Month: July 2012

Stumbling into disaster

I am just back from a conference in Berlin that was attended by finance officials from a number of euro zone countries.   I must admit that what I heard left me with an increased sense of foreboding on the future of the euro zone.     To no great surprise, officials from stronger countries made it clear their governments are willing to pay a significant price to save the euro zone – but not any price.   What worries me most is the emphasis on restoring “market discipline” given concerns for moral hazard, including the continued threat of debt restructuring.   (The sentiment behind Deauville has not gone away.)  While I have no trouble in understanding this position from likely net contributors under enhanced risk sharing arrangements, it is a recipe for Italy and Spain being driven from the bond markets.   The concern of stronger countries for their own creditworthiness under guarantee arrangements was also emphasised – and, again, is understandable.  

As has been pointed out before, the main message from “second-generation” currency crisis models is very relevant.    Concerns about the willingness of policy makers to bear the costs of protecting a currency peg — or avoiding default — leads to increased expectations of those events, raising the costs of avoiding them still further.   It is all too easy to fall into a self-fulfilling, bad-expectations equilibrium. 

So what is the way out?   Stronger countries need to lay out what institutional arrangements they require to support enhanced risk-sharing arrangements, including some substantial form of euro bonds.   For the medium-term, credible institutional discipline must replace market discipline.   The present mixed approach is not working.   In deciding whether to accede to arrangements that would significantly diminish fiscal/banking sovereignty, all countries must recognise the likely path under the present course.   It might be a bridge too far, but at least we should not stumble into disaster. 

Who will pay for banking losses?

The WSJ has a really good piece by Gabriele Steinhauser and Matina Stevis on the core story of the Eurogroup meeting, which seems to have slipped past the domestic media somewhat. Yes, yes, they’ll get to Ireland’s debt in September/October. Grand. The key issue of just who pays for any losses within the ESM is not settled, nor is it likely to be any time soon. From the piece:

Germany’s finance minister said that even once the euro zone’s bailout fund has been authorized to directly recapitalize struggling banks, the lenders’ host government should retain final liability for any losses.

Wolfgang Schäuble’s statement early Tuesday indicated disagreements on how far the currency union needs to go to protect countries from expensive bank failures. His declaration, which followed more than nine hours of talks between euro-zone finance ministers here, clashed with those of other officials, who insisted that banks’ host states wouldn’t have to guarantee any support from the bailout fund.

The issue is hugely important for Spain, which risks being locked out of financial markets amid concerns over how a European bailout for its banks will affect Madrid’s ability to repay investors.

Fun times ahead.

It’s make your mind up time

Like many people, I suspect, I usually check in on Sunday night to see what Wolfgang Münchau has said this week. This week’s article was a cracker, and it’s hard to see where he’s wrong. Either governments decide to make the radical reforms that are needed, or monetary union collapses: the news from Brussels this morning suggests that they are not going to do the necessary any time soon. The Government and Central Bank have had a long time now to get contingency plans in place, and it would be nice to think that they had actually done so.

Update: for similar views, see Sony Kapoor here, and Karl Whelan here.

Irish Governance in Crisis

In a piece in yesterday’s Sunday Business Post my colleague Dr Niamh Hardiman  makes a plea for better understanding of the roots of our current crisis in weaknesses in governance institutions. Such an understanding is a precondition for effective reform. She addresses weaknesses in parliamentary scrutiny, the capacity of the civil service for appropriate engagement over policy making, and the effectiveness of the public service itself. She highlights institutional explanations for tendencies for public policy to favour sectional interests, but argues that understanding the institutional weaknesses is the key to addressing them. The article is behind a paywall, but a fuller, multi-author examination of the issues is available in a book arising from a UCD project on governance, Irish Governance in Crisis, edited by Niamh Hardiman (Manchester University Press, 2012).

Colm McCarthy: Fours years on yet not even a parking ticket issued

Colm writes in today’s Sindo on the outstanding problem of obtaining satisfaction from those responsible for the banking crisis within the banks. As usual there is a lot to think about and digest, but one piece stood out for me:

In Ireland, almost four years after the balloon went up, not so much as a parking ticket has been issued. Inquiries are under way by the Director of Public Prosecutions, An Garda Siochana, the Criminal Assets Bureau and the Office of the Director for Corporate Enforcement but none has yielded fruit. The Irish banking bust has been described by Central Bank governor Patrick Honohan as one of the largest, relative to the size of the country, which has ever occurred anywhere.

The snail-race by the investigating bodies is an embarrassment, has fed public cynicism and the belief that those responsible for the disaster will never be brought to account.

The socially corrosive effect this delay is having cannot be estimated. There has been at least one file prepared and sent to the DPP, but that’s it as far as we go. Colm has a gloomy outlook on the possibility of any redress coming via the Oireachtas:

It does not matter which Oireachtas committee undertakes the next incomplete inquiry.