The possible shape of a second bailout for Ireland

..is discussed in the Irish Times today by my UL colleague Donal Donovan. From the piece:

The prospects for Ireland being able to access sufficient market funding by late 2013 do not appear favourable. The lending environment for sovereigns in much of the euro zone has worsened steadily and, barring miracles in Greece and Spain, is unlikely to improve sharply soon. Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.

Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.

Despite encouraging words from European Central Bank president Mario Draghi, it is hard to be confident that the estimated €40 billion needed to cover the budget deficit and repay maturing debt obligations in 2014-2015 can be obtained at affordable market terms.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

31 thoughts on “The possible shape of a second bailout for Ireland”

  1. “Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.”

    The EU Commission currently expects Italian GDP to rise to 123.5% of GDP in 2012, and Ireland to equal 116.1% in 2012, and 120.2% in 2013, and Greece’s government debt at 160% in 2012.

    Sad to see basic factual errors in the article!

  2. I hear Morgan Kelly ringing in my ears again. Cut the deficit to O% asap and cut the bank debt loose.

  3. I am sorry for the off-topic question but:

    I thought the ESM no longer had “preferred creditor status” following the acknowledged poor market reaction to the Deauville Declaration back in 2010?

  4. I doubt that Ireland will be able to obtain a lower rate than Italy (unless things get much worse for Italy than they are right now).
    Being in a better shape than Greece is hardly something to brag about.

  5. btw we are discounting a dodecahedral complex spiral with fractal-style wibblly wobbly edges rather than just lines.

  6. @ grumpy

    “we are discounting a dodecahedral complex spiral with fractal-style wibblly wobbly edges rather than just lines”.

    You lost me there!

  7. “Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.”

    It isn’t just “general market nervousness”. Most international investors can’t be bothered (because it makes no economic sense for them to devote the resources) to understand Ireland properly, its a tiddler – but they will eventually get the idea, and not be so easily spun.

    Ireland has spent the last 3 years determined to avoid the conclusion that its place in a shared currency with Germany requires ) as with the other piigs) costs, pay, pensions etc broadly comparable to those in Germany.

    Weak political leadership, zero-confrontation rules , low-hanging reforms only, capital cutbacks to avoid current ones…..

    What is Ireland’s plan for competing with Germany and avoiding a devaluation – is there one?

  8. @ grumpy,

    Any thoughts on why the IMF have done little on this? Aren’t they supposed to play bad cop? I had expected they would have done something by now, but it seems not.

  9. And what might a second Irish ‘bail-out’ look like.

    “…………..The continuing deleveraging of the banks and their possible need for further capital requirements would also feature.”

    You cannot be serious!
    We have just had an another economist on RTE News (Peter Bacon) telling us what everybody knows. That the banks are zombies.
    How on earth can further deleveraging and more taxpayers into banks solve the problem. The banking problem we have is that banks have been turned into state funded and stste proctected deb collections agencies for the ECB and German regimes.
    The banks are destroying what is left of the country.
    Not another red cent.

  10. Second bailout? Ludicrous! We will simply go and ask Russia for a loan as Cyprus have done this morning! That’s kind of ‘returning to the international markets’ isn’t it?

    Now, I wonder why Cyprus have chosen to go down that route? Perhaps they didn’t fancy becoming Greece minor.

  11. @ PR guy
    Watched that programme on Euro exit.
    It’s amazing the way people discuss it as if it will happen out of choice.
    To my mind there is a 15-20% chance of it going. Some kind of contingency planning would be indicated

  12. @grumpy

    The plan is “growth” coupled with gradual inflation. It allows politicians to restore competiotiveness without annoying anything.

    Unfortunately, “growth” has to be assumed. We have no policies to achieve same which justify confidence. We have to ignore the IMF global data for the last number of years which shows that everybody wants to export their way to health which is of course not achievable. We also have to ignore the deterioration in the Eurozone economy and the fading prospects for Eurozone recovery.

