eugenic thinking running through the whole of the last century in this regard, that raises the issue beyond a mere analogy. It runs the spectrum from Right-to-Left, from the atheistic to the pseudo religious of De Chardin, and is so widespread that it reduces the Nazi version to a footnote within the total. It’s peripheral, speculative wings, having renounced race, involve themselves in socio-sexual neo-Freudianism (witness Daniel Cohn Behndit’s colourful history), but it’s working core is satisfied with the overthrow of local distinction and unique circumstance in economic & social matters (i.e.; where they have evolved in response to local need and environment & not been consciously designed within the EU framework.)
Like most ideologies, it’s adherents have long since subscribed to it’s universality without reference to it’s relative suitability or applicability, and so are the slowest to recognise when it is the cause of rather than the solution to most problems contemporary to it.
These adherents are also the same people whose incomprehensible single-mindedness in the face of their misdeeds are wondered at by those who peruse the pages of history in later ages.

@DO’D: “Economic statistics, such as GDP per capita, simply underpin this improvement in human conditions.”

Eh? Depends, depends, depends!! Normal Distribution or Skewed? Depends.

The concept of the Meaningless Mean is relevant here. Check distribution and Median.

“China’s achievement is literally the greatest in world economic history.” Maybe. “Its all relative” – as the man said. Methinks the human cost has been airbrushed away.

re Telegraph article, an unnamed official quoting Schauble.

“He just thinks the Greeks cannot do what needs to be done. And even if by some miracle they did what has been promised, he – and a growing group – are convinced it will not pull Greece out the hole,” said a eurozone official.

So the hardliner who put Greece on the rack and insisted that he would get results in the name of ‘austerity’, now admits failure. Not only are the Greeks reluctant to implement his policies but he admits that even if implemented they will not work.

This is an extraordinary admission. Austerity was Schauble’s doctrine. He has foisted it on Europe in the form of a fiscal compact.
Yet here is the admission that it does not work.
The experiment has failed. So sayeth the chief physician.
Will he now be fired? He should be.
Who in Europe will now listen as he proposes his next experiment?
How many more experiments will Schauble implement in Europe before Europe says no?

@ Brian Woods Snr
The west has rarely had economic advancement that didn’t begin with or end in war. The US is a slight exception but it’s the economic development associated with the discovery and population of a whole new continent.
I was struck by the photos with the calf – not for show but genuine interest. You don’t see that with our guys.
We could learn a lot from these guys.

@BeeCeeTee Wait a second, private investors and speculators should be protected at the expense of taxpayers? Really? I really didn’t think anyone would posit that position in Ireland at the moment (or is it just that the taxpayers are from the other Member States (including us by the way) that they don’t count?

@Mickey Hickey

And the policy you obviously assume as the correct one today of putting c100k families into a bankruptcy regime and out of their houses solves what exactly ?? With c 150k empty houses spread across the country. Explain to me in detail how (i) this solves the bad loan problem for the bank (because to my mind it clearly just crystalises the loss with the added headache of a vacant property) and (ii ) How it improves in any manner the social cohesion of the families in question.

@Aisling,
I’ll answer that a couple of ways.

1) As a practical matter, if you want the bond markets to work, you don’t rip off investors by making some of them worse off than they would have been if the job had been left to the IMF under its regular rules of engagement. It’s happening right now in Greece, and bond prices for other stressed countries are pricing in the risk that it will happen elsewhere too.

2) As a matter of justice, if a loss is realised as a result of bringing insolvency tnto the open, as it is under IMF programmes, then if is fair that bondholders should take the damage. The risk that this might happen was, after all, priced into what they paid for the bonds. But in the case of what the EU has been doing, bondholders are also being asked to carry losses caused by pursuing political objectives. I mean objectives like saving banks, keeping the euro stable, and slowing the rate of fiscal adjustment in countries with problems. There is no justice in pushing these losses onto private bondholders, and the institutions that have been doing so are, to put it bluntly, a bunch of thieving freeloaders. If they want to do this stuff, they should have the honesty to do it with taxpayer funds, and suffer the electoral consequences.

Just to clarify:
1) I’m, of course, talking about the sovereign bond market.
2) Specifically in Ireland’s case, while the bank guarantee was notionally from taxpayer funds, the economic cost was split between taxpayers and holders of sovereign debt, so I include the Irish government of the day among the freeloaders.

@OMF

“The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit.”

Yeah… but this time it’s different innit?

Who knows what is really going on behind closed doors. All I do know is, so far this year, that when bad news is absent (there doesn’t even have to be any good news around, just an absence of bad news) there seems to be terrific pressure to drive the equity markets up. I’ve just been looking on it as an opportunity to make money ….. and I’m sure many involved in the Greek situation view it in those terms too.

from The Tao Te Ching

‘The kind of person who always insists
on his way of seeing things
can never learn anything from anyone. (#24)

‘The Tao is generous and graceful in what it does
Without ever claiming any merit

And the sage’s greatness lies
in taking no credit. (#2)

‘If the sage can find The Mother of a Nation
Then he will govern for a long, long time. (#59)

@examiner

The Treaty of the Functioning of the European Union can be dry, but is essential for the understanding of the situation, and in particular the behaviour of the ECB at the current time.

While examining EU law certainly helps understand how we ended up in this mess we can say with some certainty that the current legal framework did not reduce the severity of the European component of the global financial crisis and that it is now worsening it.

Why then the reluctance to accept that given the systemic nature of the European component of the global financial crisis the system will have to be changed before a solution is possible?

Many otherwise sensible commentators miss the following
-There is no mechanism for leaving the eurozone without leaving the EU while you’re at it. This would take at least two years and would have a lot of non-monetary economic consequences

Why not amaze me and be the first person to list the parts of any European treaty which comment in any way on the specific consequences of a country leaving the Euro? You could make your name here.

Now we all know that the ECB position is that everything that is not allowed is forbidden but then they would say that, wouldn’t they?

For another point of view see Leaving the euro zone: a user’s guide at

http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=1046781054_2011-ECO-06_Dor.pdf

@BeeCeeTee So its a good thing that Irish banks can still access the unsecured bond markets because they repaid their senior bonds, right?

Consider the possibility that protecting markets which have colossally mispriced risk may not necessarily be the way to go. It may be, if you’re trying to prevent a Lehmans in the here and now, but it is certainly not an argument in favor of allowing the continued mispricing of such risk. Eurozone sovereign bonds should be priced taking into account that supranational law probably prevents an EU sovereign defaulting on debts held by official EU creditors. Just like the seniority of the IMF this is more than capable of being priced in.

@Examainer It is not necessarily 2 years to leave the EU – that’s the ceiling but a much shorter time frame can be agreed under TEU Art 50.

@Shay Begorrah There are no rules on leaving the eurozone, only on leaving the EU, but the actions necessary to leave the eurozone from a position of weakness (such as Greece is in) would require breaking a hell of a lot of EU rules, most of which have consequences. So long as Greece does this from within the EU those consequences can be tested in pretty much any courtroom in the EU. If you’re going to leave the euro far better to leave the EU so that you only have to deal with your own laws, and reapply to join the EU within a year or two.

