The Glidepath Rule

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In addition to the 0.5% ‘structural deficit’ rule in the fiscal compact, there is also a requirement that any excess in the debt ratio over 60% be eliminated in annual steps of one-twentieth, the glidepath rule. (This requirement dates back to Regulation 1467 of 1997). It is repeated, but not introduced, in the fiscal compact. The compact says we really, really, mean it this time. 

In an economy with a zero or low deficit and even moderate growth in nominal GDP, the debt ratio tends to fall without fresh fiscal effort. The conditions in which Ireland regains market access and exits official borrowing are likely to be conditions in which the glidepath rule will not be a constraint.

If Ireland gets back to, for the sake of argument, a measured deficit of zero in a future year (say 2016 for resonance), is back in the market and able to borrow for roll-overs without any extended official lending, would this rule bind and how would it bind?

If Ireland was still in an official lending programme in 2016, the fiscal targets would be whatever was specified in that programme and would supercede other requirements. Note also that the 0.5% rule would hardly bind – there would probably be a structural surplus at a zero actual deficit, or at least it could plausibly be argued that there was one.

The glidepath rule is in terms of the actual debt/GDP ratio and accordingly would constrain the actual, not the structural, deficit. However the constraint looks unlikely to bind in a benign scenario. To get back in the market Ireland will need borrowing rates that can be afforded and that means growth rates of 2 or 3%, combined with inflation of say 2%. For simplicity, let’s pretend that the debt/GDP ratio at the end of 2016 is 100% and that nominal GDP is expected to grow at 5% (3% growth plus 2% inflation). 

If debt is 120% and nominal GDP growth below 5%, chances are we would still be in a programme. If you think we can exit official lending without some relief on bank-related debt, you can do the sums for alternative high debt ratios and higher nominal GDP growth rates.

On the 100% debt assumption, with nominal GDP growth at 5% and with an actual deficit of 0, the debt ratio at year’s end will be 100/105, = 95.2%, well within the glidepath ceiling of 98%. Even a deficit at the Maastricht 3% would be almost inside the glidepath limit.

So we could still be in a programme in 2016, or in the clear. But it seems unlikely that we would be both in the clear and in trouble with the glidepath.

66 Responses to “The Glidepath Rule”

  1. Eureka Says:

    Je ne comprend pas.
    Zero deficit in 2016 – how exactly? Cuts and taxes? Leading to GDP growth of 5% how exactly? And what about the cumulative effect of interest repayments?
    And the social price paid in emigration etc.
    This is fanciful stuff that makes no real-world sense at all

  2. The Dork of Cork Says:

    Still don’t know how the European banking system can work with such little money production and therefore higher credit ratios which will be even more destabilizing then the Maastricht disaster.
    Its a sort of leverage manifesto this fiscal pact thingy.
    I don’t believe bankers are stupid , they are merely criminals with the law / executive on their side.

  3. Carson Says:

    @ Colm McCarthy

    Thanks for that analysis.

    Let’s say hypothetically that Ireland does find itself with 100% debt/GDP and 5% nominal GDP growth in 2016 (adjust figures to suit personal preference if you wish). What is the maximum average interest rate that the country could bear to repay on its debt for it to be considered sustainable?

    Is there a rule of thumb that can be used here? I suppose the missing part of the equation is how large a primary surplus the exchequer is running.

  4. Paul W Says:

    Colm
    A subject that we need to get up to speed on. As one of the unintiated in the detail of this subject, can you /someone explain to me how the 60% debt ratio interacts with the “glidepath ceiling of 98%”? Does the requirement for elimination in annual steps of one twentieth override override legally…or does the ceiling provide a fudge? You seem to be saying that the glidepath rule is in fact not binding? (The glidepath rule “is repeated, but not introduced, in the fiscal compact.”).

  5. seafóid Says:

    “Glidepath” is such an elegant term. High up riding the thermals so far away from ground with its austerity and mud and sweat. And slow motion car crashes.

  6. David O'Donnell Says:

    Luv the 1/20th glidepath – we get done on the way up … and we get done again on the way down … one has to admire its matrixsQuidesque design … a double parable of the talents ….

    … spose the trick, from a serf perspective, is not to go too far up and to ruthlessly dump vichy-banking-system piggy-backers early on during the climb …. otherwise both unmanageable and unsustainable … and humpty-serf will fall down.

  7. Mickey Hickey Says:

    A Glidepath is an aid to navigation on a runway approach. It establishes a glide angle wrt ground vertically and wrt to the centre line of the runway horizontally with markers (2 or 3) determining distance to touchdown. This is the type of precision we need, particularly the markers. It has been replaced by higher precision aids such as high definition radar, ground proximity alarms and GPS. With these you know exactly to ten metres where you are three dimensionally. Monthly reports are now feasible in this age of cheap computers, communications and data gathering capability.

  8. Brian Woods II Says:

    And the message is? As I understand it (and I probably don’t) Colm is arguing that the markets will be more demanding than the glidepath rule, thus rendering the latter somewhat redundant at least for Ireland. Or put another way, if we are having problems with the glidepath rule we would not in any case have returned to the markets.

    One cannot dispute the math, but somehow I don’t see this particular observation running to the century of comments.

