Compact Logic

After wavering for some time, Deputy Shane Ross has now publicly taken a No position on the Treaty. (See Sunday Independent article here.)   His position is that he is withholding judgement until he sees later growth-focused elements, and takes it that there would be another opportunity to vote on the complete package later. 

While this is a coherent position, I think it is worthwhile to stand back and recall the genesis of the fiscal compact.   The euro zone crisis was spinning out of control late last year, with runs on the sovereign bonds of Italy and Spain.  (The crisis has flared up again recently with the renewed uncertainties in Greece.)   It became ever clearer that the euro zone might not survive unless stronger mutual insurance mechanisms were developed.   Understandably enough, the euro zone countries most at risk of having to make positive net transfers under such mechanisms wanted some degree of assurance that all euro zone countries would follow reasonably disciplined policies, both to limit the expected value of the contingent liability and to minimise inevitable moral hazard.   Politicians in stronger countries also needed a degree of political cover in order to convince their electorates to take on large risks.  

For the most part, it was evident that stronger commitments to mutual discipline would have to lead that strengthening of the mutual insurance mechanisms, but the logic was clear.   In the event, the actual fiscal compact did not go much beyond what countries had already signed up to under the revised Stability and Growth Pact, but it did attempt to strengthen domestic ownership by introducing domestic enforcement mechanisms for the already existing structural balance rule.   Recent events in Spain have brought the possibility of more centralised bank resolution, deposit insurance and supervision onto the agenda as part of this process. 

An often heard complaint in the debate that the commitment to develop these mutual insurance (and related growth) measures are too vague – hence Deputy Ross’s position.    But it is interesting that where the linkage is made explicit – i.e. access to a scaled up ESM – it is considered a “blackmail” clause.  

Not surprisingly, the Treaty debate has ranged widely – the impacts of austerity measures, the implications for post-2015 fiscal adjustment of the existing SGP rules, the nature of additional commitments made under the Treaty, access to alternative sources funding if the Treaty is rejected, etc.   An unintended positive spinoff is that voters are now much better informed on fiscal issues – even if sick to the teeth from hearing about them.   But in the few days remaining before the vote, and with the euro zone again in turmoil, it is important to bring focus back to the core purpose of the compact. 

75 thoughts on “Compact Logic”

  1. This is an exercise in Stockholm Syndrome with a rather naive display of what is required under the FC. Nothing of the conditionality attached to ESM is explored. No concept of the malign consequences of austerity are explored. No critique of any perceived benefits to us is dealt with.

    Opposition to the transfer payments implicit in Y support from Ireland, is being eroded in Germany and also by opposition to this concept in the Netherlands.
    Geert Wilders Party for Freedom opposes any increase or systematisation of transfer payments, from the Netherlands to other EU countries, through means such as the ESM. Reasons for voting Y have evaporated.

    Happily, its welcome aboard the No Campaign for Shane Ross TD, who I’m glad to see is borrowing extensively from the meandering logic of the No campaign in pointing out the absurd mistake we are falling into in holding the FC on the MAy 31 about which a Taoiseach in desperation will try to use rather shallow propaganda once again to sell this bad idea to the Irish public.

  2. For a seasoned politician, Ross’s recommendation that we wait for the 28 June summit is remarkably naive. 28 June is effectively the last working day of summer for Official Europe. July and August, they’re up in the hills or at the beach. Even if Ms Merkel has a Road to Paris conversion on the growth package ahead of that summit, not a whit of work will be done on it till September. It was the previous government’s decision that all the heavy lifting could wait till September 2010 that has us where we are now. Even if we say we’re not going to let the markets dictate the schedule, try selling the “just another 4 months for clarity” to peripheral country bank depositors.

  3. “There go the people. I must follow them, for I am their leader,” Alexandre Ledru-Rollin (1807-1874), a French politician is reputed to have said.

    In an Oireachtas that has left little of consequence to remember in almost five years of crisis, Shane Ross TD has in effect said that he both opposes and supports the treaty.

  4. @ Frank Galton,

    “try selling the “just another 4 months for clarity” to peripheral country bank depositors.”

    Whether Y of N, the clarity you refer to, is not there re ESM or FC at the moment. This essentially is Ross’s point and a point some others of us have made.

    From a business point of view, a contractual perspective, before signing on the dotted line, clarity is required, not its polar opposite?

  5. @ All

    I have to confess that, having listened to Shane Ross make make maximum use of his intervention on the Week at One, which an inept interviewer did little to counter, to the hope that, if the referendum results in a no vote, he will be landed with the main responsibility, and the electorate that put him in the Dáil. They deserve each other.

  6. @ All

    On the issues that are really exercising Europe and the world, I am prompted to post link from another thread.

    FYI

    http://www.ecb.int/press/key/date/2012/html/sp120525.en.html

    Notably;

    “While these are important steps, more is needed for the euro area to break the link between fiscal imbalances, financial fragmentation and financial instability. Europe needs to move towards a “financial union”, with a single euro area authority responsible for the supervision and resolution of large and complex cross-border banks. This authority should also be responsible for a euro area deposit insurance scheme. With bank resolution and deposit insurance funded primarily by private sector contributions, taxpayers would be shielded from picking up the bill for future banking crises. Essentially, I envision an authority similar to the Federal Deposit Insurance Corporation in the United States”.

  7. I have just listened to Leo V our shanks mare minister on the MF show.

    In it he illustrates the danger that is the ESM.
    He praised the IMFs Christine lagarde’s threats of war towards Greece.
    Remember this is not a national organisation.