To take one example, euro exit will collapse Greek banks. Greece will have to recap some of those banks with drachma nua. This is probably an illegal State Aid meaning that the banks in question cannot accept it, or could be forced to repay it with interest meaning they should recognize the liability. Under either analysis EU law requires that the Greek banking system remain insolvent, which is not a good thing.

Absent a source of hard currency any Greek exit will be horrific for the Greek people, Greece is not Argentina or Iceland so a solution which keeps them in the euro is preferable.

That said, I really think leaving the EU temporarily would add little to their woes (especially if membership of EEA could be agreed to cover most of that period and thus protect from the worst of losing EU membership) and would offer Greece a much firmer footing for euro exit (including allowing them default on official creditors).

Might as well be hanged for stealing a sheep as a lamb.

Part 3:

Previous post truncated due to WordPress issues, it thinks something I have typed is spam, I’ll have to do it line by line. Sorry Readers.

I ask partially because that would be crazy and partially because five lines later the paper says

One could think that the new currency would depreciate rapidly, the value of the new currency falling much below one euro.

Am I missing something here or did the late hour sap your normally remarkable ability to read and assimilate policy documents?

test.

Is it possible that the words “I was only interested in the papers view on whether there was a legal route to withdrawing only from the Euro related parts of the EU treaties.” cause posts to fail?

My apologies for the four posts above, if a moderator would delete them that would be appreciated – my initial phrasing set off the blog spam filters somehow and I had to find the offending sentence.

@DOCM

“The euro accounts of the residents in the domestic banks would immediately be converted into the new national currency on the same ratio of 1 EURO = 1 unit of the new national currency.”

If this is a measure of the quality of the rest of the paper, which I think it is, the author will be abandoning the euro on his own.

I was only interested in the papers view on whether there was a legal route to withdrawing only from the Euro related parts of the EU treaties. I do have to ask you whether it might be possible that the author of this paper is explaining the accounting exercise necessary in the initial steps of re-denomination rather than suggesting that the country would leave the Euro only to try and peg itself to it?

I ask partially because that would be crazy and partially because five lines later the paper says

One could think that the new currency would depreciate rapidly, the value of the new currency falling much below one euro.

Am I missing something here or did the late hour sap your normally remarkable ability to read and assimilate policy documents?

@All

Go on failing. Go on. Only next time, try to fail better.
Samuel Beckett

Read more: http://www.brainyquote.com/quotes/authors/s/samuel_beckett.html#ixzz1msTUfXQe

@Colm McCarthy

No need for austerity on Beckett’s second tea! I hear it was rationed during the last ’emergency’; and I hear that the ‘pillars’ are demanding reductions in Earl Grey and imposing those cut rate deutsche brands on those afflicted with ff/pd debts! Tuff ol times alrite – roight!

@Aisling

“Hell yes!” +1

Then change the bleed1n law. This is democracy; or if and when ship is sinking – declare a state of emergency and do it anyway.

Between Facts and Norms. Jurgen Habermas, 1996, Polity/MIT Press

Law mediates the relationship between the Sytems of Power and Money … and the Lifeworlds of ordinary every-day citizens. Law matters …..

hope to see you more often on the blog ….

@DOCM

Crazy? Then why should the author suggest it in any context?

Are you being deliberately obtuse or is this an accident? Whatever the merits of the paper

@Shay But this is the problem. Some of us have no problem dealing with mental gymnastics and seeing how things interact. But, hand on your heart, do you really think that every voter can deal with that?

It is so easy for German politicians to claim that the problem with Greece is their profligacy because they didn’t exercise Teutonic restraint, without ever explaining that German austerity only worked because of the credit bubble elsewhere, that German austerity is a big part of the problem.

Then again, how do you tell your electorate that they should show restraint, and then ten years later admit that their accepting that austerity caused huge problems for other peoples who weren’t being so morally restrained?

From our point of view I tend to think that things will work themselves out, hell only one country has closed this kind of deficit in 3 years without implosion, and only three EZ countries have ever run the kind of sustained surpluses required to get out of this debt death mire, and we’re the only member of both clubs (not hard given we’re the only member of the former – believe me it hurts to give CJH credit for anything).

From Greece it is about trying to put religious beliefs aside and try to figure out which is the least worst option. But there is no easy answer for Greece.

EU laws need change. But bear in mind that the changes actually required to make dealing with this crisis manageable will require a referendum in Ireland. Do you hold out much hope on that?

http://www.project-syndicate.org/commentary/stiglitz148/English
Joesph Stiglitz on the capture of the ECB by ‘special interests’.
The IMF has its own special interests as proven by Timmy Geithers veto of writedowns on Irish banks bonds made on behalf of wall street.
The fact that the ECB surpasses the IMFs zeal for making sure ‘special interests’ get repaid does lend itself to suspicion that it might be captured. Stiglitz a nobel prize winner and former chairman of Clintons council of economic advisors saying that it is caputured should really cause Irish people to sit up.
As Dr. Whelan suggests firstly Ireland should use its place in Europe to try to reform these issues with the ECB.
Dr. Honanhan raising Dr. Stiglitz article and concerns with the governing council would be a start.

@Aisling,

I’m not quite sure what your point is, but I think you may have missed my clarification that I was talking specifically about sovereign bonds. Or maybe you are making an opaque response to my criticism of the last Irish government for burning holders of Irish sovereign debt to bail out bank bondholders. Or maybe your point is some sort of rhetoric device.

But if your view is that “protecting markets which have colossally mispriced risk may not necessarily be the way to go”, I can only agree with the sentiment. I have no doubt that, in the Irish context, Anglo and Irish Nationwide should have been allowed to go bust. I also have no doubt that the other banks should have been put through a resolution process invented at short notice, with shareholders and holders of subordinate debt getting wiped out, with the remaining losses distributed between senior bondholders and depositors, and with the government’s only financial contribution being to compensate depositors.

@ Brian Wood Snr 8:59 am

We can build a minaret for ourselves out of the sands of our own moral righteousness, claim God for ourselves, proclaim our arrogant moral righteous judgment on all who come before us built on the ashes of eg clerical abuse, or the shipping of orphans taken from mothers because they were born out of wedlock, or built on the corruption that caused the present financial meltdown; or, we can acknowledge our own flawed nature, acknowledge a common humanity, a shared belief in wisdom and the importance of family and a common humanity and work together to build a better place for families to live in.

Xenophobia is dangerous whether it tarnishes UK with the bombing raids of Dresden and Hamburg, US with the outrageous loss of life in Iraq, Japan with its terrible atrocious attack on China in WW11 1937 Nanking massacre to give a few examples.

China has a deep and rich cultural and social history and has made a huge contribution to the world with its industry and work ethic and values it attaches to education and science.

We can make a contribution to their way of life as they can to our way of life. In recent years China has made a great contribution to the recovery of Iceland.

Chinese vice-president Xi Jinping is very much welcome to Ireland.

If opportunity to discuss a Plan B exit strategy from the euro has not been grasped by our current political leaders, it’s very much to our loss.

@ Brian Woods Snr

The Irish do have a good capacity for delusion and maybe you have a capacity for exaggeration?