  9. seafóid Says:

    Poor Greece . Very poor glidepath

    http://blogs.ft.com/the-a-list/2012/03/07/greece%E2%80%99s-private-creditors-are-the-lucky-ones/#axzz1oY2s662F

  10. Eureka Says:

    Glide path is really apt. It’s a nice analogy. The economy is like an airplane and we’re all passengers on it. And there are a few bright sparks in the cockpit.
    There’s a fire in engine 1 which is the banking sector. So our bright sparks divert the fuel from engines 2,3 and 4 to engine 1 because it’s the one that’s on fire so it needs more fuel to operate…
    But don’t worry passengers. Somebody’s on the pa telling us that the glide path is fine and that they’re convinced there’s a runway ahead.
    There is NO logic to this at all. No wonder thousands are bailing. Even a crashing plane has a trajectory……don’t pretend it’s a glide-path

  11. Brian Woods II Says:

    Off topic, but how really, really, silly that we are having a referendum on this. I wonder will we have a Sindo opinion poll teasing out how the populace feel about the glidepath rule, the structural defict rule etc.

    Bunreacht is no longer fit for purpose, we live in a very complex world.

  12. Carson Says:

    @ Brian Woods II

    “Off topic, but how really, really, silly that we are having a referendum on this.”

    I absolutely agree. It would make as much sense to have a referendum on the location of the new children’s hospital or whether to introduce the household charge.

    Ireland is the only country in Europe having a referendum on this issue. Sometimes it’s good to be an outlier, but most of the time if you find yourself isolated on an issue it is probably time to rethink things.

  13. Eureka Says:

    @ Brian Woods II
    “We live in a very complex world…”

    There is nothing new under the sun. Debt and usury are as old as the hills. Once you get hoodwinked by the language you’re fooled.

  14. Brian Woods II Says:

    @ Carson

    If interest rates are 5% on a 100% Debt and we are running a zero deficit after interest, I think that means we have a primary surplus of 5%, but I may be oh so wrong about that! Perhaps Colm can clarify.

  15. colm mccarthy Says:

    Paul W: in year 1, debt is 100, target 60, one-twentirth is to be eliminated, so next year’s debt target is 98…….

    Brian Woods: (i) Some politicians have been arguing that this rule is significant, in the sense that it is a material additional constraint. If my scenario is realistic, it is not likely to be. I agree that this is obvious.

    (ii) There would be a primary surplus OK – its size depends though on the weighted average interest rate on the accumulated debt outstanding at the time (a lot of which will be official debt at that stage) not on the marginal rate on new debt. It could be 3% or 4%, maybe even 5%.

  16. Paul W Says:

    @ Colm
    Thanks, that’s now clear. Have now had a chance in the interim to have a look at IIEA’s Peadar O’ Broin’s initial analysis and related Council Regulations:

    http://www.iiea.com/publications/the-euro-crisis-the-fiscal-treaty–an-initial-analysis

    So little new bar the debt brakes mechanism, plus plenty of scope for temp opt outs and exceptions.

    Still unclear, assuming not in the clear, how the Programme legally overrules…watertight?

    So in essence /practice boils down to whether Ireland has access to additional backstop post 2013.

    Not much else. Difficult referendum subject though. I can imagine electorate fatigue /yawn by Ref. Date….Would people expect a high turn out for this?

  17. Brian Woods II Says:

    @ Colm

    Apologies. I hadn’t really been following the political debate. One line wow!

  18. Brian Woods II Says:

    It was one line when I posted it!!

  19. Brian Woods II Says:

    We’ll get you to the century with one liners!

  20. Colm Brazel Says:

    I like the term glidepath especially considered in the comfort of a benign growth scenario such as

    ” To get back in the market Ireland will need borrowing rates that can be afforded and that means growth rates of 2 or 3%, combined with inflation of say 2%. ”

    Now such economic conditions represent a hypothetical optimum for survival and success in carrying our weight of debt.

    Aha, NAMA one recalls loved to pronounce on similar economic projections that would lead to the pot of gold.

    Lets call these conditions for growth at 2%/3% an unusual economic single-celled reproductive body that is highly resistant to desiccation and reality capable of growing into a new super economic organism, IrishTroikaPosterBoy.

    But last time I heard ICB was forecasting 1.5% growth for 2012, or has this figure been pared back since?

    Appears glidepath has no wings, no fuel and all bets are off including the glidepath rule?

    So I take it we’re not going back into the markets. What, therefore, are the more likely consequences of this more probable scenario?

  21. Paul W Says:

    @ CB In the more probable scenario (still in a Programme), presumably both the structural deficit rule and the glidepath rule would /could apply. Colm appears to assume that they will not overlay the Programme’s application. But is this so? Reading through some of the stuff again (plus the two IT articles today), where does it say that there won’t be a double-whammy combined Programme plus Fiscal Compact Impact? (a point that Gerry Adams says will cost an extra Euro 6bn in taxes /cuts). Is this substantively correct?

    Does that matter if the Fiscal Compact rules are already law or will become law via EU in any event?

  22. Eureka Says:

    I don’t understand.
    We will have to reduce our actual deficit to zero anyway. At that point we don’t need the markets.
    Am I missing something here?
    Sovereigns have no business raising debt. They have conscripted shareholders with unlimited liability who get to elect a thoroughly unqualified board every 4 years. They must only spend what they earn.