    Bth of these organisations are essentially banks who gain access to precious Fiat money via the cooperation of the various treasuries

    The Western treasuries for the most part liked this arrangement as long as the banks waged war in East Asia such as the 1998 crisis.
    But the banks have experienced a blow back…… these Asian countries have amassed a huge $ war chest to do battle with the Summers & Ru bins of the world.
    Therefore these banks can now only feed on their host , they will start with Greece and move up the food chain.

    Its generally not recommended you make a pact with the devil , his collateral is your soul.

    market-ticker.org/akcs-www?post=206466

    These people are nothing but Jackels…

  8. No–will be a signal to from the Irish electorate that our gross debt levels are not sustainable and the government’s bank guarantee of the bank debt was done under duress and to assist our eurozone neighbours. This unwise decision bankrupted the sovereign and precipitated the troika bail-out. Our eurozone colleagues must federalise this debt since the Irish economy can never recover without addressing this vital issue.

    The cumulative effect of austerity across europe may be a fundamental mistake. Voting No may galvanise our fellow europeans to prescribe a better solution than this.

    There is a democratic failure across europe and it appears Germany alone ,is dictating to all other european countries. All of europe must address the issue of 50% youth unemployment in Spain and Greece and the very negative outlook for Ireland drowning in a sea of debt.
    If we vote No and succeed in achieving bank debt forgiveness,then we can have a second vote and vote yes. Also in the world and european economies events are changing by the day. This referendum date may be premature. If we vote No this will allow a second vote in the future.

    George Soros is very doubtful austerity will work. When asked some years ago why he is such a wealthy man he replied ” I rectify my mistakes as quickly as possible”

    The government’s bank guarantee was a mistake –lets rectify it asap–Vote No. It’s now or never. A yes vote will copperfasten this bank debt forever.

  9. Jackals even .

    Karl Denninger again hits the mark in the latest talk with Max K.
    They are running a primary surplus……….

  10. @ All

    Podcast of Marian Finucane.

    Colm McCarthy about 20 minutes in on the reasons for voting yes and the possibility of the ESM becoming the genesis of EU-wide bank resolution scheme;

    http://www.rte.ie/radio1/podcast/podcast_marianfinucane.xml

    Article 3 of the treaty establishing the ESM states;

    “Purpose

    The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States. For this purpose, the ESM shall be entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties”.

    He also references this comment in the FT.

    http://www.ft.com/intl/cms/s/0/3aaea904-a680-11e1-968b-00144feabdc0.html#axzz1w5jikQcH

    Notably;

    “National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary”.

    These references, it seems to me, sum up the essential choice; to agree a scheme under which countries can be “saved” or their banks. The ESM is tailored to the former (but well into the future); any bank resolution scheme would be tailored to the latter and, by definition, would have to cover all the countries of the EU. (The City of London, if I am not mistaken, handles three-quarters of financial transactions across Europe).

    Some confusion appears to be emerging between the two.

    The only real choice is, IMHO, is the latter. The political will to do anything else is simply lacking.

    On a general point; texts are texts. They cannot be circumvented.

  11. @DOCM

    Not this won’t happen, but its as likely and useful as the fireproofing of a building that has already burned to the ground. The US political system wasn’t built in a day, nor was the FED. It would take multiples of that effort to recreate the ECB in the image of the FED.

    http://www.federalreserveeducation.org/about-the-fed/history/

    It did take a revolution, the years 1775-1791 especially painful.

    There are of course aspects of the Fed and the current model of global finance it follows, that may make it less a model paradigm, than you imagine; some might say, G it Sucks.

  12. Looks like the DoF have been thinking of a plan B all along..

    http://www.businesspost.ie/#!story/Home/News/CSO+survey+to+reveal+truth+of+household+wealth/id/364220cb-6dc6-4d34-baff-b5758977129a

    The CSO are going to compile a survey detailing household wealth around the country. I suppose this will include various items such as art works, etc.

    I wonder what sort of reception these surveyors will get at the door.

    “Hello I am from the CSO, we are in the process of carrying out a survey of household wealth. If you could answer these questions truthfully then the taxman will be in touch later and your income tax bill can be increased”

    Needless to say there will be no shortage of people who will fill in the forms in detail.

    Lambs to the slaughter!!

  13. John Mchale

    Will there be a thread analyising the decision of Deput Fidel McGrath also to vote No? Or are we to infer that you think Deputy Winston Churchtown is a more sustantial politician than Fidel. Or is down to the fact that Winston represents a Southside constituency and Dep Fidel represents the Norside.

    MH,
    well spotted. Deputy Ross is actually adocating a Yes vote in the Replay.

  14. @ DOCM,

    The only confusion on the table is what Colm McC imagines/hopes might happen in the future and what actually is on the table. Let me remove such confusion from the Y side and tell you on the following issue, what exactly is on the table.

    In the face of all evidence to the contrary, Colm Mc is putting out the 2 reasons for voting Y as; 1. getting access to ESM; 2, when Spain goes, we may piggy back on their problems and there will have to be a bank resolution scheme our banks may retrospectively benefit from.

    The latter reason, with a longer queue looking for bailout, that we would jump the queue in this way, is plain nonsense. How long do we have to wait before some people understand that No, is No. Greece has benefited already from default on its debt. This has not been extended to us. Hoping that Spain will precipitate a better deal for Ireland on the evidence of our deal so far, is blinkers……

    http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf

    “1. Each ESM Member shall appoint a Governor and an alternate Governor. Such appointments are revocable at any time. The Governor shall be a member of the government of that ESM Member who has responsibility for finance. The alternate Governor shall have full power to act on behalf of the Governor when the latter is not present.

