The crisis as a balance of payments crisis: Current versus capital account aspects

Martin Wolf has another excellent piece in today’s FT, which also appears without the need for a subscription in the Irish Times.    A major theme of Martin’s recent analysis has been the asymmetries in the current account positions across the euro zone, and as a result the need for a more balanced crisis-resolution strategy that involves expansion in the core.   While his analysis has been incredibly useful in many ways, I have always felt that he underemphasises the “capital account” nature of the crisis.  It seems partly under the influence of the recent excellent Breugel paper on “sudden stops” in net capital flows, this latest article provides what I think is a more balanced perspective.   For our own debate, the piece provides a useful opportunity to reflect on the relative roles of current and capital account aspects of the euro zone crisis. 

Much of the discussion of the crisis has cast it as a crisis of the current account of the balance of payments.   There is much to this; it is undoubtedly true that improvements in the relative competitiveness of the periphery and the relative demand growth of the core are critical elements of the solution.   However, the crisis is even more immediately a crisis of the capital account, with – as documented in the Bruegel paper – a “sudden stop” in net private capital flows to the periphery.  (Everybody interested in the crisis should read the Bruegel paper.) 

It is useful to consider what would have happened if large-scale official funding — including the funding of periphery banks through the eurosystem — had not taken place.  (The Breugel paper documents how massive the official funding has been.)  Current account deficits in the periphery would have declined massively, and (absent default) would have swung to large current account surpluses as existing credit lines were not rolled over.    This would have resulted in even deeper depressions and widespread defaults.   Care must be taken in interpreting the current account balance – or turnarounds in that balance – as a sign of economic health.

Without in anyway playing down the importance of the need for more balanced adjustment across the euro zone (which requires more expansionary policies in the stronger countries of the core), the “sudden stop” in private capital flows highlights the critical need to re-establish creditworthiness.   This is critical to facilitating more phased adjustment without putting an intolerable strain on the willingness of the core to fund the current account imbalances of the periphery.  

The re-escalation of the crisis in late 2011 – which may be raising its ugly head yet again with the renewed pressures on Spain and Italy – shows how fragile creditworthiness is to bad expectational equilibria within a monetary union.    This has led to efforts to shore up the lender of last resort function within the euro zone.   But a reliable lender of last resort means that the stronger countries face potentially huge liabilities for their weaker partners.   It should not be surprising that assurance is needed that adjustments will take place without default on official lenders in return for providing the financing to allow those adjustments to take place in a more phased way.  

The fiscal compact must be seen in this light.   Focusing on the unbalanced-current-accounts aspect of crisis, there is substance to the criticism that the compact forces excessively restrictive fiscal policies on the core.   But the capital account – i.e. creditworthiness – aspect cannot be ignored.   A commitment to shared discipline appears necessary to allow both the massive official funding to continue and to make it sufficiently reliable to make the market creditworthiness of the periphery less fragile. 

77 replies on “The crisis as a balance of payments crisis: Current versus capital account aspects”

No thanks , reduce internal demand so that some of the few winners left withen these broken societies can afford grossly over engineered German cars………how sick & absurd it that ?
Nah the Rubicon has been crossed.
The Euro crisis has done us a extreme favour.
It was a trap lads………..it started with the ban on monetary financing in the early 70s – leaving all power to the financial class who could then buy the politicians that were amiable to their interests.
When the debt levels were low (at the start of this process) they could buy us with structual funds and the like…….now they say the debt is too big to afford such gifts and we must work to pay interest rather then build capital… as if the debt was a physical wall !!!!

Its time we revert back to sovergin citizens …….and leave this demonic construct.

@John McHale

That is one of the most convoluted arguments in favour of the fiscal treaty that I have ever heard. If an alien read your post I am sure they would say you started with your conclusion and worked backwards to try to meet Martin Wolf’s reasoning.

A couple of point about your argument:

You say that “the capital account … aspect cannot be ignored” and that we cannot just focus on the current account. I think that is correct. Who ever said there should ONLY be a focus on the current account? On the other hand, the treaty just focusses on ONE single aspect, namely, fiscal policy. My opposition to the treaty is precisely because it is so one-dimensional. Can European policy-makers not walk and chew gum at the same time?

You seem to make a huge leap between the implementation of the fiscal compact and creditworthiness in the periphery. That is quite an assumption! There are at least three other aspects to creditworthiness that the treaty studiously ignores:
1. the overall debt burden of member states
2. the role of the ECB in the sovereign debt markets
3. the intertwining of banks and sovereigns and bank resolution

Regarding 1: if/when we get our deficit down to 0, we will still have debt to GNP of around 140%. Even if we can borrow in the markets sporadically any kind of economic shock will send us straight back to official sources. That situation will likely last for 20 years – just look at Italy’s and Japan’s debt burden

Regarding 2 & 3: one just needs to compare the economic and banking situations of Spain and the UK and then compare their sovereign bond yields to see what I mean.

So the question is why are trade imbalances, the role of the ECB and bank resolution studiously ignored by the treaty? Philip Lane thinks these reforms are just around the corner and Angie is just testing us to see what kind of characters we are. I say the German establishment have absolutely no interest in the above reforms – they are doing very well as it is, thank you.

What is most amazing is that I am sure that yourself, Colm McC, Karl W and Philip Lane know all of the above already. You know this treaty is not worth the paper it is written on. So how can you support it? At least McCarthy and Whelan have honestly (but incorrectly) stuck to the TINA argument, but you and Philip Lane seem intent on arguing for its non-existant merits.

Absolutely. The crisis in Ireland was one of capital flight. Not unreasonable flight, given that the capital that had been loaned had been misallocated, there was no credible LOLR, the collateral of the banks was severely damaged, and the sovereign committed suicide by guaranteeing everything.

Capital flight is a rational response in this situation. The question for the troika is how to stop capital flight being hugely damaging when the normal method of cutting it off (currency collapse/limited foreign reserves) is not available.