There is also much that is positive about China even in far-off lands.

South America is as dependent on commodities today as it was 40 years ago but contemporary life is a hell of a lot better for many people.

As for the Indo’s headline on thousands of jobs from the visit, let’s say that’s another exaggeration.

http://www.finfacts.ie/irishfinancenews/article_1023955.shtml

@ Aisling

private investors and speculators should be protected at the expense of taxpayers? Really? I really didn’t think anyone would posit that position in Ireland at the moment (or is it just that the taxpayers are from the other Member States (including us by the way) that they don’t count?

There is much to fell outraged about but as regards say bondholders, who are needed to fund public debt, Angela Merkel had to withdraw her proposal to have a bailin from private investors that was planned from
2013.

They now rationally demand a high premium on risky loans or go on strike. Many of these funds are required to invest in low return assets.

Big losses across Europe would hit private pension funds while pension members and those with none in the private sector as taxpayers pay for the unfunded generous pensions of the public sector.

As for equity, in the UK for example only a third of the private workforce have a pension and the average pot would pay out £1,400 annually.

Plan B

http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=1046781054_2011-ECO-06_Dor.pdf

Re ‘lex monetae’ discussion above, also Shay Begorrah link above, plus this one below here, plus China Delegation visit, I’d like to speculate on what the Irish delegation ought to be discussing with the Chinese delegation, but are probably not 🙁

http://www.acting-man.com/blog/media/2012/02/February-2012-Eurozone-Breakup.pdf

Both documents are in agreement as to the easy part of leaving the euro and the more difficult part:

Easy part:

“If any country exited the euro area by surprise, it would be highly unlikely that it would have printed enough new notes to exchange immediately for old notes. Before old notes and coins can be withdrawn, they will need to be stamped in ink or a physical stamp would need to be placed on them, and old unstamped notes would no longer legal tender. In the meantime, new notes are quickly printed.

Capital controls would need to be imposed at borders in order to prevent unstamped notes from leaving the country. Despite capital controls, old notes would still likely escape the country and be deposited elsewhere as citizens pursue an economic advantage. Once new notes are available, old stamped notes are de-monetized and are no longer legal tender. The entire process of stamping
and issuing new currency has typically been accomplished in a few months.”

Difficult Part:

The difficult part refers to the redenomination of both local and foreign debt:

From acting-man above:

“It would be impossible to enumerate all the potential forms of debt that could safely be redenominated into the new currency of the exiting country. However, Eric Dor of the IESEG School of Management has suggested the most obvious cases:
– A sovereign bond that had been issued in euro’s by the departing country, directed towards local investors, not to be traded on a foreign market and payable in the country;

– A loan in euros that was agreed on to a debtor of the departing country by a bank of another country in the euro zone or out of the zone, and which stipulated that the
repayments and interest were to be paid to a subsidiary of the lender in the debtor’s country.

– A loan in euro’s that was agreed on by a bank of the departing country, to a debtor of this country;

– A private or sovereign bond that had been issued in euro’s and that was traded from the start on the secondary market of the country wanting to quit;

– A debt based on a contract that was taken out in euros and governed by the law of the country wanting to quit or that stipulates that the payments were to be made in that country.
Source: Leaving the euro zone: a user’s guide Eric Dor, October 2011, IESEG School of Management, Working Paper Series

Undoubtedly, there are an infinite number of potential debts that one could envision would be subject to re-denomination upon exit. The previous examples, though, provide a good idea of the the potential applicability of lex monetae to debts.

HOW TO DEAL WITH SOVEREIGN DEFAULTS
Almost all sovereign borrowing in Europe is done under local law, which would allow countries to exit the euro and re-denominate their sovereign debt in local currencies. ”

In the case of Ireland, action-man points out a high proportion of sovereign debt in denominated under international law.

Its precisely in this area of legality in the teasing out of such liabiliities under an international court that we could do with a lot of help from China both in easing the pain of this from Ireland’s point of view and also from eg ECB point of view.

A commitment purchase and to support the issuance of Irish sovereign bonds needed to stabilise our exit would be an important factor in our recovery; plus a commitment to support us in any settlement negotiations, would be very helpful.

But I doubt any such negotiations such as the above are taking place in the land of dreams Tit Na N´Og 🙂

@DOCM

@ Shay Begorrah

Having now had opportunity to read the paper and, as is regrettably often the case with academic papers, would have to say that it has absolutely no merit whatsoever.

Gosh, poor old professor Dor joins professors Stiglitz and Krugman among the list of shamed prominent economists who fail the DOCM test. It will either end his career or guarantee him a major international prize in Economics and a role as a respected international newspaper and magazine columnist.

Seriously, I wonder if anywhere out there there might be an economist who meets your clearly very high requirements for seriousness, power of intellect and knowledge of the world but also does not agree with you on how the Eurozone crisis should be resolved?

@ Shay Begorrah

If I qualify my comment apropos academics with the words “when they go outside their area of expertise”, maybe it would allow a debate that sticks to the points under discussion.

Incidentally, the blog I referred to above ends;

“To put it bluntly; there are good arguments for and against the euro. That’s not what concerns me. I am concerned with the way the discussion is conducted which I think is at least as important as the content”.

@ All

FYI blog by Gavyn Davies; the “global expansionary fiscal contraction”.

http://blogs.ft.com/gavyndavies/2012/02/19/a-global-experiment-in-the-fiscalmonetary-mix/#axzz1mvF5N6yW

One must hope that it works. The analysis does, however, rather blow a hole in the argument based on the supposed exceptional future level of Irish debt.

‘international services’ above refers to financial….

@DOCM, I caught up with the discussion about the capture of the ECB on the previous thread.
To deal with the 2 major errors raised in the previous blog
1. He does not say that the ECB was responsible for not forcing the banks to buy insurance, rather that they could have ‘insisted’ on more transparency.
A seperate issue is the capture of regulators. Simon Johnson talks of a continued regulatory ‘capture’ in the global financial industry in another article.
2. Stiglitz point is that the ECB, by insisting on a voluntary restructuring is letting the ISDA dictate the terms of the bailout. If the ECB was prepared to consider an involuntary restructuring of private debt then the ISDA would not have such a strong hand.

@Mickey Hickey

OK – I agree with that proposal but it does mean that the banks have to recognise the loss and renegotiate a new mortgage on a lower house price. The proposals on the table don’t go this route – the banks don’t necessarily have to relend to the current homeowner in the first instance and there is no mention that the negative equity balance being waived despite the banks marking the mortgage to todays house price. So the net position of the current homeowner is exactly the same – they may have a new lower mortgage on todays house price (with the likelihood of a lost tracker mortgage) but the negative equity balance remains to be paid i.e. debt levels remain and pain continues.

IMF or no IMF the debt levels remain the same under current Govt proposals – to solve the current impasse somebody somewhere has to be willing to take a loss. It seems to me that the banks aren’t willing to do this, the Govt (via the Regulator) will indicate that the banks can’t afford to take such a hit but all the while its becoming increasingly obvious that the current mortgage holders or c17% of them (based on Fridays numbers) can’t take the hit either – so where should the loss eventually fall ?