    Don’t worry though. Adding Francois Hollande’s chat about growth to our own policticians chat about growth means that we are at lease united in wanting growth (and more money, and better weather).

  13. @Ahura Mazda

    Any thoughts on why the IMF have done little on this? Aren’t they supposed to play bad cop?

    This is more of an ensemble piece than a buddy movie:

    IMF: Bad cop turned tough cop after crisis of conscience caused by the botched Asian job.
    ECB: Corrupt cop working for the mob trying to cover up its own involvement in the crime.
    EU: Gutless police Commissioner hoping for promotion by framing local nobody for difficult to prosecute bank inside job.
    Germany: Cop with severe mental health issues, keen on brutality, trying to protect members of its family from being implicated in the crime.

    Of course others will say that the EU is a victim of its own grandiose ambitions for the Euro while the US based IMF is angling to protect the dollar as the world reserve currency.

  14. @grumpy: “What is Ireland’s plan for competing with Germany and avoiding a devaluation – is there one?”

    If we were in a monetary union we wouldn’t need a plan. Louisiana doesn’t need a plan for competing with California. What we’re in is a pseudo monetary union. Without a devaluation the natural outcome is for labour and capital to migrate, to the core or out of the EZ. We’ve been in this situation before, which is why there are Murphys and O’Mahonys in lots of distant places.

    For some time I’ve been consoling myself with the thought that since EMU is a silly idea it must fail before too long. Increasingly I’m asking, what if it doesn’t fail? That’s the real nightmare.

  15. @Kevin D
    +1
    Spot on.

    Perhaps a fate worse than the EZ collapse will be a generation spent paying back the bankers debt and the concomitant loss of sovereignty.

    As you say, we have been here before. As school children we were all dismayed at the 800 years of misery story that was forced down our necks. I never fully understood how a whole nation could be repressed for so long, but now the answer is obvious and it was nothing to do with those terrible English. At every juncture the people were sold out by the short-sighted and self-interested Irish Establishment.

    Grattan would have some lessons for us from his Act of Union experience.

  16. “If it turns out that another bailout is necessary this should not be seen as an admission of defeat by the Government, especially since the determining factors to a large extent are beyond Ireland’s control.”

    Why must we always hear this line, “beyond our control”. Why must our economists preach constant denial and feel the need to provide a stream of ready made excuses to their political masters? Croke Park, Blanket Guarantees, NAMA, Bailout No 1, were all met with the same chorus “we had to do this, we had no choice”. “Only game in town’ etc,. We had choices and we made choices these things were never the only games in town. Those choice were OUR choices foisted on us by wconomic and political ideologues.

    Notice also, in this article, the way Bailout 2 is dressed up in the clothes of ‘extensions to first bailouts’, “cautionary” provisioning, etc. I don’t accept this. Is this not similar to the language used in the recent referendum treaty where the government described Bailout 2 as “an insurance policy”? No it is not, It will be A second bailout from ESM, less than three years after beginning to draw down funds from Bailout No. 1. Neither, does Donal blame the government for continuing to pretend they will be going back to the bond markets. There is a distinct thought pattern evident here, it is one of denial and feather bedding the government with ready to draw on excuses.

    …and presumably, if our zombie banks need further billions to shore them up that too should not be seen as an admission of failure? If the state should have to divest itself of NAMA, should that be seen as an admission of failure? The main purpose of NAMA, we were told, was to avoid nationalisation and not to provide liquidity. Unsurprisingly, It has achieved neither purpose, granted it has provided liquidity in spades for some people!

    It’s amazing that “Bacon” is now writing reports for Treasury Holdings who are in the death grip of NAMA a body whose grotesque creation he was involved in, not to mention the major legal posturing and conflict. To my mind, Bacon is just a gun for hire. I have lost count of how many useless reports he has written.

  17. A remarkable feature of Donovan’s piece is that neither employment nor unemployment are mentioned. If a second bailout is only going to part the road for a third bailout, one wonders if there is any future at all for ordinary young talent in Ireland, or will Minister Noonan still be praising ‘work tourism’ in years to come?