“A striking feature of the euro-area crisis is thatwhereas capital outflows have been dramatic, thecurrent accounts of deficit countries haveadjusted only partially. Decomposition of capitalinflows highlights the crucial role of Eurosystemfinancing in mitigating the effect of private capitaloutflows (with a contribution of internationalfinancial assistance of a comparable order of mag-nitude in the case of Greece). The injection of liq-uidity has helped accommodate persistentcurrent-account adjustments in the southern partof the euro area, but most importantly it has pro-tected countries that could no longer rely onadjusting their exchange rates from the full nega-tive impact of a sudden stop. Given the level of integration of euro-area financial markets, theeffects of unmitigated sudden stops in southernEurope would have endangered the entire systemand put at risk the survival of the single currency”

I have to say I really don’t understand what is so “striking” about this fact as outlined in the Bruegel paper. It should not only be self evidence isn’t this the whole point of monetary union. The captial outflows are actually a reflection of the core’s lack of commitment to the single currency project and consequently the very least the periphery could have expected – afterall they are technically signed up to an over-valued currency from a periphery perspecitve vis-a-vis the under valued core countries who are the main beneficiaries of this imbalance.

@bazza

The post is not mainly about the compact, and perhaps the reference might better have been left out to prevent distraction. The main point is the importance of looking at the capital account in understanding the crisis. There is nothing novel in this, but it does sometimes seem to get sidelined in discussions of the current account adjustments. Once you focus on a sudden stop in capital inflows it is hard not to talk about creditworthiness. I believe the compact is relevant to that discussion. But of course it is just one element.

An interesting point in the Breugel paper was the discussion, towards the end, of banking being regulated and indeed rescued at a federal rather than a State level to prevent the vicious cycle we’re seeing being played out in Spain.

The tragedy is that only the ECB seems to have learned this lesson from Ireland with the LTRO, the ESM treaty still proposes that States should tap the ESM to bail out their banks rather than creating a pan European banking regulator, and a pan European banking rescue fund.

The Commission paper on “bailing in” bank investors seems badly timed, although it should be the end game, but in order to calm the crisis talking about bailing in investors smacks of “Deauville”, whereas the existence of a pan European banking rescue mechanism would reduce the pressure on Spain and Italy.

A point that struck me though was the guarantee the Greek Gov has had to give to their CB about the ELA.

They don’t own their banks and as such they’re not subject to the 123 issues we have with IBRC, they might come to own their banks but they don’t currently own them. I assume that the ECB has insisted on the guarantee, but it would seem to be more for dogmatic purposes than strict legal ones unless you take a very convoluted route through combining the ELA with the PSI to get to a prohibited transfer union position, a route which would surely call the LTRO into question since it would be open to being amalgamated with falling Italian yields leading to monetary financing.

@Bazza

“So the question is why are trade imbalances, the role of the ECB and bank resolution studiously ignored by the treaty? Philip Lane thinks these reforms are just around the corner and Angie is just testing us to see what kind of characters we are. I say the German establishment have absolutely no interest in the above reforms – they are doing very well as it is, thank you.

I agree that Germany has no interest in real reform…and I suppose it could be said why should they when they can borrow 10 year money at 1.77%. I’ve been harping on about the ECB not being a true central bank and I see other are saying the same. Is it possible to fix the treaties so that the ECB can act like a real central bank?
Ambrose has a piece on same….
“Articles calling for Spain to withdraw from EMU — or at least exploring the idea — are no longer rare. They are appearing every day. Here is one today by Federico Quevedo in El Confidencial http://www.elconfidencial.com/opinion/dos-palabras/2012/04/11/la-unica-alternativa-de-rajoy-sacar-a-espana-del-euro-9022/ “The only alternative for Rajoy: take Spain out of the euro”
Loosely translated, he says “the only way out for Rajoy is to force Brussels and above all Berlin to make the ECB act as it should act — as a lender of last resort for economies with problems such as ours — by threatening to leave the euro, and even if the threat becomes reality it would surely be the least of our problems and might even be the solution”. “

I now see that they tailored the article for different markets. Here is an excerpt from print sources.

They hit GDP three times harder in Greece than in Germany… Ireland and Italy are big losers too.

A $10 (US) a barrel increase per barrel subtracts 0.28% points from German growth a year later, the damage to Italy and Ireland is twice as great according to Moody’s and will be 0.8% in Greece.

They go on to say that $120 oil will be a Eurozone show stopper.

@ MH: Thanks for that link. Bit iffy. The ‘oil’ situation is dreadfully confused – deliberatley so, so you need to consult multiple sources and then interpolate. Even then you may not have an accurate picture.

Using ‘strategic’ reserves – except in a real emergency – which we do not yet have, is like consuming your seeds for next years planting. Its a form of ineffectual ‘willy waving’. Think ‘elections’.

The predicament is with the primary producers. They have serious domestic issues and need to keep increasing their incomes. Ramping up supply is not an option – it damages the field.

In the short run we will experience some volatile ups and downs in prices. But long-term: supplies will be curtailed. Then its every one for themselves. 2015 looks promising. If we do not have our energy security mechanisms in place, and operational, by 2020 – we regress to the 1930s.

I fail to understand this fetish with banks, balances and capital. The ‘system’ is seriously dysfunctional. Its going to slump into an intractable political nightmare. Maybe its already there. It would be more useful if there was a meaningful intellectual engagement with the nature and location of the manual labour that we have to roll-out to keep folk engaged and fed. All we are getting from those looters and clowns in Leinster House is soporific pap.

@Mickey Hickey

Where was the logic in closing the Irish embassy in Teheran?

@Aisling
I assume ECB are delighted that Minister Noonan wishing to morph Anglo/INBS PNs to soverign debt via the EFSF/ESM …. and this somehow linked to the idiotic Irish Gov tactical timing on May 31 on wearing/NOT wearing Angela’s Deauville Fiscal Corset?