    Simple questions
    1: What is our structural deficit now? What will it be in 2013?
    2: What are the maths for 1% growth 2012, 1.5% 2013, 2.0% 2014,15 and 16 with 2% inflation (still optimistic growth targets)? How does this work ten?

  23. Paul W Says:

    @ Colm If we are in a Programme in 2016 you assume that the 0,5% structural deficit rule would not be relevant as “there would probably be a structural surplus at a zero actual deficit, or at least it could plausibly be argued that there was one.” However, what happens if the structural deficit is not in such a positive place? Is there the possibility of the double-whammy impact I refer to above (and which SF seems to be peddling)? Why is such a scenarion not possible /probable?

    Apologies if you have answered this question before. I haven’t seen any such explanation.

  24. Joseph Ryan Says:

    @Eureka

    Not being an economist do not take my answers seriously!
    Q1: What is our structural deficit now? Nobody knows
    Q2. What will it be in 2013? Nobody knows from Adam (or is that Adams)
    Q3. No idea, but with your numbers, try Athens for an answer..

    Bonne nuite!

  25. colm mccarthy Says:

    Paul W: …in the preamble…

    STRESSING that none of the provisions of this
    Treaty is to be interpreted as altering in any way
    the economic policy conditions under which
    financial assistance has been granted to a
    Contracting Party in a stabilisation programme
    involving the European Union, its Member States
    and the International Monetary Fund,

    I think this means that, if you are in a programme, the programme terms over-ride the compact.

    Eureka: if we get the deficit to zero we still have to borrow to finance (large) roll-overs. Details are in the IMF debt sustainability analysis.

    Your questions: 1. Who knows? Estimates range up to 8%. 2. The growth rate that matters is after we exit the programme. If it was 2% with inflation of 2% the glidepath rule would not be operative either.

    This is all on the benign scenario of being back in the markets, which requires (i) meeting targets under the programme (ii) also needs a deal on bank-related debt I think (iii) a decent growth outlook and (iv) markets back to some kind of normality, which may need a more permanent Eurozone re-design.

    I am not saying these things are going to happen, just that if they do, glidepath will not be an additional constrant. If they do not, we will be in a programme anyway, so programme targets will prevail. So the glidepath constraint would not be a factor in either scenario, as far as I can see.

  26. Paul W Says:

    @ Colm Thanks again. Reading the words and far be it that I would claim to be an authority on this, it could mean differently (to a lawyer….). It could just mean what it says – the underlying Programme remains unchanged, yes, but there is nothing in that per se legally preventing application of the Fiscal Compact terms overlaying as well. Also, other member states can sue to enforce the fiscal compact. There is nothing in the wording deleting the Fiscal Compact agreement in the presence of the Programme agreement.

    Has any senior lawyer opined? Legally watertight?

  27. PR Guy Says:

    Easing of debt pressures OK for some… if you can get it.

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_08/03/2012_432002

  28. Eureka Says:

    @ Colm

    “Eureka: if we get the deficit to zero we still have to borrow to finance (large) roll-overs. Details are in the IMF debt sustainability analysis.”

    If we aren’t borrowing money and don’t intend to borrow money we don’t need to placate lenders – I.e we can default (or aggressively restructure) our rollovers.

    We have paid a very high price to realise that you get very little by being nice.

  29. PR Guy Says:

    @Eureka

    “we can default (or aggressively restructure)”

    Surely not? Greece was a ‘one off case’ dontcha know.

  30. Brian Woods Snr Says:

    Glidepath is fine (and thanks to MM for the proper explanation), but if you run out of fuel you kinda stall, then plummet in a controlled descent into terrain. That’s happening, and most commentators are totally clueless that our economic fuel gauges are showing EMPTY.

    Some of you are in for a real, bad, nasty and fundamentally horrible ‘suprise’. The average Irish paddy and patricia uses a lot of fuel each day (approx 7 l/p/d). So, how will we pay for this stuff? We are 95% (or near enough) TOTALLY DEPENDENT on imported fuels to energize our economy. Money is necessary, sure. But something else is more necessary. Its, Arthur Askey -”Wakey. Wakey” time.

    What’s the definition of insanity then?

  31. DOCM Says:

    @ All

    An interesting technical topic but hardly like to seize the interest of the masses. But then, that is not the purpose of this blog or, would not be were we not alone in Europe in holding a referendum on the fiscal pact.

    This is a silly action necessited by a silly majority decision by the Supreme Court in the Crotty case in relation to the division of powers in the context of the conduct of international relations.

    To the four items listed by Colm McCarthy above should be added a fifth; (v) reducing public expenditure to the level the country can afford. Unless the penny sinks home with government and electorate that this must be the priority, there will be no joy on item (ii). cf. coverage in today’s IT on the issue of the PN’s. Reality bites!

  32. DOCM Says:

    @ All

    FYI

    http://www.economist.com/blogs/freeexchange/2012/03/sovereign-debt?fsrc=gn_ep&%3Ffsrc%3D=scn/tw/eecon/sf/freeex

  33. John Corcoran Says:

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    The politicans, their families,friends,financial backers etc were state landlords who bled the state dry using these ruinous leases. This is the biggest political scandal since the foundation of the state.