In my view the loss should of course have been taken by the finaciers of the banks namely the equity, bond and deposit holders. Given that the ECB was clearly not comfortable with this solution I would have thought the ECB should as a result be on the hook for this problem – how they divy up the loss across the EU nations is their issue but I’m sorry when they stepped in and said no go to the normal functioning of the market thhey have to live with decision.

The abuse of power here was the daft idea to not let the banks fail – we were brainwashed into believing that the banks danced to a different economic tune. They don’t. The banks sell credit and take a fee for their efforts – no different to any other commodity type broker.

Whilst I agree their has been an abuse of power by the key decision makers in this debacle the easy was for Ireland Inc to stop the rot is not to pay the upcoming €3.1bn PN. I’ve always found not paying tends to focus the mind of the parties involved.

@Bond 12:01

“The figures that that article you linked to is referring to are mainly private sector issuance from the IFSC”

Yup, know that, the authors appear aware of it too as they refer to multinationals, which is what I was referring to:
specifically their point here:

“It is also noteworthy that most of the government debt of Greece, Portugal, and Ireland is held abroad, and almost half Spanish and Italian government debt is held abroad. “Almost all countries within the euro issue most of their debt under their local laws. As the following chart from Nomura shows, Greece, Portugal and Spain local law governs 90% of the bonds issued by these countries. The only countries with very large foreign law issuance as a percentage of the total bonds issued are Netherlands, Italy and Ireland. (Ireland issues more than 60% of its bonds under foreign laws, but this is likely from subsidiaries of multinationals domiciled in Ireland and not Irish companies themselves.)”

@MH 12:08

Don’t know where you got your facts from there:-) Perhaps you need to reread my comments and sources I based them on. Not talking about lender of last resort or anything further than China support of US TB’s or recent advice/support of Iceland and Olafur Grimsson.

Your doomsday loss of export jobs is off the wall as well. I like to use good sources, don’t you; or do you prefer your own ideas 🙂

Could Chinese vice-president Xi Jinping send some of his economists as interns here. We could give them visas and they could spend time assisting our highly paid academics. They might be able to show us how to get out of the mess we are in.

@ Colm

““In the case of Ireland, action-man points out a high proportion of sovereign debt in denominated under international law”

does not square with….

“Yup, know that, the authors appear aware of it too as they refer to multinationals, which is what I was referring to”

Also, re China and “recent advice/support of Iceland and Olafur Grimsson”

What exact advice or support have they shown to Iceland? Other than offering to buy up an extremely large piece of land.

@DOCM
Debt forgiveness with PSI is the correct decision for Greece. The negative effect of contagion are exagerated.
Government bond yields decreased in the week after the July 2011 summit anouncing PSI across the eurozone. In Portugal, bond yields dropped by one percent, in Ireland by almost two percent. Spain also benefited from lower borrowing costs and so did Austria, Belgium, France, the Netherlands, and Finland. Even Greece benefited from the deal with lower government bond yields. Only Italy did not see its bond yields fall. Taking a longer term view by calculating the change in ten year government bond yields from June to September of 2011 gives a similar picture. Austria, Belgium, Germany, France, Ireland, the Netherlands, Finland, Spain, and Malta saw falling bond yields. Prima facie evidence thus does not support the claim that PSI involvement caused the issues in the European sb market.

http://www.tradingeconomics.com/ireland/government-bond-yield

The penny has yet to drop that the pre-2008 income levels are not going to return anytime soon either in Ireland or many other places.

In Greece, the kleptocracy sustained many in the middle class and for the rest of society the political parties created jobs in the public service. In Ireland, employment in the tradeable sectors effectively stalled in 2001 but selling and building houses, fuelled by bank credit provided a jump in incomes and a massive boost in welfare.

Since the bust, the self-employed , usually one-person operations, have been absolutely clobbered; for the unemployed, long-term unemployment is back.

The trade unions have become so compromised as insiders that they are as silent about professional fee cartels as they are about disgraceful payoffs for senior civil servants who never had to make a consequential decisions in their professional lives.

Remember that song, ‘The Foreman’s Job’?

How easy it was to drink the soup?

So what Paul Hunt refers to will likely take many more years to play out.

But if I happen upon the podcast or video I’ve seen where he specifically addresses the support he got from China, I’ll send you the link 🙂

Why do I bother 🙂

Eoin,

The VP seemed to enjoy gis visit to Croker, although he is no Henry Shefflin. Therefore it follows that he is probably already a fan of the GAA, therefore he will help us. Does that work?

@DOCM

The issue of “regulatory capture” in the global financial system is a much wider one and can be discussed on its own merits.

Though not here obviously….

Would you just have tried to distract people from the role that the undue influence of the financial sector in European policy making has played in causing and extending the current crisis by absurdly and disingenuously claiming the issue can not be discussed in a European context?

In case anyone has lost track the Eurozone crisis is part of a global financial crisis where the dominant strain of rightist European politics, European financial capitalists and market crazed EU institutions have conspired to try and paint what is undoubtedly a crisis of capitalism as a crisis of social democracy and then proceeded to try and raid democracy and social protection in order to give an unfair and dysfunctional economic arrangement the appearance of inevitability.

Crisis in the markets? Destroy everything else.

@Eoin Bond

As regards Portugal and Greek PSI contagion, the Portuguse bond yeilds fell by 1 percent in the weeks after the PSI announcement, so no they were not affected by contagion. In July 11 before the announcement of PSI the bond yeilds were around 12% and now they are still around 12%.
There are many economic fundamental factors which influence bond yeilds in the longer term. http://www.tradingeconomics.com/portugal/indicators

Enterprise Ireland issued a press release today on Irish indigenous firm exports to China in 2010 and 2011 today.

Strangely but not, the agency did not include the figures for total exports.

The total is just over 6%:

http://www.finfacts.ie/irishfinancenews/article_1023961.shtml

@ Chris

FYI

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/127788.pdf

The change to which I referred is covered at the end of paragraph 5.

Incidentally, the PS in France is refusing its approval to the treaty on the basis that it is organically linked to fiscal compact treaty (which is undeniable given that benefiting from the first is dependent on signing up to the second).

@ DCOM
The securities market program was in action since May 2010. It was actually slightly decreased in the weeks following the PSI announcement for Greece when bond yeilds fell across europe. http://www.bloomberg.com/quote/ECBCSMP:IND/chart.
It did increase rapidly from 7th August 2011 following actions by Spainish and Italian governments. So while it does explain later bond yeild reductions for Italy and Spain and maybe other “distressed” countries it doesn’t directly explain the lack of contagion across the Eurozone due to PSI involvement.

The treaty still includes PSI following IMF guidelines – the IMF were more eager for PSI in Irish banks that the EU or ECB.

Draghi was publicily against SMP from the start when he was at Banca D’Italia so no change in opinion there.

Any legal opinions on this:
http://www.euractiv.com/euro-finance/bounds-legality-ecb-actions-euro-crisis-analysis-509841

“The judicial concept of ECB crisis policy

The German legal philosopher and professor of public law Carl Schmitt thought the true hour of state power was the emergency. The time of the Weimar Republic was very appropriate for that purpose. Schmitt argues: “The exception is more interesting than the rule. The rule proves nothing; the exception proves everything. In the exception the power of real life breaks through the crust of a mechanism that has become torpid by repetition.”