@all
The source of this crisis remains the unregulated ‘dodgy capital flows’ from the Core to the Fiscal Runaways Greece and Portugal and the PonziProperty Fetish in Ireland and Spain …. & the Core demands all its ‘dodgy’back which emasculates the fools who took advantage of the flaws in EMU.

& ECB stood idly by – the 2%remit don’t cha NO. I see no evidence whatsoever of change to the remit of the ECB.

We can address Fiscal Prudence without wearing the Corset. We don’t need a second loan to pay for the ills of the financial system; we need serious financial debt write downs and restructurings before any serious re-entry to genuine sovereign bond markets; on extant sov bonds we pay 100%. Otherwise we are into Default down the line and a generation of serfhood. Spanish ails might give some hope …

@Mickey
Now that we are beginning to accept its a balance of payments crisis (caused by bank credit / oil) we are getting somewhere at least.
I noticed Philip Pilkington over on the Yves Smith site mentioned the word Dirigisme……. certain to hurt all those neo -liberal souls out there.

“Philip Pilkington: MMT, Functional Finance and Dirigisme – Sketch of an Alternative Economic Approach for Developing Economies”

I can’t really see how you can solve this crisis in Europe given that unlike the $ its a inelastic currency but at least Europe has the institutional fiscal memory of more effective physical world solutions.

But anyhow withen the Euro the Irish Goverment must seek to drive down the number of cars imported via tax to perhaps the Y2009 level of 54,000 and also bringing in a A+ vehicle category of sub 100 or sub 90 g per km and using lets say the cheap Fabia Greenline estate for public service vehicles that do not require speed such as for Park rangers & the like ( I never seen them off road in all my years !!)
So if we were capable of importing 84,000+ vehicles in Y2010 then that could leave a surplus of 30,000 vehicles
Even at just 10,000 euros a pop that leaves 300 million to buy single unit trains (FRENCH MADE X73500s) for branch lines (the fixed capital budget must be directed from roads to rail) buses & police cars etc.
Public transport tickets must be subsidised as it is the commons – this might jar with the European commission neo -liberal set but France has a certain redundency from these shocks because of polices such as these……
en.wikipedia.org/wiki/Transport_express_régional

This subsidy might counter somewhat the euros strength in Ireland.

PS – please watch out for IR trying to dispose of its 2700s DMUs……..its called a Irish Gauge for a reason.
(I have read rumours that they want to strip & sell parts to Scotrail)
They have form in this regard which is perhaps understandable given the lack of subsidy for the commons withen Irish political culture.
But Irish rail needs to become the premier service withen the state given now its future heavy strategic role.

Mohamed el Erian, March 2010
worth a reread. now the wolf is at the door. And it isn’t the confidence fairy.

“Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.

First, at the most basic level, what we are experiencing is best characterised as the latest in a series of disruptions to balance sheets. In 2008-09, governments had to step in to counter the simultaneous implosion in housing, finance and consumption. The world now has to deal with the consequences of how this was done.

US sovereign indebtedness has surged by a previously unthinkable 20 percentage points of gross domestic product in less than two years. Even under a favourable growth scenario, the debt-to-GDP ratio is projected to continue to increase over the next 10 years from its much higher base.

Many metrics speak to the generalised nature of the disruption to public finances. My favourite comes from Willem Buiter, Citi’s chief economist. More than 40 per cent of global GDP now resides in jurisdictions (overwhelmingly in the advanced economies) running fiscal deficits of 10 per cent of GDP or more. For much of the past 30 years, this fluctuated in the 0-5 per cent range and was dominated by emerging economies.

Second, the shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.

Third, the issue is not whether governments in advanced economies will adjust; they will. The operational questions relate to the nature of the adjustment (orderly versus disorderly), timing and collateral impact.

Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.

Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialise on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.

Fourth, governments can impose solutions on other sectors in the domestic economy. They do so by pre-empting and diverting resources. This is particularly relevant when there is limited scope for the cross-border migration of activities, which is the case today given the generalised nature of the public finance shock.

Fifth, the international dimension will complicate the internal fiscal adjustment facing advanced economies. The effectiveness of any fiscal consolidation is not only a function of a government’s willingness and ability to implement measures over the medium term. It is also influenced by what other countries decide to do.

These five points all support the view that the shock to balance sheets is highly relevant to a wide range of sectors and markets. Yet for now, the inclination is to dismiss the shock as isolated, temporary and reversible.

This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.

There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.

Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.”

http://www.ft.com/intl/cms/s/0/c8655bdc-2c78-11df-be45-00144feabdc0.html#axzz1rfu4wVWj

Now that we are back onto risk off I am looking forward to seeing what Muenchau has to say.

@ V Barrrett

“The capital outflows are actually a reflection of the core’s lack of commitment to the single currency project and consequently the very least the periphery could have expected – after all they are technically signed up to an over-valued currency from a periphery perspective vis-a-vis the under valued core countries who are the main beneficiaries of this imbalance”.

Absolutely spot on!

That is all that is to it! The other outcomes are but symptoms of this lack of commitment; trade imbalances and capital flows are two sides of the same coin. The real interest of the fiscal pact, indeed its only real interest, is that it is part of an attempt to restore that commitment.

I think that it will happen because the core have a hold of the euro tiger by the tail and cannot let go of it. This may not be the situation that Kohl, the real author of the euro, had in mind but the outcome may still be the one he sought viz. irreversible deeper political integration of the Euro Area. The question for Ireland is whether we wish to be part of this. It is now all or nothing! Other countries are too concerned about the challenges they themselves face to have any attitude other than tired resignation with regard to what Ireland decides.

Somewhat tangential but here is Lenny Bruce explaining Nama’s problems in a Miami, 1961 context.