  34. Colm Brazel Says:

    @ Paul W 9:09

    Re my:
    ” So I take it we’re not going back into the markets. What, therefore, are the more likely consequences of this more probable scenario? ”

    Re your:
    ” where does it say that there won’t be a double-whammy combined Programme plus Fiscal Compact Impact? ”

    Ta for response there. It is difficult to spot icebergs especially when its quite dark and calm and they’re not exactly announcing themselves to us in the media or being discussed, but we’re talking about icebergs here.

    Lack of growth is one. You identify another iceberg above. It doesn’t specify there wont be a double whammy combined programme. Now, there are Greek sirens about who’ll cook this up into a persuasive argument that we should sign the Compact and put on its leg irons precisely because they believe it’ll give us full steam ahead to further bailouts. This is a misreading of der ‘Compact’ I suspect Francois Hollande has not misread and is vowing to change if elected.

    So, let me try answer the ‘double whammy’ bailout
    question.

    There is no open and transparent answer to that question because of the proposed rules governing the ESM that ‘Compact’ hopes to sign us up for.
    The question of secrecy attached to the ESM Treaty is a very troubling one.

    For example, the ECB has a board with a seat for each Central Bank governor including our own.

    This ESM hedge fund which will have large decision making powers re bailouts, purchase of sovereign bonds, investments, has no such democratic, representative mandate. The members of the ESM will be unelected and perhaps represent unknown decision makers from the core.

    It will be bound by professional secrecy.

    The Members or former Members of the Board of Governors and of the Board of Directors and any other persons who work or have worked for or in connection with the ESM shall not disclose information that is subject to professional secrecy.

    They shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy.

    We shall depend on the kindness of these strangers whose appointments will probably be made to ensure best interests of the core rather than best interest of the periphery.

    But the above is a relatively small iceberg in terms of what lies ahead for the euro. The euro contrary to what may appear is the case, cannot print money indefinitely. The LTRO funding arrangements comes with stigma attached
    http://www.zerohedge.com/news/presenting-europes-schizophrenia-post-ltro

    Interesting discussion here on pump and dump infinite LTRO possibilities, see comments:

    http://seekingalpha.com/article/394271-what-to-expect-with-the-ending-of-ltro-2?source=feed

    The euro has had to use a lot of ammunition to save itself recently, but structural weaknesses in the design of the euro, the future viability of bailout austerity as a path to growth, mean that its difficult to predict what will come first, ” double-whammy combined Programme ” for Ireland, Greece, Italy, Portugal, Spain eg by way of eurobonds or the breakup of the euro. In not committing to the latter, the Germans are hedging their bets :-( We’re entering the dark woods.

  35. seafóid Says:

    Say you fix on a glidepath. And you stick to it over a number of years. And then you are about to land and you realise they have moved the airport.

  36. Colm Brazel Says:

    @ DOCM

    I don’t believe Máire Whelan SC
    Appointed Attorney General on 9th March 2011
    has made a silly decision.

    Your suggestion her decision was only informed by Crotty is incorrect.

    Signing up for the Penal Laws of the Compact is more than silly. Without a deal on the PN’s its plain foolish, not that you would sign it at all.

    Its a Treaty that will do nothing to fix the real problems faced by the euro; it only makes those problems worse.

  37. Bryan G Says:

    The vehicle on the glidepath is more like a hot-air balloon than a plane. But don’t worry – wind and convection currents have been made illegal, so no worries.

  38. christy Says:

    Anybody reading this?

    http://www.irishtimes.com/newspaper/breaking/2012/0309/breaking1.html

    worth a thread so we can rant about the ECB again?

  39. grumpy Says:

    @colm mcc

    “(iv) markets back to some kind of normality, which may need a more permanent Eurozone re-design.”

    I don’t mean to be obtuse, but many seasoned analysts regard the current yield spreads to be very much back to normal – the only curiosity being the starting point of such low bund yields.

    From docm’s link to Irish Times on the pro notes (selected bits):

    Talks to reduce the burden are ongoing, but no breakthrough is imminent.

    More than six months after Dublin first raised the matter with the ECB, the Frankfurt-based institution is pushing back heavily against persistent Irish demands for a concession to ease the cost of rescuing the former Anglo Irish Bank.

    The ECB’s stance is crucial because its support is a prerequisite for any deal to restructure the debt.

    Within the ECB, the view remains that alternative avenues are open to the Government to improve its finances, among them reductions in public sector pay and welfare entitlements.

    Irish officials have examined whether a €3.1 billion cash payment due on March 31st could be delayed while the discussions continue.

    The ECB is arguing against that, however, and is understood to be making the case that the Government would damage its own credibility if it does not pay on time.

    Central Bank governor Patrick Honohan was expected to raise the possibility of postponement at a top-level ECB meeting yesterday, but ECB chief Mario Draghi said the Anglo debt question did not feature.

    The ECB is understood to be arguing that the reduction seen in Ireland’s notional borrowing costs in recent months is due in large part to the fact that the Government is implementing its EU-IMF programme.

    Given that there is money available in the bailout plan to pay the €3.1 billion due on March 31st, the case is being made that any delay would seriously erode the Government’s standing with markets at a time when Ireland’s return to markets is still not assured.

    Moreover, the view in Frankfurt is that any deal to restructure Ireland’s bank debt would clash with the ECB’s objective of reducing its overall exposure to the Irish financial system.