    ARTICLE 6
    Board of Directors

    1. Each Governor shall appoint one Director and one alternate Director from among people of high competence in economic and financial matters. Such appointments shall be revocable at any time. The alternate Directors shall have full power to act on behalf of the Director when the latter is not present. ”

    Note the Board of Directors will be the main decision makers and will likely be from the banking/financial services sector.

    Decisions, unfortunately for the periphery, will be made on the basis of qualified majority.

    Article 6 is of special note, as it hands powers to unelected bankers/financiers with
    powers above the law that by qualified majority voting give absolute control to them.

    Don’t expect any mandates to rescue or transfer aid or resolve the banking sector in Spain or Ireland.

    Colm McC can hope away the awesome benefits that may accrue to Ireland. On past performance of the Irish bailout, he should have his doubts.

    http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf

    Re “National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary”.

    Good luck with that one. There are already moves afoot in the Bundestag to mount
    opposition to the transfer payments implicit in Y support from Ireland. There is also opposition to this concept in the Netherlands. Plus ESM is a permanent loan bailout fund that expects its money back; its not envisaged as a default/write off mechanism for eg 27% of the $500b

    http://en.wikipedia.org/wiki/European_Stability_Mechanism#Contributions

    Just try and raise the possibility of funding for one country now being transferred to another country and see how far you get with that.

    Geert Wilders Party for Freedom opposes any increase or systematisation of transfer payments, from the Netherlands to other EU countries, through means such as the ESM. Reasons for voting Y have evaporated.

    But the whole thing is a mess that hasn’t even been fully agreed or ratified in Germany. The Germans are worried about the transfer of powers over to ESM as we should also be. But they like the idea of Scrooge FC for the periphery and believe we should spend less in order to save money for German bondholders.. Its also likely that growth documents that will focus on FTT and tax harmonisation proposals will be part of any likely changes to FC.

    Perhaps on the principle of fools rush in, where angels fear to thread, it would have been wiser for us to wait this one out, until the smoke clears.

    Overall, its clear measures so far to fix the meltdown of the periphery have been a disaster. Voting Y would give a clear sign of thumbs up to measures we’ve been victimised with so far; in contrast to how our German et al bondholders have been treated.

    If you think those measures have been a success and you want more of the same, vote Yes. Otherwise, don’t be a poodle, vote No 🙂

  15. Why do I keep getting this niggling feeling the FC is naught but a smokescreen and the real action is going on elsewhere?

  16. p.s. did anyone watch Enda Kenny’s TV broadcast this evening. I have to admit, I couldn’t be bothered. Did I miss anything?

  17. @ John
    Poor people can give signals but they are never listened to. In order to change things you need to have power. And, in order to have power, you need to play certain games.
    A no vote means that we are not entitled to one cent of funds. It means that we become poor. The Irish have a desperate habit of thinking that the world thinks that they are important. The Irish are not important. 4 million poor Irish asking for debt forgiveness will have the same impact as 4 million poor Nigerians asking for debt forgiveness -i.e. none.
    Politics is the art of the possible. A yes vote simply increases possibilities. A no vots is simply closing your eyes and hoping for the best

  18. Unfortunately, if the ESM is extended to allow it take direct stakes in undercapitalised banks, the chances of it retrospectively absorping already crystalised losses in Irish banks is approaching zero — I would love to be wrong. The only way such developments could benefit Ireland in the future is if additional capital is required and is provided — and thus the risks taken — by the ESM rather than the State.

    This particular avenue of potential development for mutual insurance arrangements should not be oversold.

  19. @DOCM

    re Article 3 of the treaty establishing the ESM states;
    And Colm McCarthy’s opinion that it may form the genesis of a bank resolution scheme.

    It is a bit of a stretch to read this into Article 3, though I can see how one might.

    Purpose

    The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members ……….
    For this purpose, the ESM shall be entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties”.

    I can see that in order to ‘help’ member states in presumably extreme difficulty, the ESM can enter into agreements or arrangements with “financial institutions or other third parties”.

    That could be interpreted to mean that the ESM could force resolution schemes on financial institutions. But it is a bit of a stretch.
    The key qualification above is “For that purpose”.

    The ESM can only act: “to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States”.

    A robust bank resolution would be very welcome. It is hard to see such at present in the ESM treaty. Colm McCarthy may be correct and the ESM may evolve this way and in that sense it is better in than out of the ESM.

    However the extraordinary powers given to the ESM would make any citizen uncomfortable. And if there are capital call where will the ~11 billion come from?

  20. Lets get this straight , Bank credit money is a dramatic form of Grand institutionalised theft.
    Now they wish to embed a article that will require our fiat money to bail out this Thievery forever and ever. ?
    Using the law as a bank agent ?

    How can anyone of morality vote in good conscience for this debt peonage system ?

    Yee guys will sell our souls for another year of bread.
    This depression is a complex snare.

  21. Can someone tell me where the cash will come from if Ireland decides it does not require access to the ESM – barring a miracle of being able to borrrow in the bond markets at 3 percent?

