Requirements for solvency

This post was written by John McHale

Wolfgang Munchau has another thought provoking piece in Monday’s FT.   While he believes that the announcement of the ECB’s OMT programme has stabilised things for the near term, he remains pessimistic that the crisis – which he sees as fundamentally one of solvency rather than liquidity – is on a path to being resolved. 

Although I share many of Wolfgang’s concerns, my take is a bit different.    My starting point on the solvency issue is also quite pessimistic.    Defining state solvency is not easy.   A necessary condition is clearly that the debt to income ratio is not on an explosive path.   In terms of levels, we see that some countries (Japan being the most dramatic case) appear to be able to roll over debt and fund deficits even at debt to GDP ratios in the region of 200 percent.   On the other hand, low-income countries can struggle to be creditworthy with debt to GDP ratios of 20 to 30 percent.    Lacking their own central banks that can lend to governments in their own currency in extremis, euro zone countries with high debt/deficits and weak/uncertain growth prospects have been revealed not to be creditworthy.   In a very real sense these countries would not be solvent without official sector support – and are unlikely to become so for some time.   The important question then is whether official sector policies can be designed to allow countries to be robustly creditworthy.   Designing these policies faces a double credibility hurdle: that the support will be there (if only as a backstop) if countries meet the conditions for eligibility; and that it is credible that the countries availing of the actual/backstop support can meet the conditions. 

The requirements for effective official support policies seem to be the following:  (1) Supports must be reliable – countries must be able to rely on the support being there without forced PSI as long as they continue to meet the conditions.  Where PSI is deemed to be unavoidable, this should be recognised early and done decisively so that it can be taken off the table to the maximum extent possible.    (2) The conditions must be reasonable – taking into account underlying growth prospects and the negative impacts of fiscal adjustment on growth, the required adjustments must not push the political capacities of governments to push through large adjustments beyond the breaking point.  (3) The conditionality must be flexible – unanticipated adverse growth outturns should not lead to requirements for ever larger adjustments.   And (4) the link between banking-sector losses and state debt must be broken.  

Euro zone crisis resolution policies are moving slowly in this direction, although there is some way to go on both reliability and flexibility in particular. 

Following the IMF’s new analysis on the likely size of fiscal multipliers in a liquidity trap, there is a need to revisit the appropriate conditionality regarding fiscal adjustment.    But where the current policy stance leaves huge uncertainty over whether the crisis will be resolved, this must also act as a huge break on growth.   (I discuss this further in an Irish Times piece last week.) 

Of course, the policy mix described above is a big ask for stronger countries, either directly or through the ECB.   They are being asked to take on large risks and put a lot of faith in the willingness of countries to meet the conditions.   The development of the necessary crisis resolution and prevention policies must be seen as a two-way process, where all euro zone countries submit to tighter rules on budgetary management and more intrusive surveillance (see Mario Draghi’s recent comments in an interview here).   Much of the debate in the run up to the fiscal treaty referendum seemed to completely miss this point, reaching its nadir in complaints about a “blackmail clause” regarding access to the ESM. 

I believe the crisis can be resolved.   But only if the stronger countries recognise the kind of ongoing official support regime that is required to robustly restore creditworthiness, and all countries recognise the necessary pooling of sovereignty that is required to make this regime politically feasible. 

59 Responses to “Requirements for solvency”

  1. colm mccarthy Says:

    The interest rate channel is alive and well when the country is in a solvency trap. Oh to be in a liquidity trap!

  2. Gtfaway Says:

    Whatever happened to trust but verify?

  3. David O'Donnell Says:

    ‘Spose printing 5 Trillion to tidy up might be out of the question until 2014?

  4. DOCM Says:

    What on earth does “official sector” mean? If it means anything, it is just the “solvent” states of the international community helping out those in financial difficulty, irrespective of what solvent means. By any measure, the US is in serious financial difficulty but it is still the biggest guy on the block and therefore, by definition, solvent.

    With the exception of the peripheral countries, all of the states of the EU are “solvent” to the extent that the shaky world of international bond investors are willing to buy their bonds. Ireland can easily join this company if the Greek (in Ireland’s case Hanrahan) chorus would call a halt to its moaning.