    The ECB is also understood to be arguing that the benefit of the low interest rate on these loans – 1 per cent mostly, with some loans at 1.75 per cent – is not fully taken into account in Irish debate on the Anglo debt.

    BTW, have I extrapolated your view correctly – that if the ESM was a non-issue for Ireland because it had a different economic and financial starting point, you would not think signing up to the compact was the sensible chioce?

  40. PR Guy Says:

    @christy

    “Anybody reading this?”

    Yes. Was looking at it in detail earlier today.

    Doesn’t sound like they really even got it onto the agenda.

    I presume the stance after Greece (and constantly repeating it’s a ‘one off’ after they saw just how peed off bondholders can get + no doubts lots of threats behind closed doors about what could be done to sovereigns if there was any more suffering of bondholders) is that EZ/ECB now has to be seen to be being ‘hard’ on in programme countries and making them pay up in full or we are going straight back to unsustainable 7% + rates on bonds for Spain, Italy, etc. and buckets more crisis management.

    I would take it as read. We ain’t going to get any help and “vote on that Paddies because we don’t need you to implement the fiscal compact and it’s Ireland that is going to need the ESM (just as an ‘insurance policy’ mind you, as Leo V says).”

    Isn’t life dandy and grandy?

  41. Joseph Ryan Says:

    Historical anecdote re gliding: Off topic
    Those with an interest in World War 2 history, may recall what was possibly the most successful gliding operation ever to take place. Released from 8,000 ft the three gliders landed in the very narrow strip between the Caen Canal and the Orne river. The operation was led by a Major John Howard. It was the start of the DDay landings, with the objective of getting control both bridges.
    http://en.wikipedia.org/wiki/John_Howard_%28British_Army_officer%29

  42. grumpy Says:

    The excellent Namawinelake is in pithy form not far off topic from this:

    http://namawinelake.wordpress.com/2012/03/09/what-did-michael-noonan-get-in-return-for-an-agreement-which-may-leave-this-country-stranded-without-practical-funding-options-from-2013/

    ‘FairComment’ or ‘Noonan Abuse’? ;-)

  43. Brian Woods Snr Says:

    JR: You’re not off topic. Obersturmbannfuhrer Otto Skorzeny, ring any bells? Not to mention those nutters who ‘glided’ infantry into Arnhem! Those guys knew how to deal with predicaments.

    And to stray back toward topic: Guess who are the largest liquid hydrocarbon (energy) importers in Europe?

    “Put your hands together folks for … (drum roll and trumpets) – Ireland (95%); Italy (80%); Spain (75%); Greece (70%) and Portugal (70%)”. And some folk believe that ‘we’ will ‘grow’ out of our debt predicament.

    “Pull the other leg, its got a bell on it!”.

  44. The Dork of Cork Says:

    @Brian
    It is pretty clear – we were the battery hens for German Industrial chicken farmers & the dumb cattle for British Bovine Banking pastoralists.

    mazamascience.com/OilExport

    Look above at the rise of oil imports for the PIigs with the exception of Italy (Italy has a mainly electricity generation problem – it uses NG).

    Also see the slow decline of oil use withen Germany & France – they were projecting out their wealth abroad and getting a interest / export income from our oil consumption.
    Meanwhile France has not got enough fiscal room for what it does best – big grand projects in concert with local authorties that sometimes work………..
    fr.wikipedia.org / wiki / Ligne_de_Nantes – Orléans_à_Châteaubriant

    If this project is successful the 100s of still intact regional branch lines closed in France during the 60s & 70s will come back on line.
    http://www.youtube.com/watch?v=rJ_Jx34gJJE
    http://www.youtube.com/watch?v=YoSBIEsMG5w

    But what are they trying to do ? – project out a fuel surplus to the periphery perhaps so that we can waste fuel again and they obtain a interest income from this waste.
    France (50%) has a Higher fuel self suff. then Germany (40%) and could well reach for 60% if these projects are successful.
    However the investment funds are pitiful when compared to the fixed capital Building “investment” in Ireland & Iberia during the naughties.

    Interesting times.

  45. David O'Donnell Says:

    The Glider took off in 2002 … as we are into a bit of genealogy:

    This is from an IMF working paper – WP/07/44 – written in 2004 by Elena Duggar and Srobona Mitra, entitled, External Linkages and Contagion Risk in Irish Banks, (link here).

    It lists the exposed areas for Irish banks – areas where contagion could become a factor.

    Here it talks about the banks’ exposure to the wholesale funding markets – the very markets which started to dry up late 2007 onwards, hitting full crisis in September 2008 in the wake of the collapse of Lehman Brothers:

    Third, the increased reliance on wholesale funding in recent years, including interbank borrowing and capital market issues, is another potential source of international interdependencies. The average loan-to-deposit ratio for Ireland exceeds 150 percent, one of the highest for industrial countries. All of the major Irish banks are dependent for funds on the interbank and securities markets—AIB and BoI fund about 40 percent of lending in the market, while the market funding requirement for the Anglo IB is at about 35 percent. The overwhelming bulk of both nonresident interbank borrowing (83 percent) and debt securities issued and held by nonresidents (83 percent) in 2004 were vis-à-vis non-Euro area residents.” (p.7)

    and ….

    Measurement Of Contagion In Banks´ Equity Prices, it was written by Reint Gropp and Gerard Moerman and published in December 2003 as ECB Working Paper no. 297.