Start at 1:07

@DOCM

‘The question for Ireland is whether we wish to be part of this. It is now all or nothing!’

It appears to be Nothing or Nothing. NO is only tactical response. And we remain IN.

@John McHale

Should you not be highlighting the fact that 1.5billion has been handed over to unsecured bondholders from AIB today. Instead, you quote from the Financial Times and Martin Wolfe who never even saw this financial disaster coming in the first place.

@ceterisparabis

George Sorts has an excellent piece just published in the FT a possible reworking of the role of the ECB (sorry, link too difficult to copy with my phone).

Soros’s piece is a great follow on from Wolf’s article.

@John McH

Yes, that last paragraph comes across as a currently inevitable sales pitch.

The term “lender of last resort” seems to have morphed a little recently. It used to be about the central bank/banks LOLR function to the banking system, but now it is being used in a way that requires the reader to assume it applies to the sovereign. Hold your horses.

In non-ZIRP teritory – ie common experience – such action by a central bank toward its sovereign has always been the same thing as dialling up domestic inflation and dialling down the value of the domestic currency on FX markets.

The whole point about the Bundesbank’s position among central banks was that it didn’t do this – other (lesser) CBs did. It is for them an existential thing. That was what every country who joined the Euro signed up for – whatever the politicians wanted to spin. That is the reason real estate investors (who would listen) were told they should not expect their borrowings to be inflated away as they assumed. They would have to pay back real money. German money.

The term LOLR as you are using it is not something the Germans want – and purveyors of pathways and gateways should really warn the people they advise of this. Currently the impression is being given that pathway laid equals pathway used. Similar with regard to correcting current account imbalances.

In Zirpland, the BOE printing works to support the currency and gilt market because the alternative is thought to be likely economic decline. There could be a point at which if the market thinks QE is not going to allow the economy to avoid stagnation / recession, then the traditional reaction could kick in with a big decline in Sterling. The gilt market reaction might be interesting.

I would like to see a acceptance by economists that the reason we had a collapse in rail freight in this country was more then because we had a ending of the rail freight subsidy.
It was because of the nature of EMU & the Euro itself…which gave us access to cheaper BTUs.
Sure we are a small country which is not ideal for rail freight but the small volumes are indicative of other strictly monetary factors.
The stuff coming out of Navan does not travel very far anyhow.

We have the finest of GM motors not running to capacity because of this monetary & neo -liberal madness.
In terms of saving liquid fuel / wear & tear on Trucks its the lowest hanging fruit around at the moment , it just takes a bit of Elan & cop on.

Of course this saving of fuel will show as higher fiscal defecits………
The Euro is built on top of mindless waste……. the fiscal conservatives will never tell you that of course.

Rail Freight traffic (tonnes kms per year) Y1992 to Y2009

633,267 / 574,568 / 569,318 / 602,457 / 569,885 / 522,377 465,941 / 525,991 / 490,825 / 515,754 / 426,307 / 398,309 / 399,041 / 303,223 /206,777 /128,908 / 103,235 /79,310

Its a currency designed to enrich Arab oil sheiks & their fellow travellers the bankers & BMW waste merchants.

There was 406,000 tonnes of Beer conveyed via rail in Y2005 !!
In years 2007 & 2008 exactly zero – can anyone explain these numbers ?
We have slowed down our drinking but not by that much !

There was nearly 300,000 tonnes of petrol & oil shipped in each of the late 1970s years …..now since y2006 exactly zero.

Up to as recently as 1999 there was 1012,000 tonnes of general freight moved on rail …… , in the year of our Lord Y2008 there was exactly 67,000 tonnes.
These commodities are not effected by the slow down in construction or the closure of the NET plant.
A shift back to rail freight to even 1990s levels will save much more fuel oil & truck imports then Duncan Stewart ever will.

The only thing that is being said in convoluted form here is, ‘enable us so we can take on even more debt, trust us!” Sorry, to say I don’t trust the people who start with conclusions and work their way back towards assumptions that justify the conclusions. That was also the modus operandi with the ‘blanket guarantee’ and ‘NAMA’ both of which are disasters.

One of the ironies of the “Treaty on Stability Coordination and Governance in The Economic and Monetary Union” is, that in Irelands case, it’s a compact that allows us to borrow even more money. It runs counter intuitively. I can see who is going to be force fed austerity and who is going to be bailed out again, it reads to me like more of the same reckless economic policies we have pursued since the crisis began. More “trust us”.

Consequently, I will be voting ‘no’ from both an economic perspective and a moral one. At least, that way I can live with my conscience. Fiscal Compacts and debt stacking only leads to infinite postponement of taking the hard structural decisions that have to be taken and that have been avoided at all costs. It actually enables the taking of wrong decisions safe in the knowledge that these wrong decisions can be financed from the debt pile. There is little doubt that those making the decisions will be retired like the others when it hits the fan.

The fiscal treaty as far as our government is concerned has as its bulls eye ESM funds and a second bailout. On the 11th of January Michael Noonan told us this second bailout was “ludicrous” what I found ludicrous was the government signing a codicil barring us from access to ESM funds while at the same time his own Taoiseach turning around to tell the country we must sign the Fiscal Compact or we would not have access to our “insurance policy”? Maybe it is an assurance policy and the event assured is default.

@Robert The year that I was born, and I was born in December so trust me when I say I remember nothing of that year, I was oblivious to its politics and their consequences, was 1977. A year in which FF offered the Irish electorate the world and then some. Oh yes, the counter cyclical tax cuts were supposed to be reversed, but it is always so much harder to take away things once you’ve created expectations by giving them in the first place.

Charlie McC would have us believe that his give away budgets would have been fine had they been reversed once the economic climate had stabilized, but goddamn it the FF parliamentary party got in the way and Charlie got sent over to “Europe” so Brian C could continue “giving away” the family silver to the Irish electorate.