  22. @ Joseph Ryan

    I don’t think he is correct. Reuters Breakingvews columnists covered the issue some time ago.

    http://blogs.reuters.com/breakingviews/2012/05/22/direct-bank-recaps-wont-give-spain-quick-fix/

    The problem once again is the cavalier attitude of academic economists to the institutional context. The ESM does not even exist yet. Even when it does, it will be, effectively, an SPV the legal govenance arrangements for which are not the same as for the EU. Barnier’s on the other hand must, by definition, be working on an EU-wide legislative proposal.

    The old adage “when all else fails, read the instructions” comes to mind. The only avenue for rapid action by the EU – as opposed to the EA – is via the old-fashioned legislative route, especially if the measure was adopted by way of Regulation (as in the case of most of the Six-Pack) which has the enormous advantage of not requiring national ratification procedures.

    The euro is the currency of the EU, up to this point actually adopted by 18 member states, with two (UK and Denmark) with an opt-out from the obligation to adopt it but with both countries having been careful not to abandon their right under the treaties to do so.

    In the case of the UK, the limits of a national position of pretending to be on the sidelines while actually being on the pitch has reached its limits. (The Danes are in the ERM II and the krona is effectivly linked to the euro).

    Incidentally, C McC also takes his usual swipe at the ECB saying that it is opposed (!) and that Ireland “should support the Commission”. As the ECB has all along been endeavouring to get governments to face up to their responsibilities, and given the speech by Praet, I am puzzled, to say the least, by this contention. There are, no doubt, differences about the technical content of the proposal under discussion but that is par for the course.

    He is, however, absolutely correct in the two reasons he advances for voting yes in the referendum the holding of which in the first place, and the conditions under which it is held, is the outcome of idiosyncratic decisions by a benighted Supreme Court.

  23. Can someone explain why we should defer the referendum when we are hardly going to vote against favourable measures agreed in the parallel growth strand in June? Some people will, inevitably, regard the measures as inadequate, but vote against them? The Irish people would surely decide something is better than nothing.

  24. In all the debate about the treaty, pity Swift is not alive, not once has the government swung the telescope around and examined its own lamentable record in reform.

    What sums up best the high level cynicism in Official Ireland is the decision of the Dail ‘to rise’ for a break – in the midst of the most serious persistent crisis facing the country since the euphemistically named ‘Emergency’.

    But euphemisms define the day.

  25. @John McHale

    You mention that you find coherent Shane Ross’s position that we should vote No to the Fiscal Compact and postpone signing it unless and until other actually helpful measures are agreed at EU level.

    In fact almost every person who is not a member of the Irish Government parties or an agent of the Troika agrees with him. We all think it probable that the coalition government has fired ahead with the referendum as they fear more time for debate would mean more likelihood of defeat, both because of the Fiscal Compact’s driving logic and implications being understood by the public and the strong possibility that the economic situation in Ireland is going to deteriorate seriously before the year is out destroying the governments political capital.

    So we are agreed that coherency is important.

    Then you say on the Fiscal Compact:

    In the event, the actual fiscal compact did not go much beyond what countries had already signed up to under the revised Stability and Growth Pact, but it did attempt to strengthen domestic ownership by introducing domestic enforcement mechanisms for the already existing structural balance rule.

    Here is our problem of coherency: Both yourself and Philip Lane have frequently opined that the Fiscal Compact is going to lead to the “ownership” of issues being shared at an EU level in some as yet undefined way (possibly Eurobonds, centralized bank resolution funded through printing or what have you.).

    Yet it seems like more than simple optimism to say that after the Fiscal Compact is signed that Germany and the ECB are going to propose or allow measures that go against both its spirit and intent (the spirit being officially establishing German style neoliberalism as the EU’s economic philosophy and the intent being to localize the costs of governments sorting out international market failure – at least smaller countries).

    For those Eurozone countries not bordering Germany the Fiscal Compact brings Europe in exactly the opposite direction to the one required.

    Now I do understand those who suggest we vote Yes out of fear of attracting the kind of punitive treatment being dispensed to Greece but anyone who suggests that a Yes vote serves our non emergency funding requirements or long term European political goals does not seem coherent to me.

    @DOCM

    As the ECB has all along been endeavouring to get governments to face up to their responsibilities

    Oh please.

    DOCM Redux: It is never the fault of either the bankers or the technocrats. They are only following the profit motive/orders.

    The ECB is at the heart of this disaster, had the terrible twins of Jean Claude-Trichet and Lorenzo Bini-Smaghi spent more time confronting the banks than bullying states this fiasco might not have happened. And before you explain that it was outside their mandate the ECB spent much of its time doing things not strictly in its mandate, as long as they related to the interests of the financial sector and its investors.

  26. @Shay

    My reading of the situation is that the stronger euro zone countries do want to save the euro. But not at any price — and therein lies the nub of the ongoing crisis. A price by which they take on large risks and induce undisciplined policies is most likely too high, but we can only guess at the actual line. There does appear to be a willingness to develop the required mutual insurance mechanisms to allow the euro zone to work, conditional on all members pledging to pursue reasonably disciplined policies. This will be a staged process (partly driven by emergencies, and partly by actual demonstrations of willingness to pursue disciplined policies.) Given that the fiscal compact changes relatively little for us (especially given the recognised need to pursue disciplined policies in any case), there is not much additional cost as far as I can see — indeed we directly gain from a slightly more credible fiscal framework. Now I understand that there are many who would like to see the euro disintegrate, but if you don’t, then signing up to the fiscal compact seems a small price for helping the necessary mutual insurance mechanisms that would allow for a less fragile euro zone to develop.

    I understand that you see all this through quite a different lense.