Trichet in his ECB practice unconsciously copied that concept. Why? Fiscal Emergency in certain euro member states is a unique occasion to get rid of the rule of law. That leads directly to “unlimited ECB government”.

As a matter of fact ECB has become a de facto sovereign TFEU-legislator. What has started as a temporary suspension of rules has in the meantime become the definite and general revision of Article 123-125 TFEU and Article 127-130 TFEU.

In the meantime, the pending legal action in the European Court makes progress (plaintiff reference N°T-532/11). What remains to be seen is whether the General Court will declare the action of a citizen admissible. If the court does not have that wisdom, the ECB will be without any legal checks and balances and its way straight to its collapse as well as the collapse of the eurosystem will become inevitable.””

The legal counsel of the ECB should not be able to dictate what is legal or not, yet, people believe that as the ECB legal counsel says that the ECB cannot suffer losses on its SMP program. The ECB is not, or at least should not be, able to decide what is legal.

I do wish the press would stop framing the Greece story with words like ‘rescued’ and ‘saved’. They are like bloody parrots who will repeat any crap they’re given.

@ Gavin Kostick

It is difficult to try and go in two opposing directions at the same time. That this was what was being attempted did not become evident to Merkel and her advisers until it was too late to reverse engines in the case of Greece.

Hence the contradiction that you identify and the policy dilemma that it has given rise to.

The answer from the markets will depend on how the countries most likely to be affected react. If, for example, the plaint in Ireland, “if Greece, why not us?”, or “Stop the March payment on the PN”, were to gain the upper hand, our goose would be well and truly cooked.

By the way; Greece is different! The aim is to get the debt ratio back to a floor which would be seen as an excessive ceiling for Ireland.

The latest reports suggest that reducing the excessive rates on the bilateral loans in the first bailout (oh happy days of righteous indignation!) will be an element in the final package (even if governments have to go back to their parliaments on the issue).

It’s endgame alright. Greece is clearly never going to meet any of the targets it’s been set to get back to ‘sustainable’ levels. There really is nothing new coming out of the Greek talks last night. It is just the same old buying time. Not quite ready to pull the plug just yet. Need to get some more stability into the banks probably before they do pull the plug.

Fwiw, recent Spiegel Interview with Sinn – In German only unfortunately-

Spiegel :

Why does Europe insist on the bailout packages for Greece?

Prof. H.W. Sinn: This is not so much about Greece.

This is about financial Institutions and Banks, from Wallstreet to London and Paris. They took the Greeks hostage to force this never ending flow of bailout packages, not towards Greece, but into their own pockets.

….

Dear Hans Werner, I share your view, but would like to complete the picture. I know you did not do this in purpose, we are not getting younger.

From Wallstreet to London, Frankfurt and Paris.

@ Brian G

You are attributing a view to me that I do not hold. The IMF is, of course, the main trigger. But you have to wind the film back further. It was Germany that insisted on IMF involvement. Merkel and Schaeuble were at least agreed on that. Trichet was adamantly opposed. It meant that Berlin was absconding from its responsibilities in respect of maintaining the single currency and he saw clearly the complications that would arise with Washington in the room (which is what IMF involvement effectively boils down to). But German banks had been badly burnt by Wall Street. And Merkel was on her crusade to subdue the markets.

We are where we are!

Herewith a link which opens a vista for the future. If past performance is any guide, the EA will again take the wrong direction before being forced back on to the right one.

http://ftalphaville.ft.com/blog/2012/02/20/888061/the-case-for-ecb-debt-certificates/

cf.also Winkler paper on the “Joint Production of Confidence”

@DOCM,

I think you are hinting at the potential to constrain the ‘nastiness’ when you refer to the opinion polling that suggests that 70% of Greek voters wish to retain the Euro. It is of little use lamenting the desire of the main politcial parties to force an early election. Papademos isn’t Monti; and, conversely, the rag-tag political factions in Italy lack the (slightly fraying) cohesion of PASOK and New Democracy.

It may be that voters will severely punish the alternating economic lunacies of PASOK and New Democracy since 1975, but New Democracy was probably touching its core base vote at the last election and PASOK will take a hammering just because it was the incumbent while this tragedy unfolded. There will have to be a long overdue cleaning of the Augean stables, but I am reasonably confident that enough Greek voters will will a centre-right/centre-left grand coalition and seek to re-build a national common bond (similar to what has happened in Ireland with the slightly more and slightly less constitutional nationalists pushed to the edges with the hard left).

This, in the first instance, is a problem for the Greek people to solve. But the EU has to hasten institutional reform to be able to provide necessary relief when the Greek people respond as I expect.

PR Guy

I exchange thoughts with HW once in a while, and he knows me to call a spade a spade.

Christine Lagarde: “The success of this strategy crucially depends on full and timely policy implementation by Greece and long-term support by euro area member states.”

Translation: boots on the ground.

Christine Lagarde: “The success of this strategy crucially depends on full and timely policy implementation by Greece and long-term support by **euro area member states**.”

Translation: “We’re outta here (as regards providing any significant money) – hope it works out for you guys!”

@DOCM

The Latin American experience is perfectly relevant – heavily indebted countries borrowing in an external currency. It is only not relevant when viewed through some sort of flawed “this time it’s different” logic. The ECB doesn’t care about the new tiered seniority structure making it impossible for Greece to return to the markets, as it doesn’t care whether Greece can ever return to the markets. The IMF pushed hard for significant OSI, and although there was some movement, it fell far short of what they were looking for.

The ECB’s behaviour is a classic case, in engineering terms, of uncoordinated local optimizations being made to a fundamentally unstable and unworkable system. Since no attempt is being made to fix the overall system, walking away is a perfectly rational response by the IMF.

@ all

Take a bow folks. Mighty hurling. Ars longa vita brevis.

@ Mark

‘Even now no Irish politician will openly admit the fact that they are actively participating in the process of dissolving the Irish Nation State. And while it is commonly spoken about on the continent, it’s supporters are still in the minority’

+ 1. We’re on the one road, the road to God Knows Where

@ PR Guy

assume this is an element of the “collateral” that it has agreed to put up against some of the loans.

@ Bryan G

You are approaching this issue from the wrong angle. There is no point in attributing sentiments of one kind or another to the ECB. It is an institution and it acts in accordance with its legal mandate (which is, of course, an outcome of the political agreement with regard to the establishment of the euro; that the latter was a very botched job is generally agreed and not under discussion).

The point that I am making is that the concerns of Draghi in the matter of the ECB taking a loss on its bond purchases relate to the treaty ban on the monetary financing of governments. That I am correct is borne out by this report in today’s FT.

http://www.ft.com/intl/cms/s/0/68c0095a-5cb6-11e1-ac80-00144feabdc0.html#axzz1n1cExExl

The stance adopted by the Bundesbank was a smokescreen, in my opinion. What would really be of interest would be to know how the German representative on the governing council (formerly an economic advisor to Merkel, if I am not mistaken) viewed the matter.