To paraphrase our illustrious compatriot, to [be taken in by one FF administration] may look like misfortune, to [be taken in by two] looks like carelessness.

@Bazza
Thanks. I will try to find it.

@Grumpy.

“The whole point about the Bundesbank’s position among central banks was that it didn’t do this – other (lesser) CBs did. It is for them an existential thing. ”
Is not the same for us….Europeans?

@Seafóid: “The sooner this is recognised, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.””

If you persist in wilful, obstinate and mendacious ‘blindness’ … … and of course you arrange for your critics and detractors to be third-party slimed (you can plausibly deny involvement). What then? For what?

What is the political agenda?

This crisis – whatever, and however you want to characterise it has its origins back in the 1970s. Think of it as the symbotic relationship between a host and a parasite. It is not meant to happen that the latter so debilitates the former that it expires, but it can happen, and it has. The current political and financial hubris is all about attempting to revive a corpse – it won’t work. It has not worked. And it will not work.

The political and economic choice is very stark. Attempt to live on a declining income as your debts increase. Else, kill off all debt and live on half your income – with an increasing cost of living. Think any political critter would articulate this scenario – even to themselves?

Now I know what went on on Easter Island; wilful, obstinate and mendacious ‘blindness’.

@Grumpy

All true. The problem is a clashing of existential imperatives: ensuring the euro is a low-inflation currency and ensuring the euro.

@ All]

FYI

http://www.irishtimes.com/newspaper/opinion/2012/0412/1224314639557.html

Three central admissions are contained in this piece by Minister Howlin; (i) the government is not following a policy of austerity but borrowing money to, effectively, follow a counter-cyclical economic policy (ii) this cannot go on indefinitely i.e. the budgetary gap has to be closed and (iii) the “official lenders” will continue to lend only if the gap is closed and the money is paid back.

All points that are self-evident but to which many participating in the debate hav failed to grasp or are deliberately ignoring.

@ seafoid
‘Now that we are back onto risk off I am looking forward to seeing what Munchau has to say.’

http://www.spiegel.de/wirtschaft/service/0,1518,826868,00.html
Translates pretty OK with Google.

As bazza notes at 4.56 on the 11th, the Irish sovereign committed suicide by guaranteeing everything. The poison takes a while, but the process is irreversible. Fig 5 of the Breughel paper certainly shows that we are on a ventilator now.
The ‘grand gesture’ of Sept 2008 had its roots in the FF hubris which Aisling bemoans, but the other sides of the house played their own parts in the debacle in the preceding years. The problems in Ireland were by no means all fiscal, as Paul Hunt tirelessly points out.

Bazza goes on to point out the intertwining of sovereign and bank finances, which El Erian flags pretty well. I would guess, as a non economist, non finance person, that such a state of affairs has to render much traditional banking wisdom pretty worthless. The very notion of creditworthiness has been thoroughly subverted by Wall St and the City of London in recent years anyway. It’s a joke that the market pot should be calling the state kettle black.

As grumpy indicates, something is going to crack. DOCM hopes the Germans will get religion at the last minute, but there is not much sign of it to date. If we do get to the kind of reason which Dork offers, it looks like it will be preceded by a serious breakdown in the European social order.

@John McH, Grumpy

They are very important points about the ethos of the Bundesbank.

There is a real contradition at the heart of the German economy. On the one hand, the Bundesbank and the famed Schwabian housewife want “stability”, low inflation and, consequently, a strong currency. On the other hand, German exporters on which the economy feeds require an undervalued currency.

The Euro, and even the crisis itself, have managed to square this circle for the Germans. In monetary terms, the US and the UK have QE, China has capital controls and Germany has the PIIGS.

That cannot last forever. The last time the German export model worked in a low inflation, strong currency environment was ca. 1990.

Of course, this is all quietly ignored in Germany, but should be repeated again and again by our politicians.

@ BW

We should never underestimate the human capacity for self delusion or the capacity of power to manipulate perceptions until everything falls apart

I ordered this recently and it arrived in the post yesterday. Why evolution is wrong.

http://www.rose-publishing.com/Creation-and-Evolution-wall-chart-LAMINATED-P33.aspx

I wonder who drives this kind of thinking and why. Presumably there’s a wall chart for why cliimate change is a fantasy. Another one for why inequality is a fantasy and so on.

March 2010 was a very good vintage. Martin Wolf again

“Now Germany insists that every country should eliminate its excess fiscal deficit as quickly as possible. But that can only happen if current account balances improve or private balances deteriorate. If it is to be the latter, there needs to be a resurgence in private, presumably debt-financed, spending. If it is to be the former, there are two choices: first, current account balances must deteriorate elsewhere in the eurozone, entailing a move to smaller private surpluses in countries like Germany. Or, second, the overall balance of the eurozone must shift towards surplus –a “beggar my neighbour”policy.
In practice, the most likely outcome of such fiscal retrenchment would be a slump in countries with large external and fiscal deficits. Given the lack of competitiveness of such external deficit countries and the weakness of demand elsewhere in the eurozone, such slumps might become very long-lasting. The question is whether populations would put up with this. If not, political crises will emerge, with inherently uncertain consequences.
Let me put the point starkly: Germany’s structural private sector and current account surpluses make it virtually impossible for its neighbours to eliminate their fiscal deficits, unless the latter are willing to live with lengthy slumps”

And how about the IMF warning this week that risk free doesn’t mean much any more ?

http://www.ft.com/intl/cms/s/0/b597638c-83e8-11e1-9d54-00144feab49a.html#axzz1rjesSPSI

@ DOCM

“(i) the government is not following a policy of austerity but borrowing money to, effectively, follow a counter-cyclical economic policy”

I think this, and Howlin’s “Contrary to the view articulated, the Government is not pursuing an “austerity” strategy” is over-simplifying.