  27. People I respect (Karl Whelan, Megan Greene, etc) call this a bad treaty in economic theory terms, except we should vote for it because we will need a second bailout .

    Surely these fiscal rules are being put to us by the Germans because, in fairness, they are being asked to pay peripheral debt. They wish to ensure that we put in place economic policy that will put us on track to return to the markets.

    However, I think this contractionary policy will not convince markets to reduce the price we pay on debt, as the negative effect it will have on growth will increase the premium on the risk free asset (i.e. German bonds).

    We can implement the austerity needed to get to sustainable debt levels on our own, without signing a treaty on it. I think this approach will better convince financial markets that Ireland is a safe bet because it is a flexible approach. It is macroprudential but allows for room for maneouvering on fiscal policy in response to future shocks.

    I think we should vote no to a bad treaty, because it’s a bad treaty. Principles come before resigned pragmatism at this point in time for me.

  28. “I sometimes had to act against the preconceived opinions and first impressions of my constituents…I value solid popularity – – the esteem of good men for good actions. I despise the bubble popularity that is won without merit and lost without crime” — Thomas Hart Benton, US senator of Missouri, 1850.

    We are in an age where telling the truth can evoke outrage and it’s reported that the Facebook page of Christine Lagarde, IMF chief, was bombarded with 10,000 messages in response to daring to point to extensive tax evasion in Greece.

    In Ireland, it’s rare for politicians to tell home truths to the public. Public pandering is the default route but is often against the public interest.

    Senator Benton took an unpopular stand in his home state saying the “incurability of the evil is the greatest objection to the extension of slavery” to new federal states. A colleague on one occasion pulled a gun on him on the floor of the US Senate.

    Uncommon valour is not expected of Irish legislators but they should reflect on the words of Irishman Edmund Burke to the electors of Bristol in 1774:

    “You choose a member, indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of Parliament. If the local constituent should have an interest or should form a hasty opinion, evidently opposite to the real good of the rest of the community, the member for that place ought to be as far, as any other, from any endeavour to give it effect.”

    … finally back to Greece and the truth:

    “In a study done last year, the OECD described government-run Greek hospitals as deeply corrupt. It concluded that we could save 30 percent of the costs, which is enormous. The hospitals generated a deficit of €7 billion last year. Imagine what an unbelievably large amount of money we could save by simply introducing computers into hospitals. Until now, there has been far too little control over the purchasing of medications and equipment. In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption” – – George Papandreou, Greek prime minister, Feb 2010.

  29. From @Docm Reuters link above:re Spanish bank bondholders:

    “Haircutting them would be politically problematic.”

    By Neil Unmack and Fiona Maharg-Bravo:
    The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

    In a war of propaganda, the bondholders/ markets have surely won, when reporters can take such a view as expressed above, without qualification.

    If it is politically problematic to haircut bondholders, why is it not politically problematic multiplied by thousands to hand their losses to ordinary citizens.

  30. @ The Alchemist

    I agree with your view that what is missing from the debate is any element self-examination but I wonder if references to the failure of “Official Ireland” are really useful. All sectors of what might be described as the “governing establishment”, in all areas both public and private, are discredited.

    @ All

    On the circumstances surrounding the conduct of referendums, a very useful commentary on the impact of the McKenna and Coughlan judgements.

    http://www.independent.ie/opinion/analysis/johnpaul-mccarthy-balancing-act-as-government-and-parties-shackled-by-courts-3119618.html

  31. When ever you find yourself on the side of the majority; its time to pause and reflect. Mark Twain.

    The yes brigade sound awfully like the soft landing brigade, they were professors also.

  32. @ John Corcoran
    “A yes vote will copperfasten this bank debt forever.”
    Why? If Spain negotiates access to some form of pooled EU funding mechanisms to directly recapitalise it’s failed banks how could Ireland be denied the opportunity albeit retrospectively?

  33. UL Student,
    A good post. Now in outline can you state how you would balance the books over 2012-13 and a bit- the remainder of the current bail out.

  34. @ John McHale
    “the chances of it retrospectively absorping already crystalised losses in Irish banks is approaching zero”
    As above, why? This does seem critically important to many no voters and should give yes voters pause for thought.

  35. On one side in this battle you have Germany with quite right wing policy. On the other side is a softer centre left alliance lead by France.
    The problem is that the centre left alliance is broke. Angela might be isolated but she is the only one with money. She is also the only one who can raise funds independently in the market. She is also very p***ed off at the moment.
    We are being expected to take sides now. Angela might win this round but ultimately softening on austerity will come from pressure arising within Germany as opposed to pressure from outside.
    All this is getting quite scary

  36. Colm McCarthy, John McHale and Fianna Fail support the yes vote. Guess who supported the property bubble, the bank guarantee and now the yes vote?.

  37. @Eureka
    What is money ?

    The Germans merely have claims on our accounts.

    We have the misfortune to be infested with Quislings who need the Teat of a central authority outside the bounds of the traditional state as thus divorced from messy local politics.
    They ask us to vote for this and yet claim everything is outside our control.
    If so who controls it ?
    Where is the chain of command withen the Eurozone ?

  38. @Joseph Ryan

    From @Docm Reuters link above:re Spanish bank bondholders:

    “Haircutting them would be politically problematic.”

    In a war of propaganda, the bondholders/ markets have surely won, when reporters can take such a view as expressed above, without qualification.

    Welcome to the class war, the rich plan to win.