    Here it talks about banks of EU-wide systemic importance:

    we identify banks, which appear to have been of systemic importance within individual countries and across countries. Overall, the results suggest that there may be relatively few banks with EU-wide systemic importance. The banks consistently identified as systemically important in the EU are Deutsche Bank, Dresdner Bank, Danske Bank, Allied Irish Bank, Bank of Ireland, ING, ABN Amro, HSBC and National Westminster Bank. BNP Paribas, Natexis, BBVA, Banco Santander and a number of large UK banks seem to have some systemic importance, but the evidence is weaker.” (p.6)

    So, as early as 2003, both AIB and Bank of Ireland were identified by the ECB as being of systemic importance in the EU.

    As to how two banks in a country with 0.78 per cent of households in the EU, ended up as having systemic importance to the EU, well, that’s a story worth exploring.

    Links here:

    http://www.irishleftreview.org/2012/03/09/2004-report-interbank-borrowing-heart-irish-bank-funding-stream/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

    … and I do believe The Governor had a succinct WP around this time as well.

    Dissent, of course, was not to be tolerated by PD_FF

    p.s. I’ve jumped from 10,000 feet … thankfully I had a parachute … 30 seconds of free-fall provides brill empirical insight into property crashes!

  46. Ordinary Man Says:

    @ Grumpy

    Thanks for the link.

    Astounding collective incompetence.

    Really very sad that the country is represented by such an un-talented bunch of parish pumpers – but then again that is who we elected.

    No one can say they were not warned.

  47. Paul W Says:

    @ All The Fiscal Compact is a legal agreement with fiscal triggers presenting known unknowns. The Govt’s approach to it is thus far disconcerting. They appear to only have Plan A which assumes Ireland will deliver on the Programme and that therefore the Fiscal Compact is largely irrelevant. However if, as discussed above, Ireland is in the Programme in 2016 and in breach of Fiscal Compact’s metrics, it seems to me that the triggers kick in and there is therefore the potential for the double whammy I refer to above. I have no idea how Mr. Adams’ Euro 6bn additional cost figure is arrived at….no doubt at the upper end..but even a fraction of that would be concerning.

    The overriding comment here seems to be that there is no way that Ireland will not be in a Programme in 2016. There is also an implied assumption that we will be in negative territory vis a’ vis the Fiscal Compact thresholds. The potential for double whammy cost is therefore an issue. I see nothing of it in the newpapers or anywhere else…bar Gerry Adams’piece yesterday.

    I take CB’s point that many other known unknowns and unknowns can happen in the meantime…..but sticking to the discussion with Colm for now…..

    Is it too much to believe that those representing Ireland in negotiating the drafting of the Fiscal Compact could spot and eliminate /mitigate such an (potential) issue? I presume that those people and technicians are fully aware of this kind of thing (are there other “icebergs”…I only looked at some of the detial of this yesterday). Is it therefore too much to believe that the Govt would then put the facts to the people? It is disconcerting too that SF may have it right (I acknowledge here that I look at the rise of SF in Ireland with great concern).

    Hopefully more of this can be brought out into the open.

  48. Paul Hunt Says:

    While Ireland is an official support programme the terms and conditions of the ‘fiscal compact’ will not apply since the conditions of the support programme will over-ride them. But the presumed objective of the official support programme is to get Ireland to a position where the terms and conditions of the fiscal compact will apply. If Ireland needs a further support programme, this situation will be extended.

    Therefore, the logical conclusion is that Irish people should not be asked to decide on this fiscal compact until such time as Ireland is close to exiting the support programme – either this or the highly likely follow-up programme – and the referendum should be postponed until then. It is only then that the Irish people will be in a position to make an informed decision.

    If the Government presses ahead with its proposal to hold this untimely and irrelevant referendum the people should simply abstain from voting.

    It is the only sensible course of action. People may never know enough to make an informed decision, but they most certainly don’t know enough now – and any politicians who claim they do and they should are being deliberately misleading and pirsuing an agenda about which they are not being open or honest. And that goes for politicians in both the ‘yes’ camp and the ‘no’ camp.

    Why should the people be asked to decide when they don’t have to for possibly a considerable period of time?

  49. Paul W Says:

    @ Colm I have now read your recent Sunday Independent article:

    http://www.independent.ie/opinion/analysis/colm-mccarthy-voting-yes-to-this-flawed-treaty-3038822.html

    Well written and reasoned, and highly influential among the public (my elderly mother understood and praised it!).

    Your article says “The Irish budget deficit will be zero, or very close to it, four or five years from now, in any plausible scenario.” As per our short discussion above, the open question is what if this is not the case?

    However, even if there is a zero budget deficit in line with Programme requirements, you say that “Ireland will be well above the [60%] limit whenever we graduate from the official lending programme.” To state the obvious, the question of whether and how the Fiscal Compact rules overlay any Programme (or post programme period) is rather fundamental.

    Look forward to reading any further thoughts you may have on this. Not easy, obviously.

  50. Paul W Says:

    @ PH “While Ireland is an official support programme the terms and conditions of the ‘fiscal compact’ will not apply since the conditions of the support programme will over-ride them.” The Fiscal Compact is a legally enforceable treaty. My question therefore is what is the legal basis of this statement that you make here?