If governments do nothing, then they can run up a surplus in times of growth, but when a downturn comes tax returns fall and expenditure goes up as the ‘automatic stabilisers’ kick in.

I would not count this as taking active pro or anti-cyclical measures, merely allowing an ingrained process to take place.

Government austerity measures in a down turn means deviating from this to further reduce expenditure and raise revenues. In this sense, this and the last Irish government are certainly engaged in austerity measures on an heroic scale.

One of the pithier summarries I’ve read of the Fiscal Compact is that it is an attempt to ban the automatic stabilisers.

From the same article by Brendan Howlin I also note:

“The importance of growth is factored into our budgetary figures. Our own economy has returned to modest growth and indeed, the greatest impediment to future growth is the state of the global economy.”

The Irish economy has only returned to modest growth if you take GDP, not GNP, for the year of 2011. For the last two quarters by GDP and GNP it has shrunk. As much of Ireland’s trade is with the UK and Europe where similar policies are being attempted this does not look good.

http://www.cso.ie/en/media/csoie/releasespublications/documents/latestheadlinefigures/qna_q42011.pdf

@ Grumpy

The Germans also have a ZIRP

http://www.zirp.de/

“The “future initiative” of Rheinland Pfalz (ZIRP) aims to promote the State as an international centre and enhance its attractivity as a place to live and work and as a centre of European culture.”

http://www.cnbc.com/id/47025908?__source=ft&par=ft

“The second bailout for Greece, the epicenter of the euro zone debt crisis, and recent liquidity programs have not resolved the euro zone debt crisis and the EU is unlikely to survive without far-reaching reforms, George Soros, chairman of Soros Fund Management said on Thursday.

In a commentary piece for the Financial Times, Soros warned that “Europe is facing a long period of economic stagnation or worse” with the continent unlikely to survive its destabilizing effects.”

@seafóid Did anyone think that it had resolved the eurozone crisis or that the eurozone crisis is easily resolvable?

As John McHale succinctly put it “The problem is a clashing of existential imperatives: ensuring the euro is a low-inflation currency and ensuring the euro.”

Germany is not going to give on the former until it is clear that that is the only option to protect the latter and we’re not there yet.

@ Aisling

“Did anyone think that it had resolved the eurozone crisis or that the eurozone crisis is easily resolvable?”

You’d have to ask someone in the market. It seems as though a number of sheep thought things were on the mend. Gold came down significantly while risk was on.

@Seafóid you don’t have to believe that things are fixed to take profits. You only have to believe that they’re “fixed for now” which LTRO achieved.

Imagine …..we have no rail access to this deep water port…..
http://www.sfpc.ie

Fantastic little Marine traffic boat watcher website
http://www.marinetraffic.com

Oh if only a U Boat commander had this data back in the day.
Although now they threaten us with coloured paper…. its more cost effective I guess.
Go to ports …… then lets say go to New Ross & you will find a little coaster called Koriangi departed from New Ross on the 10th of April 20.04

@aisling, seafoid

What the authorities are relying upon repeatedly is that people “in the Market” think there may be sheep. And enough of them that getting trampled is a real possibility. If there are assumed to be enough money weighted sheep, then the truth is irrelevant to Market players, only anticipating the movement of the real of imagined sheep. Market players who understand the truth then behave is if they too were sheep.

At some point they can realise that there are no, or few actual sheep, and act accordingly. This is what the authorities fear.

Although in reality we have the coloured paper Ace.
Its our only Ace in the hole it seems.

@ Bazza

Nailed and nailed and nailed on the head!

It is the failure of not just the government but also the left leaning opposition parties that have failed to properly convey what you have outlined that is our real weakness in public (and I suspect Private) debate. It is akin to counsel for the defendant refusing to make the strongest point in his case either because he does not understand it or for fear of upsetting the judge. Either way it is dereliction of duty on a grand scale by all concerned.

That Breughel paper is a little gnomic (possibly the Gnomes of Zurich) – in the conclusions what precisely the cure is likely to require interventions to foster the sustainability of public finances, means is left to the imagination of the reader.

It could mean debt write offs, it could mean inviolable fiscal rules imposed from Europe, right? Where is Jean Pisani-Ferry coming from?

@aisling

As John McHale succinctly put it “The problem is a clashing of existential imperatives: ensuring the euro is a low-inflation currency and ensuring the euro.”

Germany is not going to give on the former until it is clear that that is the only option to protect the latter and we’re not there yet.

Of course signing up to the Fiscal Compact delays the time when Germany might have to make that choice so its clear that support for the Fiscal Compact (and relatedly for the bank bondholder bailout) worsens our position politically , and the position of the non German bordering Eurozone states generally, and improves Germany’s.

The game remains to avoid acknowledging the systemic nature of the crisis (EMU, the current EU political settlement, a powerful yet dysfunctional Eurozone financial sector) by focussing on a host of often unrelated problems in the periphery instead.

Germany’s government, with collaboration of the ECB and its EPP fellow travellers, are being allowed to define the important problems of the European component of the global financial crisis as the ones for which its preferred solutions have some application. They are making their own reality, neocons style.

Formatting fail above, sorry folks.

That Breughel paper is a little gnomic (possibly the Gnomes of Zurich) – in the conclusions what precisely “the cure is likely to require interventions to foster the sustainability of public finances” means is left to the imagination of the reader.

It could mean debt write offs, it could mean inviolable fiscal rules imposed from Europe, right? Where is Jean Pisani-Ferry coming from?

@aisling

As John McHale succinctly put it “The problem is a clashing of existential imperatives: ensuring the euro is a low-inflation currency and ensuring the euro.”

Germany is not going to give on the former until it is clear that that is the only option to protect the latter and we’re not there yet.

Of course signing up to the Fiscal Compact delays the time when Germany might have to make that choice so its clear that support for the Fiscal Compact (and relatedly for the bank bondholder bailout) worsens our position politically , and the position of the non German bordering Eurozone states generally, and improves Germany’s.