On the possibility of the ECB issuing debt certificates, as recommended by Nomura, I checked this out and it seems (a) there is full provision in the existing rules for such issuance (b) the possibility of doing so has been adverted to over the past few years, notably by LBS.

I remain of the view that the Latin American experience has little to give in the way of guidance with regard to the crisis in the euro because the contexts are completely different. The point about effectively borrowing in a foreign currency only emerged courtesy of the efforts of Paul de Grauwe, which does not say much for the economic analysis underpinning the euro in the first place. But it does underline the political rather than the economic nature of the problem viz. the status of the CBs in the ESCB is only as good as the sovereigns backing them. This is where debt certificates issued by the ECB might come in.

Even if the Latin American experience was relevant, it would not be one to emulate.

http://www.economist.com/node/21547750/print

The selling off of assets in the energy sector including sections of the ESB. The Troika will allow monies raised in excess of ¢2bn to be invested into employment generation.

Would it be a good suggestion to spend those monies on the creation of a public sector company for the energy sector to make up for any job losses future owners of the ESB may make; also to provide competition against the newly private ESB especially if it embarks on some ENRON/California charade using blackouts, cutting off the electricity supply?

Don’t laugh, I’m serious !

http://www.willembuiter.com/3scenarios.pdf

@Bond Eoin Bond

Did they only have a collateral agreement with Finland do you know?

I thought they were the only ones who insisted on it and I believe it was signed last week. I just assumed they had put up the state railway system/a couple of islands/future taxes on Germans putting their towels on sunbeds before daybreak/etc. as collateral.

Would anyone out there be able to quantify the size of the gold reserves held in Greece?

@ Pr Guy

Is this of use?

http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/grc/eng/curgrc.htm

@ PR

“Portugal and Ireland will not be offered more generous terms on the back of Greece’s new deal – under which the interest payment on its first package are cut.”

Greek deal will now be at euribor+150bps, Portuguese and Irish is basically at Euribor flat (or the fixed rate derived off the euribor curve), so we’re already getting it a lot cheaper than the Greeks.

@Bond Eoin Bond

“so we’re already getting it a lot cheaper than the Greeks”

Bummer.

@ Bryan G

Your focus remains too narrow. There is, of course, no ban on losses in the treaty on SMP as such a provision would be a nonsense. But what we are talking about is the ECB participating in a debt writedown for a country in budgetary difficulties which would be impossible to justify in political terms and, almost certainly, also legally, given other provisions in the treaties. (What the Bundesbank was up to in its reported misgivings on the seniority issue, I do not know!).

That is not where the real action is, in my opinion. I suggest that, if you have not already done so, that you look at the Alphaville post above and do a track-back of previous postings and links, notably Draghi’s remarks before Christmas on the lack of quality collateral i.e. safe assets.

Notably this link.

http://ftalphaville.ft.com/blog/2011/12/05/778301/the-decline-of-safe-assets/

@DOCM,

you’re confused again. The ECB is supposedly filled with technocrats hired to do what is right without political concerns. Now you’re claiming that it is subject to political interference and cannot take an action due to political reasons. It is quite an accusation. Which politician is interfering with the ECB?

@ Brian G

Both you and Jesper misunderstand the nature of the EU. It is a political undertaking operating in a legal context. My reference to action by the ECB in taking losses being “poliitically unacceptable” clearly refers to Germany. The ECB must have regard to that. It cannot operate in a manner divorced from political reality. As to whether such a step would be legal or not is a matter which could only be established by the ECJ not by any blogger, myself included.

As to the question of whether or not debt certificates would be of assistance, I have no idea and did not venture a view in the matter. I simply said that I thought that it was the development to watch, especially in the context of the next flood of LTRO liquidity.

@ Gavin Kostick

It leaves it where it has always been; in the real world!

The members of the governing council and, of course, the executive committee, are expressly forbidden from taking instructions from any quarter but the individuals involved cannot live in some kind of parallel universe divorced from the necessity of taking into account the political impact of, and the response to, decisions being taken.

@ All

FYI

http://online.wsj.com/article/BT-CO-20120222-712553.html

@ Jesper

You should make an effort to stick to the issues and leave aside the ad hominem remarks.

As to which understanding of how the ECB works is correct, everyone is free to come to their own conclusions. The issue is an important one. The wider the debate the better.

@ Jesper

This is, of course, the case and I am not questioning it. But to extrapolate from these prescriptions that the ECB must live in some kind of ivory tower divorced from the world about it is to part company with reality. Executive Board member Asmussen has certainly not done so.

@ Brian G

It may be noted that Asmussen was expecting, on behalf of the ECB, a one-third contribution from the IMF.

I see there appears to be a trail now of German political visitors dampening any speculation on any relief from the ¢31 bn plus ¢16 bn interest contrary to what Dukes, FG/LB, Noonan have been flagging.

The Irish Government must be well used to getting it all wrong by now, nothing new there 🙂 Next ¢3bn + end of March. Children on hospital trollies Day, Mar 17, ‘Compact Day’ (?) get to suck the debt sweets to see how they taste; you know if they don’t take them, they won’t get any ESM wards, or further payments to pay IBRC’s ¢47 bn.

@ DOCM

RE “@ Brian G

Both you and Jesper misunderstand the nature of the EU. It is a political undertaking operating in a legal context. My reference to action by the ECB in taking losses being “poliitically unacceptable” clearly refers to Germany. ”

Nope, DOCM, you misunderstand the nature of the EU and are confusing it with the EMU, they are not identical. The EMU undertaking operates in a legal context operating in a political EU context.

Its an important distinction especially to countrIEs like the UK.

@ Bryan G, DOCM, Jesper

“The IMF are saying that if EZ-style PSI is going to happen, it is not going to be funded by the rest of the world.”

And who might be ‘the rest of the world’. It might be worthwhile for some to read carefully the following article:

http://goldnews.bullionvault.com/euro_default_cds_022220124

“The major creditors to Greece – the firms that stand to lose the most from a default – are represented by the Institute for International Finance (IIF). The IIF negotiated the debt swap deal, which includes the 74% write-down on behalf of its members. The important point is that those members still have to individually agree to the terms.

Who are the members? According to BusinessWeek:

“The IIF’s steering committee that negotiated the swap included representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas, Commerzbank AG, Deutsche Bank, Intesa Sanpaolo SpA, ING Groep NV, Allianz SE and Axa.”

Biggies are in France, Germany.

“The IIF has a larger group called the “creditors committee” made up of 32 insurers and banks. These are the main banks and financial firms facing the write-down in the value of their Greek debt. So why are they willing?

The main answer is that they’ve already written that value down on their books. They’ve used the three months since the Long Term Refinancing Operation (LTRO) began to prepare for just this moment. They could’ve borrowed money from the European Central Bank (ECB) to replenish their capital levels after taking the Greek loss.———

———-

“If that were the case, the members of the ISDA wouldn’t be worried about the credit default swaps related to Greek debt. But they are. And the members most worried are the five US banks that write 97% of all credit default swap contracts in the US.

Those banks – JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup – are all represented on the board of directors of the ISDA. Those banks have collected income by selling credit default insurance on European banks. Those banks stand to lose the most if Greece defaults.