  5. Gtfaway Says:

    Oh, on 4… There’s still a large rotting corpse called Anglo hanging roud the neck of the irish state. A clear statement by the IFAC on the imperative of cutting it loose and on the manifest insolvency problem if we don’t would be nice. Or even a “my personal opinion” John.

  6. DOCM Says:

    @ All

    FYI

    http://www.ft.com/intl/cms/s/0/c5ef5ef8-21c5-11e2-9cb4-00144feabdc0.html#axzz2AcAofRZa

    http://en.wikipedia.org/wiki/Lilliput_and_Blefuscu

  7. David O'Donnell Says:

    [...] recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

    By Simon Johnson (2009)

    http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/

    And burst the Conflationist Fallacy into smithereens …. we are THE exemplar.

  8. David O'Donnell Says:

    fyi

    The eurozone’s sovereign-debt crisis both reflects and reinforces a banking crisis, most glaringly in Spain, but also in Italy, Ireland, and Greece. The European Commission’s plan for a eurozone-wide banking union aims to sever the link between public debt and banks’ solvency by instituting a common regulatory framework. In a new Focal Point, Project Syndicate contributors consider whether that will be enough to bring long-term stability to the eurozone. Commentaries include:

    European Commission President Jose Manuel Barroso on why a banking union is needed

    Howard Davies on flaws in proposed banking union reform

    George Soros on why Germany must lead or leave the eurozone

    Former ECB President Jean-Claude Trichet on what makes the EU exceptional

    To read the full Focal Point, click here.

    http://www.project-syndicate.org/focal-points/sticking-with-the-banking-union

  9. grumpy Says:

    How much more political integration is likely to be required before the EZ core take advantage of the Pathways and Gateways open for them to properly bail out the periphery, given that wealthier regions in Spain are increasingly hostile to assisting less wealthy regions of Spain?

  10. grumpy Says:

    @Colm mcc

    If a country gets stuck in a Solvency trap long enough, might it actually dissolve?

  11. David O'Donnell Says:

    No. It would crystallize due to evaporating liquidity and lack of a suitable revolutionary catalyst. That is, it morphs into dead rock.

  12. Frank Galton Says:

    Does PSI as used in the post mean private sector involvement or public sector involvement?

  13. Anewdawn Says:

    Donal Donovan of the fiscal council pours a whole bath of cold water on any prospect for debt relief in the times.
    http://www.irishtimes.com/newspaper/opinion/2012/1030/1224325894281.html

    failure to deliver on such expectations, despite the best efforts of the Government, apart from possible political difficulties, could cause public disappointment and discourage confidence.”
    Do you think so? Gosh…

  14. seafóid Says:

    My attention was drawn to “unanticipated adverse growth outturns ”

    Unanticipated by whom?

    Interest rates are at rock bottom. Why? Because the financial system is in a coma and there is no growth.

    Why would Ireland be expected to grow ? How ? By exporting to the EZ ? Which is not growing.

  15. Joseph Ryan Says:

    On Munchau’s question as to why anybody would be more optimistic now than six months ago, how about this argument.

    Draghi’s OMT is at least a promise to try to keep the patient alive with something more substantial than lectures on the hazards of getting ill and the benefits of dieting.

    @John McHale

    ” And (4) the link between banking-sector losses and state debt must be broken. ”

    Absolutely. The Spaniards would surely agree with you. But the private sector and official supporters (ECB etc ) want future profits back ‘where they belong’.

    Per the Troika’s report last week, we are already committing to hand the bank profits back to private sector. Funny decision that, imho.
    I wonder what is the annuity value of the current ELG to the government.

  16. brian lucey (@brianmlucey) Says:

    John : Almost by definition a country cant be insolvent as we normally think it. What happens is that it becomes illiquid (tax or other revenue don’t allow the servicing of debt and that then spirals out of sight). Countries then default, restructure something (spending or income), inflate or repress the debt.
    So the issue is actually liquidity, unlike banks where the actual insolvency (assets v liabilities over any reasonable horizon) issue comes to play
    The European problem is that countries are facing levels of debt with levels of servicing costs that are “too much” to bear. Now, the issue becomes in that case who defines what is too much. Therefore it’s a political issue.