    “But the presumed objective of the official support programme is to get Ireland to a position where the terms and conditions of the fiscal compact will apply.” Ok, let’s assume so for now – but as Colm says we will be well above the 60% threshold when we exit the Programme (assuming we reach zero budget deficit). The Fiscal Compact rules only then (again ???) kicks in, as things currently assume and will not be “bypassed” or irrelevant if there is no or little growth in the meantime. It also appears to me that it is again only assumption that a further Programme will kick in usurping the Fiscal Compact (again). The facts are otherwise (please prove me wrong).

  51. David O'Donnell Says:

    @Paul W

    It is actually very easy – and simple enough for high infants, or advanced junior infants, to understand:

    We are being requested to place ‘NONSENSE’ into the Irish Constitution; from an ‘objective realist’ perspective this is nothing unusual as one may find quite a bit of ‘nonsense’ in there at times …. the question is whether this new bit of ‘NONSENSE’ is harmless or benign on the one hand OR potentially pernicious or potentially damaging to the CITIZENRY on the other?

  52. Bryan G Says:

    @Grumpy et al.

    That’s an excellent namawinelake posting and it has a good comments thread. From that it appears that Seamus Coffey and Citizen Adams take exactly the same position on access to official funding if the treaty is not ratified. Two quotes – one from each

    The European Council will not refuse emergency funding to any euro zone member state in the future, irrespective of their final position on the austerity treaty. To do so would be to break the commitment it gave at the European Council summit of July 21st, 2011, when it said it was “determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes”.

    and

    We’ll have access to official funding for as long as stick to the programme. The Excessive Deficit Procedure is set to last until we get to the 3% deficit limit by 2015. As long as we are making progress towards that we will have official funding for as long as we have no access to market funding.

    The argument for a “yes” vote, as made by Whelan, McCarthy etc essentially boils down to – “it’s a deeply flawed treaty based on bad economics, but we need to vote for it to keep official funds flowing”. Were it ever to be acknowledged that a sudden stop to official funding isn’t going to happen as it is contrary to other countries’ interests, then the Yes argument just falls apart completely.

  53. Bryan G Says:

    @Paul Hunt

    I agree that postponing the referendum makes a lot of sense. For me the strategic goal is that rubbish economics and a removal of flexibility doesn’t end up getting embedded into the Irish constitution. A tactic of delaying and postponing the referendum aligns with that.

    One aspect is that this whole issue may well be overtaken by other events, such as the resolution of Spain’s recent defiance, and the election of a French president determined to “renegotiate” the treaty. And, since most of the arguments boil down to access, or otherwise, to official funding, why not wait until the contours of the problem are more sharply defined?

    If the referendum does go ahead, though, I would strongly argue for a no vote rather than abstain.

  54. Paul Hunt Says:

    @Bryan G,

    We seem to be in broad agreement. I would be surprised if, on reflection, quite a few people were not to come to the conclusion that postponing the exercise is the best course. Whatever about abstaining or voting ‘no’ if the referendum is to go ahead on the timescale currently being indicated, the immediate priority must be to campaign for a postponement. If that effort fails, the focus can be on the vote. But the immediate objective must be ensuring that a decision is not required by voters until it is necessary.

    This is the best way to expose the cant, hypocrisy and cant of both camps.

  55. Paul Hunt Says:

    Apologies. Instead of the cant squared in the above I meant to include bluster, but bullshit might be more apt.

  56. Ordinary Man Says:

    FYI

    http://www.washingtonpost.com/world/financial-derivatives-agency-greek-deal-is-credit-event-triggers-credit-default-swap-payouts/2012/03/09/gIQAJ3qf1R_story.html

  57. DOCM Says:

    @ All

    As we do not know on what basis the AG advised the government that a referendum was necessary, it is not possible to come to any definitive view as to the reasons for that decision. However, one must conclude that, as the fiscal pact is a treaty outside the the provisons of the article in the Constitution relating to the EU – a fact which is generally recognised – her decision was in all likelihood based on some other aspect of the relevant jurisprudence.

    Assuming that Wikipedia is reliable in the matter, bloggers can come to their own conclusions.

    http://en.wikipedia.org/wiki/Crotty_v._An_Taoiseach

    Notably;

    “The judgments were divided into two sections. The first consisted of a single judgment of the court which upheld the constitutionality of the European Communities (Amendment) Act, 1986. The constitution requires the court to give only a single judgment on the constitutionality of acts of parliament. The second part consisted of separate judgments on the constitutionality of ratifying the foreign policy provisions of the Single European Act. In this section Justices Walsh, Henchy and Hederman formed the majority of the court and ruled that the SEA could not be ratified by the state without a reference to the people. They argued that the state’s power to determine its foreign relations was held in trust from the people and could not be alienated by the government. Chief Justice Finlay and Justice Griffin dissented”.

    Bloggers that way inclined can go to the actual judgement (cf. Wikipedia link) and read both the adopting and dissenting opinions and come to their own conclusion.

  58. Brian Woods Snr. Says:

    @Paul W.

    The ‘debate’ – if you could describe it as such, is somewhat akin to the First Class passengers on the Titanic musing about the rate at which the water was rising (or more correctly – the rate at which the unfortunate vessel was sinking). We are going down – in stages, but down. Its called Economic Regression.