    Remember that the capital investing classes have a great deal of political influence domestically in Spain as well as in the wider EU, there may be no European solidarity but common purpose has certainly emerged in Europe’s wealthy and mobile elite. When you couple with this with Germany’s need to insulate its banks from the mess they contributed so much to and the ECB’s primary allegiance to the financial sector you have a very powerful triad of influence.

    The European Commission is too far to the right to form a cohesive opposition and EPP fellow travellers still govern in many Eurozone states so most likely this will continue until we get something on the lines of the Red Brigades entering the fray or a few wing left wing governments come to power and are wiling to end the charade of cooperation with Germany.

    @Michael Hennigan

    Senator Benton took an unpopular stand in his home state saying the “incurability of the evil is the greatest objection to the extension of slavery” to new federal states. A colleague on one occasion pulled a gun on him on the floor of the US Senate.

    You might leave trying to coopt Senator Benton’s lone progressive historical stand to support regressive causes to the American right Mr Hennigan.

    Who exactly do you think will fall for the meme that opposing slavery (however weakly) and supporting Europe’s political right and financial sector are in any way related?

    Modern day capitalists really do believe that their struggle to enrich themselves is somehow related to the cause of human progress and this is as good an example of the failures of self examination as one could hope to find.

  39. Listening to Colm McCarthy on the radio yesterday I am almost persuaded to vote yes.

    Colm McCarthy suggested that the fiscal compact was a prerequisite to EU level bank regulation and bank resolutuion and that ESM funds could be used to fund the support of the banks in Spain, with knock on retrofitting of our situation.

    Obviously these things are uncertain, and it would be far better if our vote were taking place in a number of months’ time.

    Also, I would like to know just how much of the ESM will go into banks and on what conditions.

    Nevetheless, EU Bank regulation and EU Bank Resolution are things we have all been calling for for upwards of three years now.

    Perhaps we should stick the course for just a little longer, even if the Government was stupid to put us in this position this early in the year.

    H

  40. @tulmcadoo I don’t have the economic policy prescription to balance the books, merely am giving my thoughts on why I’m voting the way I am I guess.

    But as you mention it, I think balancing our books is too easy a catchphrase. Once we stop the rising debt to gdp ratio then we are doing okay, running a deficit in times like these is OK, in my opinion.

    I don’t think the reason we can’t sell debt at an affordable rate is because of macro fundamentals anymore, we’re doing pretty good in terms of exports and the falling euro can only help us. Rather it is now that the eurozone crisis is so unstable that the risk is too high.

    In my opinion, the Fiscal Treaty doesn’t fix the euro instability, which is banking related. June 1st we’ll still have unsustainable yields on bonds if we vote yes or no. Hence, the principles come first for me.

  41. Krugman’s FT interview with Martin Wolf last Saturday is succinct about the Euro and it’s chances of survival.
    @ Michael Hennigan
    Christine Lagarde’s comments re Greek corruption levels probably failed to emphasise the massive problem of the level of corruption at ‘Official Greece’ level whch has filtered down to all levels of society.
    Is there a country or sizeable organisation in the world whose leaders, along with their elite supporting groups and mechanisms, is not corrupted by access to the levers of power and ‘the trough’?

  42. UL student,
    Unfotunately, there is nobody to finance a deficit in 2013 plus. EZ sovereign bond markets are closed to all bar the core & this will get worse. We will also have eschewed the ESM.
    We could do as Grizzly suggested y/day and expropriate the assets of private pension funds or a Tsipiras suggested fund the Greek state from bank depos.

  43. John Mc Hale says that retrospectively fixing our bank debt through the ESM mechanism is not on whilst Colm McCarthy takes the opposite view. Who is right?

    Spanish banks…
    “Mr Dallara added that he expected the Spanish banking sector’s woes would be “manageable” overall.”
    Where did I hear that before?

    Bankia seems uncannily like our Anglo ….being the first to go…after that we were told the rest were “manageable” and we all know where that led.

    If Bankia (which includes 7 cajas, I think) is in such deep do da, then it is reasonable to assume that all the others are in a similiar state having failed to recognize property losses for the past three years.
    Spain is just a much larger version of IRE.

  44. re- John Corcoran
    ‘Germany alone ,is dictating to all other european countries. All of europe must address the issue of 50% youth unemployment in Spain and Greece and the very negative outlook for Ireland drowning in a sea of debt.’
    &
    Shay: ‘Who exactly do you think will fall for the meme that opposing slavery (however weakly) and supporting Europe’s political right and financial sector are in any way related?’

    The Deutsche 6 point plan begins:
    # 1; Reduce wages (they’re not talking about the top-end civil service or protected sectors, btw),
    # 2; Remove job security (ditto)….

    Welcome to the human meat-mart

  45. @Michael Hennigan

    The nasty little man with his magic labelling machine strikes again!

    Little? I would prefer to think of myself as physically compact.

    You have a lot of information at your disposal, and a long history in business, but I will be damned if I can discern a narrative in your musings that plausibly explains how Ireland’s current mess is somehow a result of national character failings and insufficient commitment to the logic of globalization or the free market. I will be double damned if anyone can explain how the Fiscal Compact fixes these (non-existant) problems.

    We are a small country where the failings of a much bigger international system have manifested dramatically, those invested in the failed system have with remarkable success made the local victims pay for the damage caused by the global criminals.

    I never get tired of repeating this:

    The political and intellectual divisions at the start of the European component of the global financial crisis remain the divisions now, four years later.

    There are those who believe we need to sacrifice social democracy, the sovereignty of the peripheral states and popular democracy to save the Eurozone financial system and those who believe the Eurozone financial system is the problem.