    Its also here a moral issue. The ELA extended on the wretched anglo adds to Eurozone money. What is the moral weight of that (even if taken across all other similar banks) versus any reduction in services? Is the abstract issue of potential Eurozone inflationary pressure down the line more morally superior than a single additional child in a classroom? Or a reduced childrens allowance? Or even reduced lawyers fees? I know this is an economics blog but it cannot be a moral free zone.

  17. Yields or Bust Says:

    @Brian Lucey

    Fully agree with the above I think you’ve got it about right.

    Just one important idea - economies are about the people and the lives they live in their chosen country (choice is not that simple in many instances as you know) but the economy can’t grow itself out of its liquidity issue with half the population within it currently insolvent - this is what we have today.

    The Govt (and the official sources) in my view has put their own liquidity ahead of the people in the hope that a liquid/solvent Govt can pull the people behind it. It can’t. Economies work exactly the opposite i.e. the people provide for the Govt and the Govt then allocates based on social and other needs.

    The current policy choices may have worked in the Ireland of the 1980s but not now because today half the population are insolvent and the rules and the solutions need to change to reflect this fact. As far as I can see JMcH still doesn’t get this because why would he sit on a council whose aim it is in life is to restore the liquidity of the Govt as soon as possible and to hell with the consequences becuase this is what faster/harsher austerity as proposed by the Fiscal Council strives to do.

    Its so blantantly obvious that the only way out of this mess is private debt relief on a grand scale and following that the Govt will restore its own balance sheet - but not ahead of the people.

  18. Shay Begorrah Says:

    @brianmlucey

    Its also here a moral issue. The ELA extended on the wretched anglo adds to Eurozone money. What is the moral weight of that (even if taken across all other similar banks) versus any reduction in services? Is the abstract issue of potential Eurozone inflationary pressure down the line more morally superior than a single additional child in a classroom? Or a reduced childrens allowance? Or even reduced lawyers fees? I know this is an economics blog but it cannot be a moral free zone.

    There are three schools of thought on that issue here.

    (1) Yes, this blog is a moral free zone, as is the current EU and this is how it should be. Moral issues are impossible to price and so have no place in economic discussions. Instead we’ll stick to the facts, like rational expectations, the efficient markets hypothesis and the purifying effect of market discipline on the otherwise dissolute character of countries not bordering Germany.

    (2) People with their savings in Euros in morally more upstanding countries (more neoliberal) have a superior right to see the value of their savings protected than failing countries have to protect their unfairly high standard of living (”Hayek, I can walk!”).

    (2) Isn’t the most pressing ethical concern about the moral hazard of hardworking creditors not being repaid, or indeed people being offered incentives to have children with special needs?

    Really Brian, try and be serious and focus on Croke park and pro-cyclical fiscal rules.

  19. John McHale Says:

    @Brian

    I actually don’t find the solvency/liquidity distinction that useful for the current situation. It seems to me that the key question is whether other euro zone members and others in the international community are willing to provide funding support on conditions that are politically feasible in the recipient country. The availability of such support — even if not drawn down — will be critical to the creditworthiness of vulnerable euro zone countries for some time to come. It is true that the situation for some countries is one of multiple equilibria, and thus has features of a classic liquidity crisis. This is most obvious for countries still meeting all their needs from the bond market, such as Italy and Spain. But given that weak creditworthiness is associated with a “fear of a costly default”, even countries not in the market could face feedbacks between growth and creditworthiness. The fear of default lowers growth; and low growth raises the fear of default.

    As an aside, I take DOCM’s point about the approrpriateness of the term “official support”. It is a hold over from situations where it was primarily the IMF that provided such support. It might be better to refer to it as collective support, given that it involves collective (even if for now asymmetric) risk sharing within the euro zone.