The game remains to avoid acknowledging the systemic nature of the crisis (EMU, the current EU political settlement, a powerful yet dysfunctional Eurozone financial sector) by focussing on a host of often unrelated problems in the periphery instead.

Germany’s government, with collaboration of the ECB and its EPP fellow travellers, are being allowed to define the important problems of the European component of the global financial crisis as the ones for which its preferred solutions have some application. They are making their own reality, neocons style.

I think many people are finally realizing the deep rentier inefficiencies withen modern market states with the European Union the most extreme example of this sick market state phenomena.
The state if it somehow choose to invest in a mixed passenger / cargo Foynes railway line must borrow from banks rather then itself….paying interest to build a more sustainable core capital base less dependent on outside energy inputs that can be manipulated.
Even if it did it would have to deregulate the rail cargo business using the commissions neoliberalism as a template – this would most likely gift the commons to a multinational while we continue to pay interest for the gift we delivered.
This explains why Industrial corporations are sitting on mountains of cash with little industrial activity going on below decks while goverments who can print money at will if they choose are strapped for cash!!

Its a sick world out there.
http://www.webofdebt.com/articles/canada.php

“Today this silent coup has been so well obscured that governments and gamers alike are convinced that the only alternatives for addressing the debt crisis are to raise taxes, slash services, or sell off public assets. We have forgotten that there is another option: cut the debt by borrowing from the government’s own bank, which returns its profits to public coffers. Cutting out interest has been shown to reduce the average cost of public projects by about 40%.”

@Seafoid
Sure its everywhere …….. the UK not unlike Ireland (although Ireland is of course worse) has always had a tendency for very poor & corrupt fiscal decisions with the local shopkeeper mentality taken advantage of by their elite but the monetary structure in the EU is obscene.
I come from a more leftish Gaullist perspective on things but despite their dire privatisations of railways across the water it has become a success despite itself due primarily to its monetary policey after 2008………it is now reaching capacity because of those historically poor fiscal decisions…….you can’t make this stuff up really.
With NIR the only statish passenger railway company remaining with a vertical integration model in the UK (direct rail services also does the Nuclear freight business) which is far more holistic when all costs are factored into the equation especially for small countries such as Ireland………..(road freight does not pay directly for the roads for example)
However this UK monetary policey is effectively a socialisation of malinvestment because of dire fiscal decisions such as the decision to stop New Nuclear build in the early 1990s ” to save money ”

What a quaint concept…… as if currency was a valuable physical good………
Meanwhile NIR have 1960s scale passenger numbers & rising……….

@ CP

Speaking of orderly exits the other side of the House of Morgan is on a bit of a shaky scraw at the minute

http://www.ft.com/intl/cms/s/0/99979138-7e67-11e1-b20a-00144feab49a.html#axzz1rjesSPSI

And Jamie is going around in circles

“JPMorgan’s share price has been through today’s level of $35 twenty-odd times since 1997. In other words, the stock has gone nowhere for 15 years”.

http://www.ft.com/cms/s/3/65e0a83c-3e09-11e1-91ba-00144feabdc0.html#ixzz1jivuOsT9

It’s not ideal even for the galacticos .

@ Seafoid

I was more intrigued with

“”When they restructure the euro treaty…….”

Not if but when.

“The Irish case from an ECB perspective

Speech by Jörg Asmussen, Member of the Executive Board of the ECB,
at the Institute of International and European Affairs, Dublin, 12 April 2012”

http://www.ecb.int/press/key/date/2012/html/sp120412.en.html

“I know that the decisions concerning the repayment of bondholders in the former Anglo Irish Bank have been a source of controversy. Decisions taken by the Irish authorities such as these are not taken lightly. And the consequences of subsequent actions are weighed carefully. It is true that the ECB viewed it as the least damaging course to fully honour the outstanding senior debts of Anglo. However unpopular that may now seem, this assessment was made at a time of extraordinary stresses in financial markets and great uncertainty. Protecting the hard-won gains and credibility from the early successes in 2011 was also a key consideration, to ensure no negative effects spilled-over to other Irish banks. Determined action and a willingness to take tough, even controversial decisions, has placed Ireland’s financial system on a steadier footing.

A necessary step for Ireland to emerge from this crisis will be to ensure the long-term viability of the banking system as a pillar of the Irish economy. Doing so will further enhance confidence in the system and limit the burden that the banking system places on the taxpayer. Any proposal to reorganize and strengthen the Irish banking sector, and in this context to replace promissory notes with support from the EFSF must meet important criteria, including that it should improve the chances of both the State and the banks returning to market-based funding, and of the banks reducing their extraordinary reliance on the Eurosystem. The ECB is ready to work with the Irish authorities on such proposals.

I understand the strong desire of the authorities to minimise the costs associated with the banking sector rescue, including costs incurred to date, and those still to come. Let me make some comments in this area. When the programme for Ireland was designed, the costs of the banking sector measures already in place, including the promissory notes, were fully factored in. The annual cash repayments of promissory notes is thus financed by programme resources. That programme is on track. Any deviation from that programme should be considered very carefully indeed. The perceptions that have built-up around Ireland’s successes in the programme should not be jeopardised. It has been hard-won and it is worth fighting for. Therefore, the ECB remains of the opinion that Ireland should honour its commitments stemming from the promissory notes, as foreseen. This in our view is the best way to regain sustainable market access.”

@ Paul Hunt

“Cue buckets of bile and indignation about odious debt…”

Well, that was obviously my intention. You know I’m nothing if not a rabble rouser… 😉

@Bond Eoin Bond

He’s blowing a lot of smoke at us there…
To paraphrase
We lent you the money to pay the PNs, so just pay up and stop moaning.