    The Fiscal Compact is an attempt by the political right to win this battle of opposing ideological positions and class interests and ensure that it can never be fought again.

    Why not put aside the cherry picked economic indicators and dislike for Ireland’s sclerotic and self satisfied establishment (however justified) and see if you can frame the Fiscal Compact in a more plausible way?

  46. @Ceterisparibus

    “Bankia seems uncannily like our Anglo ”

    My concern is they may have worse out there. It will be interesting to see where Spain is going to find this €19bn. Are they really just going to give Bankia Spanish govt. bonds and then the ECB will give Bankia the face value cash? Who knows? Perhaps they will if it is accompanied by a promise that all bondholders will remain unburned?

    Did you see the Bloxham story?

    http://www.independent.ie/business/irish/irelands-oldest-stockbrokers-bloxham-ordered-to-cease-trading-3120187.html

  47. @MH
    Yanis Varoufakis is also not too happy with the French woman who took over from the French man.

    ” For her seriously ridiculous remarks on Greek child poverty not being as worthy of her concern as the poverty of far worse off African children. So, to the Managing Director of the one global organisation which has contributed the most to child poverty in Africa and Latin America, and who is now at the helm of a similar effort to bring similar ‘reforms’ to Greece”

    If she had only gone to the trouble of taking off the three strings of pearls from around her hard neck and the diamond studded ring and toned down the preposterous posh overtones while delivering her “insights” she would surely have attracted less people to her FB. But then again, this may not have suited her.

  48. re-PR guy & the other Spanish banks – Remember how poorly the Irish story was framed in even the British media, who wd. have had easy access to better information had they been inclined ? (Not that our own local pamphlets were particularly objective; but there was enough in the public domain to get a reasonably clear picture)
    I think most people in Europe are under the impression still that Ireland’s debt was mostly spending-related.
    What most people (me included) are restricted to is the diet of a cobbled-together Sky-News soap-opera about Bankia, and they grow so attached to their story that it seems difficult for them to assess developments outside this frame they’ve made for themselves.
    But there’s surely, somewhere, some reasonable information about the debt levels of the rest of them ?

  49. @PR GUY

    You could do a loaf and fish job with that.

    Latest from IT on Spain….
    “Bankia parent BFA is set to report the biggest loss in Spain’s banking history today.

    “The figures are much higher than any other release from any other bank,” a financial source with direct knowledge of the bank’s situation told Reuters.

    Bankia, marked out by the Spanish government as its single- biggest banking problem, has so far insisted the extent of its own possible losses could not be extrapolated to the rest of the country’s banking system.”

    In the immortal words of MRD….they would say that.

  50. @Mark
    “but there’s surely, somewhere, some reasonable information about the debt levels of the rest of them ?

    Yep…buried deeply in the Banco de Espana. From what I’m reading they have only provisioned for 20% property losses. As we discovered north of 60% is more realistic.

  51. Have all banks published(or are they known) their total mortgage lendings for the period affected ?

  52. ‘as we discovered north of 60 % is more realistic’.

    Just on that subject, and last week’s stories that Dublin prices are rising – they’ve dropped 7 or 8 grand from within my small but representative panorama since March. And I’m inclined to believe that lowest acceptable prices are being relayed to potential buyers as offers-made…
    I don’t think Spanish prices rose as much in relation to pre-boom as ours did – so will the drop be consequently less and more tied to the higher unemplyment, etc ?

  53. @Shay Begorrah

    You have a lot of information at your disposal, and a long history in business, but I will be damned if I can discern a narrative in your musings that plausibly explains how Ireland’s current mess is somehow a result of national character failings and insufficient commitment to the logic of globalization or the free market.

    Perhaps (youthful) optimism obscures your vision.

    Joe Lee does a wonderful job peeling back national character traits and rubbing them against evidence of empirical failings in economic planning, policy formation, political accountability, anti-intellectualism, censorship, parochialism, and so forth.

    The tribunals of the past twenty years have laid bare a shameful culture that requires the silence of many to prosper.

    If the tribunals took place in the UK or elsewhere, a battalion of domestic commentators and political neophytes would drown in post-prandial tut-tutting, assimilating their conclusions as evidence of the fundamental ‘decency’ of the Irish character.

    There is a persistent failure in ireland, in my opinion, to own ‘our own’ problems. There are so many examples of the policy being right but the facts being wrong, that the boundary between reality and fantasy is invisible.

  54. @Shay Begorrah

    You have a lot of information at your disposal, and a long history in business, but I will be damned if I can discern a narrative in your musings that plausibly explains how Ireland’s current mess is somehow a result of national character failings and insufficient commitment to the logic of globalization or the free market.

    Perhaps (youthful) optimism obscures your vision.

    Joe Lee does a wonderful job peeling back national character traits and rubbing them against evidence of empirical failings in economic planning, policy formation, political accountability, anti-intellectualism, censorship, parochialism, and so forth.

    The tribunals of the past twenty years have laid bare a shameful culture that requires the silence of many to prosper.

    If the tribunals took place in the UK or elsewhere, a battalion of domestic commentators and political neophytes would drown in post-prandial tut-tutting, assimilating their conclusions as evidence of the fundamental ‘decency’ of the Irish character.

    There is a persistent failure in ireland, in my opinion, to own ‘our own’ problems. There are so many examples of the policy being right but the facts being wrong, that the boundary between reality and fantasy is invisible.

  55. @ Robert Browne

    The lady maybe have protested too much but the whataboutery deflects from the truth of her main point.