    On the ELA, I don’t buy the argument that just because the money was “printed” it is any less real money than if it had been transferrred from other governments. Under an inflation targeting regime, the amount of money printing and thus seigniorage revenunes are effectively fixed — there is still a budget constraint. I don’t see the main issue as one of inflation, which the ECB has the instruments to control. It is more an issue of the distribution of seigniorage, and thus very similiar to the broad debate about the appropriate distribution of the costs of the crisis.

    Of course, in the midst of a crisis there are tradeoffs to be made. Significantly extending the effective maturity on the ELA (or its replacement) — i.e. allowign the specially created money to exist for longer — would significantly ease medium-term funding requirements and possibly the present value of this part of our debt. To the extent that this helps Ireland to return to the markets at an affordable interest rate it could have significant benefits for euro zone crisis resolution through a positive demonstration effect. This is our best argument, and it seems to have traction.

  20. brian lucey (@brianmlucey) Says:

    John
    a) agree the solvency-liquidity issue tracks poorly to the sovereign level (as badly as accounting rules track to central bank balance sheets)

    b) Never said ELA wasnt real. Its very real. I naively thought central banks created money to oil the wheels of society… Agree its about seignorage/inflation costs, but again, there was me thinking we were all in this together as a union. It cant be one way the only way and thats why its political. Our friends in the center can pay by inflation/seignorage costs, by lower exports in an overvalued new pure dm, or by transfers. We pay by getting more like them, they by us. The alternatives are a more hobbesian (no eddie not you) europe and that worked well…
    c) Thats semantics (but ok…) Lorcan Roche Kelly suggested a 100y ELA. Karl W now suggests 1000. Both are in PV terms almost the same as letting it sit forever. Thats what walking from the wretched note amounts to - an infinite extension. My fear is that people in DFin think 40y = ∞y. Theres a big difference. Asking for 40 we will be lucky to get 30. Asking for longer we get longer. That is if we get anythign other than a harvey smith….

  21. eamonn moran Says:

    @ John mchale
    “My starting point on the solvency issue is also quite pessimistic.”
    Unfortunitely its actually the most optimistic I have seen from any Irish economic commentator.
    @ Brian Lucey
    Brian I disagree. I think when a country no longer has control over its own currency it can become insolvent.

    Japan US and UK cant really become insolvent without gross negligence from their central banks but Greece Spain Ireland Italy and Portugal could.
    Isnt a default a reflection of insolvency?
    Some people were saying during 2008 that the banking problem was a liquidity rather than solvency issue.
    But in banking, due to the way they are legally set up I think they are practically the same thing.

    @ all
    Getting back to growth being the big issue now facing the economy.
    I want to point out some work I have been doing that has a big impact on the Growth in the domestic economy.
    There are now 163,000 less people in their 20’s living in ireland than 4 years ago. The employment rate for the 618,000 that remain is about 55% and was 72% 4 years ago.
    Young people spend most of their money in the domestic economy
    How can you get growth in the domestic economy when this is the case?

    PS I am going to be talking on newstalk tonight about Irelands Jilted generation. They are the ones taking the brunt of the Croke Park agreement and Private sector Employers decision to let young employees go rather than reduce wages.

  22. Actuary Says:

    “I believe the crisis can be resolved. But only if the stronger countries recognise the kind of ongoing official support regime that is required to robustly restore creditworthiness, and all countries recognise the necessary pooling of sovereignty that is required to make this regime politically feasible.”

    Missing the crucial “should” question which naturally comes before the “can” question.

    Should the crisis be resolved in this fashion is the question that is not be addressed anywhere.

  23. Gavin Kostick Says:

    @ Eamonn Moran

    What time may I ask?

  24. eamonn moran Says:

    You will have to set an alarm! :) about 10;45pm I believe.

  25. David O'Donnell Says:

    Yes, it is Systemic, Political & Ideological

    The systemic is now recognised - weaknesses and aporias at one level can only be solved by moving to a higher level of EZ Integration …. (banking union etc fiscal korset flawed as it is;

    Nature of this level is primarily a political matter …..