Tut, tut, Mr. Bond. You have no need to stir it; it churns and foams in excessive volumes. Why, little else seems to fill the space here. All one has to do is to change the nationality and Tom Macauley’s aphorism appears perfectly apt: “We know no spectacle so ridiculous as the British public in one of its periodical fits of morality.”

Rajoy: “To talk about a bailout for Spain at the moment makes no sense….. Spain is not going to be rescued; it’s not possible to rescue Spain, there’s no intention to, it’s not necessary and therefore it’s not going to be rescued. ”

Step 1. Deny (as above)!
Step 2. Pretend that any IMF officials landing in the country are there for some other reason.
Step 3. Get CB Guvn’r to let something slip on a morning radio programme.
Step 4. Call a press conference to announce bailout.
Step 5. Announce you are going to retire at next election but that you will be taking your full pension entitlements.

@PR Guy
Extraordinary stuff from Rejoy…he must have poor pr advisers. It a wonder he didn’t say….we are fully funded until whatever…

I wonder will Spain and Portugal go together?

@BEB surely you could have put the part where he blamed us for our lax regulation up front and center?

“I frequently hear in the Irish debate the sense that the debt resulting from the bank rescue is not Ireland’s debt. I can understand this sentiment and how many people feel about this situation. But what must be understood, is that in the run-up to the crisis, insufficient domestic policies (banking supervision and economic policies) played a major role in excessive credit growth and risk management failures in the Irish banking sector, the bubble in the housing market and the loss of competitiveness.”

…and then he wheeled out that tired old line about the ECB not having any regulatory powers… like anyone would believe that!

Aislong

Regulatory powers be damned.

There was a time when people resigned on principle because they did not like what was being done. If Trichet was made of different stuff, he would have gone when the bubble was being blown. His legacy, which includes the other business at Credit Lyonnais, instead is a festering shambles.

To have growth you either have growth of fiscal debt , indeed just goverment debt free money or bank credit.
The fact is the money growth was stifled under edict in the eurozone to facilitate bank credit growth which was not only inefficient but grossly negative in terms of wealth creation.

Don’t take them seriously , they are not stupid but need to work on their comedy act.
Just pay for the ticket with Punts.

Why would you want to save this system – to pay the interest on sov debt the system now needs a continuous series of credit bubbles on a larger and larger scale.
Its completly absurd.

@ Paul I was being sarcastic. The Nyberg report laid out all of the failings (albeit with too narrow a scope) and they weren’t those of the ECB. They were ours, our politicians’, our regulators’, our business peoples’. We own this mess, we didn’t learn from the ’77 FF manifesto that we shouldn’t accept bribes prior to elections, I’m not altogether hopeful that we’ll learn that lesson second time around. We’ll blame those, including the ECB, who are cleaning up the mess and forget about how this mess was created in the first place.

@aisling
If carlsberg did central banking they wouldn’t be the ecb. El erian upthread cautioned in 2010 about looking at the situation with the models of the past. It reminds me now of the somme 1916. Sure the plonkers in dublin were out of their depth but the incompetence goes further than d2.

@Seafoid
With all due respect, you are being naive.
These guys see themselves as social engineers. (and they are)

Their market state monster has been at least 40 years in the making.
They are loving this.

@cp
Say the euro treaties are restrucured and greece is ejected along with portugal and maybe others. That won’t help any of the other strugglers incl france who need a weak euro to get sorted out.

@dork
At the back of everything is plutocracy but the central bankers are unleashing massive forces they can’t fully control and the chance they mess it all up even for brideshead is not insignificant. Over the summer a house in england went for 140 mn stg. Evelyn waugh would have approved but these times are fragile.

@DOCM Sorry, sarcasm again. The knowledge that such a fair and open speech was going to be so misrepresented by people caused me to want to start attacking it to get ahead of the masses. Sorry. But thanks for posting the link in case any one thought he was lying about the regulatory powers.

@ Dork +1

“These guys see themselves as social engineers. (and they are)”

You have condensed a lot into that little pithy sentence.

@Ceterisparibus

“I wonder will Spain and Portugal go together?”

That’s an interesting question.

@Dork

Re social engineers. Which guys are you talking about? Nobody gives a 5hit about social engineering in the financial services sector. It’s just about making money.

@Paul Quigley

“If Trichet was made of different stuff, he would have gone when the bubble was being blown”

He couldn’t. He was put on point to make sure bondholders escaped unscathed. He will soon be reaping the rewards for that if he isn’t already. I am not joking.

@ PR Guy

I am sure you will agree that we want to be as fair as possible here. This is serious stuff.

I suggested that Trichet was a bit challenged in the integrity department. You seem to be suggesting that ‘malleability’ was one, or possibl, the main criterion for his appointment.

If you have the time, its worth lookin at some of Bourdieu’s empirical and theoretical investigations into how power is actually transmitted within institutions. You can’t be appointed unless you are perceived to be ‘suitable in all respects’.
Those four little words open the door to a whole raft of tacit understandings, for which the word ‘sound’ provdes a neat summary. One has to have pased through an awful lot of ‘tests’ before one is considered ‘sound’ at that level of seniority.
He was of course, a safe pair of hands. The question is, safe for whom, and for which interests. Any rational discourse on the ECB has got to factor those questions in.

http://books.google.ie/books?id=wMwuhhQchrQC&pg=PA99&lpg=PA99&dq=bourdieu+co-optation&source=bl&ots=7-LJRimmcj&sig=P9h4l6qfwsflzIP5SBq-7IJRSv4&hl=en&sa=X&ei=bG2IT43pKJSDhQfagbHtCQ&sqi=2&ved=0CCYQ6AEwAQ#v=onepage&q=bourdieu%20co-optation&f=false

@Paul Quigley

I think your last para hits it Paul. Who is really doing the appointing/annointing?

p.s. good link vis the horseracing win on the other thread. Very funny.

Comments are closed.