Olivier Blanchard provides an assessment of the challenges facing Greece in this IMF blog post.
Paul Mooney has a long op-ed on higher education in today’s Irish Times.
Mooney taught at DCU and was president of NCI. That experience colours his assessment and recommendations. As I have argued time and again, some universities should focus on research and the academic side of education while other universities should focus on the more vocational end of third-level education. Mooney’s one-size-fits-all assessment and recommendations are more appropriate for the teaching end of higher education. Differentiation and specialization are a better way forward. Some Irish universities should lose the right to grant PhDs while other universities should minimize undergraduate numbers.
Mooney first discusses working hours. Teaching hours are a fraction of total working hours — a small fraction at the research end of the university spectrum and a larger fraction at the teaching end. That gradient can and should be made steeper: Many university lecturers are incapable of decent research while at the same time many good researchers are buried in teaching and administration.
Research is multifaceted. Some research is really applied, immediately leading to profits for companies and photo opportunities for politicians. Such research is best done in companies and consultancies. There is also blue skies research, curiosity driven stuff that is truly appreciated by only a handful of people and that perhaps one day might lead to something useful. Such research is best done in universities and national laboratories. Blue skies research does not benefit Ireland. It benefits humankind. It satisfies our thirst for knowledge. It feeds applied research. Blue skies research is a global public good. As one of the richest countries on the planet, Ireland has a duty to contribute.
Ireland can, of course, decide to free-ride and hope that other countries will provide the public good called fundamental research. But there are local spillovers too. The financial reward for top academics is small relative to their capacities and outside opportunities. A low teaching load (and hence a lot of time for research) is part of the reward for top academics. Top academics make top schools. Top schools attract top students. Top students join or form top companies, which prefer to be close to big pools of talent.
Like so many others, Mooney seems to think that technological progress is all about the natural sciences and product innovation. In fact, process innovation is at least as important. With a few exceptions, successful Irish companies are better at process innovation than at product innovation. RyanAir did not invent a new plane. Guinness and KerryGold convinced the world that their product is best (without changing the actual product). Ireland would make a bigger contribution to the global stock of knowledge if it would focus on what it is good at — and that is in the realm of ideas rather than things. The graduates of Ireland’s business and economics schools definitely command a higher wage than the graduates of its engineering and natural science schools.
Mooney also calls for (improved) measurement of performance. I could not agree more.
BlackRock Solutions provided the key granular analysis underlying the landmark 2011 PCAR study of the Irish banks; the NYT reports on its role in the Greek banking sector here.
Colm writes another dinger of a piece for the Sunday Independent, it’s required reading. From the piece:
No other eurozone member has incurred bank-related debt under ECB duress. There are no provisions in the Maastricht Treaty, in the Stability and Growth Pact or in any other pact or international treaty which grant this power to the ECB, nor was any eurozone member state ever asked to accede to such an arrangement. Commissioner Rehn’s Latin phrase (“pacta sunt servanda”) has no pact to refer to, insofar as these imposed debts are concerned. Ireland never signed a pact or treaty which empowered the ECB to behave in this fashion.
One can only speculate as to the ECB’s motives, since it does not deign to explain. European banks have come to rely heavily on unsecured bond financing and the ECB may have felt that no bank bondholder should suffer losses, in order to encourage the survival of this market in bank debt. If this was the motive, the policy is being paid for, not by the ECB, but by Irish taxpayers and sovereign bondholders and financed by European taxpayers and the IMF. There is no pact which confers powers of taxation on the ECB.
All of the Greek debt relieved, to the tune of €100bn in recent weeks, was contracted, without duress, by the lawfully elected Greek government. The write-down was welcomed by Commissioner Rehn, who described himself as “very satisfied by the large positive turnout of the voluntary debt exchange in Greece”. The same “exchange” was described by one of the bankers enduring a 74 per cent haircut as “about as voluntary as the Spanish Inquisition”. The bondholders agreed only after punitive retrospective clauses had been inserted into bond contracts, with the agreement of the European Commission. Some of them are initiating court actions, presumably in jurisdictions cognisant of the “long European legal and historical tradition” to which Commissioner Rehn refers so approvingly.