“The solvency of banks on both sides of the Atlantic depends on Europe’s most-indebted governments never defaulting on their bonds. ”

The thing about unregulated shadow banking and how it leverages debt is like this; cds is like insurance, so say a major seller of CDS like Morgan Stanley issues insurance on a Greek bond, obviously it pays up in the event of a fail of that bond. Plus it doesn’t have any LTRO system in place. Even worse, CDS can be sold to anyone on virtually anything. So CDS on that Greek bond can be sold multiple times over exposing Morgan to a counterparty risk far in excess of the value of the bond itself.

“the total notional value of the over-the-counter global derivatives market was $708 trillion in June of 2011, or 11.4 times the size of global GDP in 2010.”

That is the market blowout risk the firecappers are trying not to set alight.

@Colm Brazel

By “rest of the world” I meant IMF member countries.

I think that’s quite a weak article that you linked – long on handwaving and short on details. Greek CDSs are not about to cause a meltdown. The net amount outstanding is less than €4bn. CDSs are marked to market and CDS sellers have to post collateral/margin on an ongoing basis. Dealers may have large notional exposures but the net will be low since they are just intermediating between other parties. If anything CDSs spread risk away from the banking system to hedge funds/speculators etc.

The reason the ECB insisted on a “voluntary” restructuring was so that they could avoid taking losses on their own holdings simply by not volunteering. When that didn’t work they declared themselves to be super-senior and forced Greece to go along. The whole issue about whether a credit event happens or not was just a sideshow.

@ Bryan G

Re ” I think that’s quite a weak article that you linked – long on handwaving and short on details. ”

Actually, I rarely give ground, but on this one, I have to partially agree with you. Plus the guys probably have some gold bullion skin in the game.

RE “CDS sellers have to post collateral/margin on an ongoing basis” That is technically true but there has been widespread speculation the hedging against CDS is not worth the paper its written upon, a bit like the acquisition of multiple mortgages for single properties tried here ‘successfully’ in the past. The banking system is exposed through investment banking in the US primarily, but with LTRO they’ve managed the cap the potential blowouts for now. Rating agencies have been worried about this eg

http://articles.businessinsider.com/2011-11-18/markets/30413921_1_fitch-bank-exposure

Here’s a table of European bank exposure: http://www.bloomberg.com/news/2011-12-09/european-banks-cds-held-and-sovereign-debt-exposure-table-.html

Here is a better discussion of the CDS risk focusing on what happened to AIG which ran out of CDS collateral in 2008 and contributed to the meltdown.

http://www.businessweek.com/magazine/us-banks-guarantee-more-european-debt-11032011.html

But since then US banks have reduced their risk and earned a lot of money through the LTRO balloon. However, the problem of the peripherals remain; the risk has not gone away and Europe can still face a blowout as credit downgrades of particularly Italy have shown.

One aspect of this though I’m curious to know further is the counterintuitive role of the ECB in relation to Greece:

You write,

“When that didn’t work they declared themselves to be super-senior and forced Greece to go along.”

I’m trying to get a better handle wondering why they did this ? Also I’m wondering how this can be enforced in a meltdown situation, what collateral would this be based on, gold, foreign reserves ?

Also do you have any links to the detail of the financial bailout of Greece that specifically relates to agreements made with Greece under cover of this demand ?

@Bryan G,

and I agree about your point about senior bondholders and the ECB preferred solution. I don’t like it and the ECB position that anything but 100% protection for senior bondholders seem a bit high. Why not 95% or less?

It seems difficult now to address the situation with senior bonds, but it has to be addressed. The ECBs position that sovereigns has to guarantee 100% of capital and interest of senior bonds due to ‘implicit’ guarantees is something that I do not see as a good way going forward. Could a sovereign (not dependent on the ECB) legislate that only explicit guarantees up to 80% of the capital of senior bonds will be supported?

I keep reading about financial markets wanting certainty, the uncertainty regarding implicit guarantees has to disappear into history and I do not see it as possible that the explicit guarantee can be 100%, in an ideal world the national parliaments would set the limit preferably in the constitution.

Senior bonds have been the facilitator of large capitalflows and the large capitalflows have been a cause of the crisis in Ireland.

I believe that the Irish property bubble would have been less severe if the implicit 100% (including interest) guarantee of senior bonds had been clarified before the crisis. Why allow an implicit guarantee? Why should the guaranteed amount be 100% of capital and interest?

I seem to remember a post a couple of years back where it was claimed that some investors wanted to diversify their bond holdings and therefore wanted to invest in Irish government bonds. At the time there were not many Irish government bonds around but as they wanted the Irish government bond ‘play’, they invested in senior bonds of Irish banks. Their investment then made the credit boom even worse. Law of unintended consequences?

& then we have the stress tests for banks…. Supposedly to reduce uncertainty. Why is there uncertainty? Is it possibly due to some weaknesses in legislation regarding valuation of bank assets?

EU institutions are looking into wage growth in nations, not sure why that is prioritised over looking into ways of dealing with the banking crisis. It looks like EU institutions are about controlling the citizens on behalf of finance instead of controlling finance on behalf of citizens.

@ PR Guy,

That American banker was telling it like it is. Plus you know the new CDS is LTRO is not just the EMU version of QE, it can also be used to recapitalise banks, sovereign debt, American investment banks; yep, lots of European banks instead of using it to purchase European sovereign debt are hedging their bets and using it to purchase Us dollars and bonds.

Re “I really must get in touch and ask him if he would like a new PR Guy.”

No, he was using the term in the correct sense there 🙂

@Colm Brazel

AIG was different, because it had a AAA-rating and didn’t have to post collateral, and when it lost its AAA rating then it had to post a huge amount all at once, which it could not do. The rules have changed since then, so that everybody has to post collateral as prices change. Most collateral is cash, according to this article, which also gives more details. The major US banks say their net positions are small – this has been a slow-motion default for two years, so there has been ample time to hedge appropriately. At this point I don’t think any form of meltdown due to Greek CDSs is credible.

The ECB did a bond swap with Greece, getting new bonds that were the same as the old ones except that the new ones are exempt from the CACs that Greece is retroactively imposing on its old issues. I have no doubt that this approach was decided in Frankfurt and Greece just went along. Since the ECB will be exempt from the CACs they can just keep their bonds till maturity and get paid at par, which is what they plan to do. As Greece’s situation got worse over the last few months it became clear that a 100% participation rate in the “voluntary” bond swap was needed, to get the numbers to add up for the “120% in 2020” target. Hence the CACs, and the need for the ECB to do something other than not volunteer. More details can be found in the link posted below.

@Jesper

Denmark has already implemented and refined a sensible approach on bank resolution. In the EZ the issue isn’t even on the agenda. In Denmark’s case the banking industry itself pre-funds a Deposit Guarantee scheme. If a bank fails it is transferred to be a subsidiary of a state Bad Bank, and the bank is wound down, with senior bondholders taking losses. This scheme raised the cost of funding for all but the biggest banks, so they made some changes to spread the losses over the entire banking system, but the taxpayer pays no more with the latest changes than they did previously. In fact Sweden said they were going to implement a similar bail-in approach, but I don’t know how far along that is.