    Is there a permanent ban on discussing unemployment in the media in Ireland? Endless numbers of advisors, consultants and experts can be recruited to hoover around the corners of any problem that government caprice chooses, but the big bleak show that affects half a million people and more doesn’t get an audience at cabinet apart from periodic windups of the official blather phonogram.

    Yesterday, La Rebubblica published a multipage pullout on unemployment in Italy and likely employment prospects – grim. No paper in Ireland would dare produce something as honest in my personal opinion. It would offend the gentry at the Top Table and we can’t have that in he midst of the most talked up ‘recovery’ in Europe.

    A striking finding in the report, or projection if you wish, is that those hovering around the 40 mark are while too young for a pension, too old for a job. Perhaps the profiles of the unemployed are different in Ireland, but recent evidence of the continued rise in the number of long term unemployed suggests otherwise.

    Fours years into an unemployment crisis and not one high impact idea has emerged from the political Top Table. Endless discussion of banks on the other hand.

  18. @ PR

    perhaps because there’s a lot of hot Russian money in Cyprus and they didnt want the ECB taking over…

  19. @Alchemist:

    “Endless discussion of banks on the other hand.”
    +1 , Even though I am as guilty as the next on that score.

    ‘But the banks are the blood that makes the economic body work’ or some such inane nonsense that I heard from Minister Quinn on Morning Ireland.

    But it is fantastic propaganda. A propaganda that has suceeded beyond the wildest drreams of those who benefit from it most, banks investors and large bank creditors and assorted others.

    We must save the banks!!

    How about a daily chart on unemployment on the fron page of every national daily, showing numbers of people as well a percentages.

    This blog could perhaps five a lead.

  20. @ Grumpy,

    Unfortunately, I think the IMF are the only ones that will force things through. I don’t see the Irish gov taking the initiative.

    @ Shay,

    Much as I like pinning some (merited) blame on other troika members and Germany, there are significant reforms required within the Irish economy and I see the IMF as having a key role in this.

  21. @Bond Eoin Bond

    “perhaps because there’s a lot of hot Russian money in Cyprus ”

    Is there now? I was always under the impression it was mostly in London. I would have thought any hot Russian money would have been leaving a place like Cyprus in droves when TSHTF originally in Greece. I really must stop believing everything I read in the papers.

    Or is it in the northern (Turkish) half of the island? Nothing surprises me with the Russians. I met some directors of a couple of Russian banks once. They insisted on meeting me in the cafe at Heathrow to have our discussions. They clearly hadn’t been brought up in public school or other traditional banking backgrounds. A very furtive bunch who someone later claimed were ex-KGB bods who simply happened to be in the right place at the right time to take over a couple of banks (or did he say ‘hold up’?). Nice workski if you can get it I guess.

    @Robert Browne

    “If it turns out that another bailout is necessary this should not be seen as an admission of defeat by the Government, especially since the determining factors to a large extent are beyond Ireland’s control.”

    Unfortunately, we are going to hear a lot of that line in the future. It’s one of the “key messages” so I’m told by a PR colleague in political areas. It wasn’t me guv. I didn’t do it. It was them external factors wot waz beyond my control that dragged us down.

    I see Greece are also losing in the soccer this evening. I do hope Spain don’t end up playing Uganda in this tournament. I hear Uganda are jolly upset at Rajoy saying that “Spain isn’t Uganda” because they have a positive (5.2%?) GDP growth and Spain doesn’t.

  22. Jordi Pujol puts the boot in, from the FT de Satharn

    “Above all, is it not the smaller countries of the eurozone – Greece, Ireland and Portugal – that have needed multibillion-euro bailouts from the EU and the IMF?

    “No, look, there are little countries that have done very well: Denmark, Finland, Austria. Then there are countries that have done relatively well given that they are new: Estonia works well, Slovakia works well – and Slovenia, it’s much smaller than Catalonia, 2m inhabitants. It’s not a question of being a big country or a small country. It’s whether one is serious or not serious.”

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