The Financial Times, in a leader last Thursday, argued that Ireland should be afforded debt relief in order to ensure debt sustainability. “Pacta sunt mutanda” it intoned, which means treaties should be altered. The portion of the Irish debt in dispute here does not derive from any pact or treaty but was arbitrarily imposed by the ECB. There is no need to alter any treaties and the FT, uncharacteristically, has misunderstood the Irish case.
This whole sorry saga has raised once more the enduring policy dilemma of ensuring that central banks are both independent and accountable.
This impressive new book includes a lengthy section on the Irish banking crisis. One of its authors (Jerry Caprio) will speak about the book next Wednesday March 21 1pm-2pm in the IIIS seminar room, TCD. All welcome.
The recent financial crisis was an accident, a “perfect storm” fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. And policy makers? They did everything they could, given their limited authority. It was all a terrible, unavoidable accident. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan Greenspan.
In Guardians of Finance, economists James Barth, Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system, had years to process the evidence that risks were rising, had the authority to change their policies–and yet chose not to act until the crisis had fully emerged.
The current system, the authors write, is simply not designed to make policy choices on behalf of the public. It is virtually impossible for the public and its elected officials to obtain informed and impartial assessment of financial regulation and to hold regulators accountable. Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public–rather than that of the financial industry, the regulators, or politicians.
This new IMF working paper is instructive.
Summary: This paper looks at some technical issues when using CDS data, and if these are incorporated, the analysis or regression results are likely to benefit. The paper endorses the use of stochastic recovery in CDS models when estimating probability of default (PD) and suggests that stochastic recovery may be a better harbinger of distress signals than fixed recovery. Similarly, PDs derived from CDS data are risk-neutral and may need to be adjusted when extrapolating to real world balance sheet and empirical data (e.g. estimating banks losses, etc). Another technical issue pertains to regressions trying to explain CDS spreads of sovereigns in peripheral Europe – the model specification should be cognizant of the under-collateralization aspects in the overall OTC derivatives market. One of the biggest drivers of CDS spreads in the region has been the CVA teams of the large banks that hedge their exposure stemming from derivative receivables due to non-posting of collateral by many sovereigns (and related entities).
John McHale provides his views in this IT article.
Simon Carswell provides a detailed report here.
The new ECB Monthly Bulletin includes handy summaries of the Fiscal Compact and Cyclical Adjustment of the Government Budget Balance (Boxes 12 and 13; pages 101-105)
From Simon’s reporting, one proposal seems to be along the following lines: AIB/Permanent TSB would swap their trackers for a long-term government bond. (There is no magic value creation there; presumably the value of the bond would match the value of the trackers.) The trackers would be moved to IBRC, where they would be used as collateral for a long-term, low-interest, Government-guaranteed loan from the EFSF/ESM. (The loan might have to be provided directly to the Government given EFSF/ESM rules.) The funds would be used to pay off the ELA and the promissory note would be cancelled. I would guess that the ECB would welcome this, as the promissory note/ELA arrangements have a more than a whiff of monetary financing of a government. The various swaps would be designed to be “capital neutral” for the various entities involved.
Of course, this is all speculation, and might not even be one of the multiple options under consideration. But I think the Government needs to proceed carefully if it is. For all the criticism of the promissory note/ELA arrangement, stripped of the complexity it amounts to an interest-free loan from the euro-system to the Irish State. (I say interest free because the Central Bank of Ireland’s profit on the ELA goes to the Exchequer.) The advantage of restructuring the promissory notes is that it reduces the heavy near-term funding requirements facing the Exchequer. Such funding requirements will complicate the return to the bond markets. But any improvement in the funding situation would need to be weighed against any higher ultimate interest rate cost. (One complicating factor could be the dependability of ongoing ELA.)
Holders are low-interest trackers are told to be wary of giving them up. The Government needs to be similarly wary in any complex multi-swap deal. An arrangement that leaves the EFSF/ESM out but extends the maturity of the promissory notes looks preferable.
Paul Hunt is a regular commenter on this blog. He has an article in the latest issue of the Dublin Review of Books.