EU institutions are looking into wage growth in nations, not sure why that is prioritised over looking into ways of dealing with the banking crisis. It looks like EU institutions are about controlling the citizens on behalf of finance instead of controlling finance on behalf of citizens.

I agree with this. The one-dimensional diagnosis of the problem, and its associated solution, has been largely driven by Germany. More generally I still find it bizarre that basic issues such as pan-EU bank deposit and resolution schemes, and mechanisms to prevent future credit bubbles and massive imbalances, are seemingly off the agenda.

@ Bryan G

Indeed! Herewith a link that should be of great interest.

http://www.ecb.int/press/key/date/2012/html/sp120224_1.en.html

@ Bryan G

And another journalist missing the point.

http://blogs.reuters.com/james-saft/

What appears to be escaping every one’s attention, apart from some comments I saw in the Blogosphere, is that we are witnessing the biggest sovereign default in history.

@ colm mccarthy

I will do my best!

We are all banking experts now; of necessity!

You may have seen this item by Zoltan Pozsar some months ago.

http://www.ft.com/intl/cms/s/0/fed87d52-20c3-11e1-816d-00144feabdc0.html#axzz1nKWdUFMk

All that Draghi has done is buy time. As Germany (or, at least Schaeuble) seem to be insisting on closing down the sovereign bond market, something has got to give if the present European slow-down is not going to turn into a full-blown recession. Assuming the Greek pirouette does not come unstuck, action will have to be taken in the coming weeks.

James Saft asks: “If this is the way business is done in Europe, with the cooperation of the IMF, why would Britain or the U.S. be any different if similar issues arose?”

Britain has the Bank of England and the US has the Fed. As Atrios would say, this has been another edition of Simple Answers to Stupid Questions.

@ Bryan G 5:36

Now its my turn to say, ” I think that’s quite a weak article that you linked – long on handwaving and short on details. ” 🙂

Disclaimer, the following is a wide ranging speculative piece, but really the issues covered here require more than I can give here to subjects in question; but, if this sparks a few new thoughts and questions, however unsatisfactory this is of some worth.

I think there is a common misbelief that the CDS market has successfully in the case of Greece been adequately sanitized and sterilised to prevent contagion; or that the problems re bond markets particularly effecting derivatives and CDO (collateralized debt obligations) particularly synthetic CDO’s are easy to deal with and have been adequately addressed.

The problem is the drift or infection or cross contamination of CDS across markets in general in a domino effect that in the case of interbank lending, for example, increases anxiety especially in the world of investment banking.

Because of the growing market in derivatives, derivatives are the canary in the coalmine that signal alarm in times of economic trauma eg AIG.

There was a CDS collateral problem you correctly identified with AIG, but this AIG problem related to CDO’s about which there is little in the article you link to.

The problem with CDO’s is the doubt related to the underlying assets upon which CDO’s are based; another problem relates to the mark-to-market nature of CDO’s, how markets can suddenly collapse effecting CDO value as everyone runs to the door.

To understand how complex this market is, consider Synthetic CDO’s in the following dribble:

http://derivativedribble.wordpress.com/2008/11/11/synthetic- cdos-demystified/

http://en.wikipedia.org/wiki/Credit_default_swap# Regulatory_concerns_over_CDS

Efforts are being made to stem the tide of problems in the CDS markets.

” A clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the risk of counterparty defaulting on a transaction. In the over-the-counter market, where credit- default swaps are currently traded, participants are exposed to each other in case of a default. A clearinghouse also provides one location for regulators to view traders’ positions and prices.”

To illustrate the importance of these instruments and perhaps a rush of propaganda to state the problem has been defused:

“During the current 2012 negotiations regarding the restructuring of Greek sovereign debt, one important issue is whether the restructuring will trigger CDS payments. ECB and IMF negotiators are trying to avoid these triggers as they may jeopardize the stability of major European banks who have been protection writers. ”

There is a useful thesis here:

http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009- CDOmeltdown.pdf

OTC’s can be nasty, odious and toxic and to date little has been done to reform the financial services industry and prevent abuse that led to subprime problems in the US. There is to my mind no reason to not suspect that suspect collateral and assets due to the very nature of unregulated derivatives do not lie as instruments of financial destruction across the global financial system.

“…the advent of synthetic CDOs significantly altered the evolution of the CDO market. Rather than investing in cash bonds, synthetic CDOs were created from pools of credit-default swap contracts (CDS), essentially insurance contracts protecting against default of specific asset-backed securities. 15 The use of CDS could give the same payoff profile as cash bonds, but did not require the upfront funding of buying a cash bond. Furthermore, using CDS as opposed to cash bonds gave CDO managers the freedom to securitize any bond without the need to locate, purchase, or own it prior to…”

The arcane world of red codes, clearing houses for sovereign CDS eg in the following, is difficult to compute.

https://www.theice.com/publicdocs/clear_europe/circulars/ C11170_att2.pdf

Greece and Italy have been victim to speculative CDS attack, also highlighted by Merkel, she has spoken against speculation in CDS exacerbating the meltdown in the EMU:

” The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. …”

http://en.wikipedia.org/wiki/Derivative_(finance)# OTC_and_exchange-traded

A key insertion in the 2000 commodities futures modernisation Act was that which exempted over the counter derivatives like credit default swaps from regulation by commodities futures regulation commission. This has proved to have been a disastrous mistake whose consequences we still face.

There is huge resistance in the financial services and banking sector to any regulation interfering with opportunity for profit.

Non disclosure, poor reporting, lack of transparency, regulation, unaccountability, unreliability eg see Rating Agencies critique in Harvard Dunlop thesis above, mean nothing is what it seems; what is there, for sure, is one big problem the world has to face as it did under Roosevelt when he brought into effect the 1933 Banking Act Glass Steagall.

De Regulation in the Gramm Leach Blilley act in 1999 dismantled safeguards that contributed to the mess in global Finance of today. The losses in OTC subprime handed onto European banks have been unaccounted for and hidden away. The market in toxic CDS speculation is still out there.

A couple of intriguing takes as part of an ongoing interest on the above I have is to do with the very nature meltdown itself in relation to derivatives and OTC. These financial instruments provide a different component to other defaults through history as they are a recent phenomenom. One aspect of this is what I’d term gravity economics meaning forces in the financial industry cause chaos rather than purely physical, economic forces such as a drop in manufacturing output. This creates a synthetic, unreal economy much like the euro currency as it undergoes a switchover to manufactured illusory economics making you wonder how long the center can hold.

The magic world of LTRO has for the moment defused the derivative instruments of mass destruction across Europe. Interbank lending which
in a rerun of 2008 was looking for its european AIG and drying up lending has again begun to move. But the huge takeUp of LTRO by banks throughout Europe will signal a weakness in the euro when this funding dries up. Another weakness will become evident when this funding is used as a fund to further further speculation in financial markets rather than on release of credit into economies where austerity and deflation mean
investment is at risk.

The gravitational pull of resources, financial support to banks and financial institutions, away from the ‘common market’ of credit and business investment and employment, will reveal the euro as the financial black hole the euro currency has become.