    George Papandreou said on tax evasion in 2010:

    “To give you just one measure of the scope of that problem, fewer than 5,000 Greeks declare incomes of €100,000 or more (in a developed country of 11m people), and that pattern must end, and it will end. We will be prosecuting offenders, no matter how rich or powerful, to show that we mean business. The rule of law means that the law applies to all. Such changes, we are sure, will bring in billions of unpaid taxes and help underpin our return to fiscal health.”

    A government survey in 2009 of 150 doctors in Kolonaki, a wealthy Athens suburb, showed that half of the doctors said they were earned less than €30,000 a year. Thirty said they made less than €10,000 – – it seems like Ireland in the 1970s.

    Prosecutors will be in a position later this summer to issue charges against dozens of current and former politicians in relation to their tax declarations and the possession of assets, following a broad investigation by the Financial Crimes Squad (SDOE), sources have told Kathimerini, the Greek newspaper.

    SDOE is currently reviewing the financial details of up to 650 prominent figures after initial checks revealed inconsistencies in their E9 forms, which are used to declare properties each year. The list of those being investigated includes current MPs, former deputies, local authority officials, doctors, academics and lawyers, sources said.

    Greece in 2010 had 180,000 teachers and one of the world’s best teacher-student ratios but 20,000 teachers “worked” in administration because there are no classrooms for them.

    Private tutoring is widespread in southern European countries such as Greece (spending estimated at more than €950 million per year, which is equivalent to 20% of government expenditure on primary and secondary education), Spain (€450 million), Italy (€420 million) and Cyprus (€111 million), but much less popular in northern EU countries such as Sweden and Finland, where schools appear to largely satisfy expectations.

  56. @tulmcadoo

    True we could do those things should we need to, which we more than likely will. But I’d rather ratify the treaty when it comes to it, as if we were ratifying it as a condition to the bailout. Whereas now we are ratifying it in case we need the bailout, which means that either a) we need the bailout and we’ve signed the rules, which we could do in 2013 ; or b) we ratify the bailout and there is any number of outcomes that we cannot predict.

    Game theory would suggest you hold off, I guess, unless you buy all the stuff about jobs, investment and growth from the posters (which I don’t). What do you think?

  57. @Ceterisparibus

    “From what I’m reading they have only provisioned for 20% property losses.”

    I think that’s the figure for commercial mortgages, lending to developers and so on. According to the FT a couple of Saturdays ago, they’ve provisioned nothing like that for residential mortgages and the vast majority of them are still ‘marked to fantasy’ (i.e. their original value). I forget the figure for Spanish residential mortgages off the top of my head but it was hundreds of billions (€625bn rings a bell) according to the FT report.

  58. PR Guy Says

    Below is the elementary property valuation error that bankrupted Spain;

    http://www.independent.ie/opinion/letters/bubble-values-3034584.html
    Professor Neil Crosby’s online response to this Irish Independent letter “Bubble values” 29th February 2012

    “The analysis may be simplistic but unfortunately it is not flawed. Banks ask valuers to tell them what the market value/exchange price is at a point in time and then lend vast amounts over time based on that simple number. The surveyor gives them that simple number and do not think it is their job to tell the banks that the question they have been asked is stupid on its own and what they should have asked for is the underlying value. It was obvious in 2005 and 2006 that prices in the property market were higher than could be sustained by any rational cash flow analysis. But in a culture that rewards individuals for short term performance rather than longer term perspective, it was in neither the bankers’ nor the valuers’ interests to stop it. I cannot see anything in what the UK regulatory authorities have proposed that makes me think they understand the role of property valuation in driving asset bubbles and will prevent it all happening again sometime in the 2020s.”

    Neil Crosby
    Professor of Real Estate and Planning
    University of Reading

  59. ULS,
    It will not be possible for a programme country to access private bond markets at current rates for other than short term due to reputational damage, Solvency II and bank deleveraging. Therefore running a stimulatory fiscal policy like this country will not be possible without official funding. This runs out for us in the middle part of 2013. So prepare for a move to primary surplus in 2013 in the event of a No vote. The mainstream No campaign is now frightened that they might win. Listen to the whine of Boy Barrett on the radio tonite. He is s..t scared his voters might blame him for a slashing in SW.

  60. @ Tull
    Show me the maths….
    What %age sw cut is needed? What % tax hike is needed? What amount of debt write down is needed?

  61. Eureka,
    About half the SW bill is c 10bn & about half the PS pay bill would be the crude order of magnitude. Offset part of that with a property tax of about a grand with some lower paid exemptions. I doubt raising taxes would work since people won’t pay.
    Print another 10bn to recap the banks with PNs and extend the term to 100 years, leave the euro.
    Then run a balanced budget for ever – no cyclical jiggery pokery.
    I would think this is a reasonable scenario in the event of a No.

  62. @Les Reed

    “the chances of it retrospectively absorping already crystalised losses in Irish banks is approaching zero”
    As above, why? ”

    The name of the game is power and if you ain’t playing power you are in the wrong place

  63. @ tull

    Great numbers.
    Now following the EZ departure what sort of depreciation of the nouveau punt would you expect? And how much would interest rates rise by ?

  64. Seafoid,

    how about minimal depreciation…we are running a current a/c surplus as is. I predict money would flow back in.
    Short rates i.e policy rates would go up a little to combat inflation. I have no idea what long rates would do. Depends on inflation, default, reaction of EZ partners. It gets fuzzy on this point.

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