    Since this is such an awful prospect it tends to be either ignored or slimed. Depends on which snake-oil sales person is on duty. My prediction is, that within a generation, Ireland will have a pre-WWII standard of living. We will be completely unable to avoid this economic decline (as will all western economies) since our major economic nutrient – liquid hydrocarbon fuel – will have be rationed.

    The real debate has to be about how we will transition from a ‘hydrocarbon’ economy to a ‘carbohydrate’ one. But this is unlikely.

    Cheep! Cheep! (that’s for DoC).

  59. DOCM Says:

    @ grumpy

    Are you serious about the Namawinelake coverage? The ESM does not require unanimous agreement. The details, as far as I recall, are that it comes into force once those countries providing 90% of the capital have ratified it. Ireland will have to borrow its capital contribution!

  60. Bryan G Says:

    @DOCM

    You are correct that the new ESM treaty now requires only 90% of the votes tied to the capital key, to go into force. However I’m pretty sure that 100% of the countries needed to approve the change that was made to get to this point – i.e. change the ESM from version 1 to version 2. This is because the change made falls under the scope of decision making that required unanimity in the original version. Version 2 of the ESM treaty could not have been produced and signed without Ireland’s explicit consent.

    I believe the Irish government made a huge blunder, believing that their strategy of seeking to avoid a referendum had succeeded, when in fact it had not, and they now find themselves in a position that was unnecessary and could have been avoided with regard to access to official funding. Germany can always insist on any conditionality it desires anyway since it has a veto over all ESM disbursements, so could have enforced the rules it wants for the duration of the programme. If the Fiscal Treaty is not ratified they are faced with either a public climbdown which will have to be fudged (likely) or triggering an Irish default (unlikely). All this could have been easily avoided.

  61. DOCM Says:

    @ Bryan G

    The referendum has nothing to do with the ESM which is an international treaty of the classic variety as opposed to the fiscal pact which – it must be assumed – is seen as having implications for the budgetary authority of the Dáil (the same consideration, which again it must be assumed, that prompted the legal advisers to the German government to advise – according to reports – that it required the constitutional procedure of a two-thirds majority in the Bundestag).

    A treaty text is negotiated and/or subsequently amended by the parties to it and the final text is what they have agreed, including the procedures for ratification. Full stop!

    Any other take on the situation does not stand up to serious examination.

    If you wish to start attributing blunders to others, you need to provide justification other than your own beliefs.

  62. Bryan G Says:

    @DOCM

    My previous point was based on your 8:46 comment which I took to mean that Ireland could not have prevented the change to the ESM (requiring TSCG ratification as a precondition for access) since it could be outvoted. Perhaps this was not what you meant.

    Ireland could have prevented the ESM being modified in this way, by saying that there was a possibility the TSCG would be rejected in Ireland, and that this should not endanger all the good work done to date/best boy in the bailout class etc. etc. etc, and so did not agree to this change. It chose not to. This has now created the issue that is being hotly debated – ESM access. I don’t see why it is in Ireland’s interest to link the two – hence it was an avoidable blunder.

  63. grumpy Says:

    @docm

    My interpretation might not be as unambiguous as MWL’s – mischief around ratifying E C Decision amending Article 136 TFEU if the ESM looked like it did – thereby causing hassle, delay, political embarrassment & attendant plotting and scheming leading to, maybe a deal on the ESM wording to shut Ireland up before German electoral politics became too unpredictable – might be more likely in my view.

    NWL’s focus just on the ESM might be a simplification, but the points about the government’s full cooperation with this process are, I think, powerful.

  64. Paul Hunt Says:

    There are so many unknowns here that it is possible to only very few definitive judgements. As DOCM points out, the AG probably had no choice because the relevant Constitutional provision was not sufficiently elastic to cover the ‘fiscal compact’. Thank David cameron for that – as John Bruton recently did.

    Once that was clear the Government tried to make a virtue of necessity and, despite the Taoiseach’s assertion to the contrary, there is an intent to employ the noise during the campaign to force some concession on the darned PNs. But the Taoiseach is technically correct; the fiscal compact and PNs are two separate issues, because the latter will have to be resolved under existing arrangements.

    The fundamental problem is that we have a Government that only speaks to mislead the public or to manipulate public opinion. We don’t know what goes on behind the scenes. There is no forum – oh what a functioning parliament would be worth – to thrash out these issues and to mediate between Government and the people.

    And everyone in the EU outside of Germany is being damaged by the conflict between what the German Government knows it should be doing in its own interests and the interest of the EU and Chancellor Merkel’s over-riding desire to be re-elected.

    I think Grumpy is right. Linking ratification of the fiscal compact to access to the ESM is for German domestic political purposes.

    There is little point lamenting that Ireland is subject to the whims of German voters as interpreted by their politicians. Greed, stupidity and the lust for power put Ireland in this position. But Irish voters can still refuse to participate in this premature and currently irrelevant referendum.

  65. Brian Woods II Says:

    Might make the century, I stand ejected!

    Is it not the case that Regulation 1177/2011 already applies the 1/20th glidepath rule and this not an incremental effect of the Fiscal Treaty?

  66. John Corcoran Says:

    Why did the soverign sign the commercial property cartel’s feudal leases and waist hundreds of millions of it’s citizens money?

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