Average weekly expenditure is estimated to be €810 per week or around €42,000 per year. The release contains lots of detailed information by income decile, region, location and household tenure.
My slides from this evening’s Policy Institute event are available here.
Michael Moore of QUB raised an interesting point with me last week. A NO vote would not affect our membership of the IMF. Presumably, Michael asked, we could still turn to it if/when we need a second bail-out? And recall that the troika – the coalition of the willing – was just put together because it was considered demeaning for the EU that a member state should seek a bail-out from entirely external sources. Given all the indications of how much the IMF has changed in the wake of the Stiglitz critique, they might even have a better deal to offer than our EU partners.
Michael, of course, likes to lace his stews with chili. But still…
Then, though, it would be up to our American partners. A senior IMF official confirmed to me over the summer the veracity of Morgan’s account of the Geithner veto. Soundings to be taken over St Patrick’s Day at the White House?
Randy Wray is a prominent economist writing in the post-Keynesian tradition, and is very prominent in the debates online around Modern Monetary Theory. He has an intriguing paper on a jobs guarantee scheme for Ireland here. I’m sure our readers will have lots to say about this proposal, and it is welcome food for thought.
Paul De Grauwe argues that the LTRO operation is a poor substitute for direct ECB intervention in the sovereign debt market in this FT article.
In comments on Philip’s Sunday Business Post article, Bryan G raises a number of important points about what actually changes as a result of the Fiscal Compact. I think an important role for this forum is to discuss what the Compact actually does, so thanks to Bryan for focusing on the question. For one thing, it may reveal areas where clarifications from the Commission are required so informed decisions can be made.
Bryan G identifies what he sees as the major consequences of the Compact:
(a) requiring rapid convergence to MTO [Medium-Term Budgetary Objective]
(b) limiting the scope for temporary deviations due to exceptional circumstances
(c) requirement for an automatic correction mechanism
(d) requirement for Member States that have been made subject to the excessive deficit procedure to put in place budgetary and economic partnership programmes
(e) the ex ante reporting of public debt issuance plans.
(f) defining the scope and procedures for Euro Summit meetings
Points (d) and (e) are the subject of the proposed two-pack. Point (f) seems uncontroversial. I think Bryan G is right that point (c) is a — indeed I would say the — critical element of the Compact, and relates to the requirement to put a correction mechanism into “binding and permanent” national law. From my reading of the proposed Compact and the revised Stability and Growth Pact (SGP), I do not see the case for (a) and (b) being real innovations. Continue reading “What Would Change as a Result of the Fiscal Compact?”
Central Bank economists have released two new technical papers on the Irish banking sector:
The article below was published in today’s Sunday Business Post.
The Irish electorate will soon be asked to express its opinion on the new EU Fiscal Compact Treaty. Although the treaty document is quite short, its content is quite abstract and addresses issues that have been mainly debated so far within a fairly small technocratic circle of economists. So, what are the economics of the fiscal compact?
The economic logic behind the treaty is that a deep commitment to fiscal sustainability provides a key anchor for macroeconomic policy. If the domestic population and international investors are confident that a government will maintain public debt at a level that does not pose default risk, sovereign debt will be considered a “safe asset’’. In turn, this avoids the incorporation of risk premia into the sovereign bond yield, which is an important saving to the government in terms of its debt-servicing bill. Furthermore, a low sovereign yield lowers the funding costs faced by the banking system, in view of the close financial connections between banks and the government.
The ECB provides some suggestions to improve the detailed processes that lie behind the Fiscal Compact in this opinion.
Eamon Quinn has an interview with Lucinda Creighton here.
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.
We regularly emphasise to our research students the importance of expressing ideas in visual terms, rather than just relying on text-based explanations. David McWilliams has produced an excellent example here.
Request – anyone writing on the debt reduction rule please be crystal clear about the difference between a five percent reduction in the gap between the current debt ratio and 60 percentage points of GDP (the ‘one-twentieth’ rule) and a reduction of five percentage points in the debt ratio.
Fabian Bornhorst and Ireland-expert Ashoka Mody have a good piece here.
See announcement here.