    And the real stumbling block here is Ideological …. the missing key is a properly functioning ECB as a LOLR capable of tidying up …. yet the German Ideology of the moment is rabidly anti-Keynes and rabidly anti monentary financing [which impacts on our little PN issue; and CDU led or Socialist led or a new Grand post sept 2013 does not change this] -

    I fail to see how the Conflationist Fallacy can be torn asunder without printing a decent few Trillion to tidy up the EZ Sov Debt and then move to EuroBonds …..

  26. paul quigley Says:

    @ john mchale

    ‘(3) The conditionality must be flexible – unanticipated adverse growth outturns should not lead to requirements for ever larger adjustments. ‘

    What about jobless growth, which is the only kind we are likely to get on this island for the foreseeable ? Is that an ‘unanticipated adverse growth outcome’ ?
    The FDI financial flows tail is wagging the Irish econoy dog, which means that most orthodox analysis must be built on sand..

  27. Joseph Ryan Says:

    @Anewdawn

    “Donal Donovan of the fiscal council pours a whole bath of cold water on any prospect for debt relief in the times.”

    http://www.irishtimes.com/newspaper/opinion/2012/1030/1224325894281.html

    I have just read that article. It is a terribly dispiriting piece. Not only is the white raised, the author seems anxious to wrap the country in it by concluding after some very poor analysis that;

    “But all told, a very large part of the €64 billion pumped into the banks by the State would remain unrecouped.”

    Every cent of that money should be recouped.
    The unguaranteed bondholders at the time of the ECB threats were over €20 billion. This matter should be contested at ECJ level and ELA withheld until the case is decided.
    The remainder should be recouped by an levy starting now on Irish retail banking. The method is simple. High yielding preference shares to be retained until the €64 billion is paid.

    I have to ask the question openly;
    How is the Irish government expected to conduct any kind of tough negotiation, when a member of the Fiscal Council that advises the government, goes publicly on record with such a supine capitulation?

  28. eamonn moran Says:

    @ John McHale

    John given that you believe “The fear of default lowers growth”

    How are people supposed to believe your openly expressed opinions on our chances of avoiding default?

    Are you basing your opinions magical wonders of the confidence fairy?

    I also agree with Joseph Ryan above
    How can the government be expected to hold negotiations on a debt deal when members of its own fiscal advisory council are sabotaging their efforts?
    Is their no fight in either Donal or yourself?
    We have clear moral arguments and the government genuinely seem to believe they are getting somewhere with negotiations. As Colm McCarthy already said they were not alone in believing they were getting somewhere. Ollie Rehn also believed we were. For people that hold a lot of weight in the powers of confidence fairies Id suggest Donal’s piece has done major damage.

  29. grumpy Says:

    @Brian L, John Mch

    The Irish effectively got permission to print money on a lime limited basis with a ‘de-printing’ schedule attached. It’s not a popular message to convey, but the Germanic perspective on this is that that was an act of generosity. Of course, had the use of actual, borrowed, pre-existing money been insisted upon there was a bit of a cul de sac there for Buba, but I am, yet again, sceptical that that has been pointed out to them in a suitably blunt manner by people who could carry the conversation beyond the first salvo.

    Where we might be going with this could be that all the ’special case’ stuff is a means to placate the Buba wing of the ECB as the ‘de-printing’ schedule is extended. That may be the extent of the significance of that phrase.

    Ireland should be making the argument that the EZ had no alternative to the printing, and that it should be Europe’s job to ‘de-print’ it, not just Ireland’s. But, again…

  30. John Foody Says:

    @ Eamonn Moran

    This is something that really pisses me off. Though government reaction to the crisis in terms of tax increases and spending cuts appears equitable.

    I feel this is used to falsely imply the crisis burden has been shared equally. Which of course is nonsense, the 2 groups that have paid the most are the unemployed and the boom time borrowers, both problems disproportionality affect the young. Does it not stand to reason that the adjustment burden then should be favoured toward the young?

    So what does the state do, block off work oppurtunities in the public sector or via public sector spending. Increase pension age. Increase 3rd level fees and decrease 3rd level supports. About the best thing they’ve done for the young is agree to an extension to the Canadian work visa from 1 year to 2 year for under 35s. Of course demand will outstrip supply, so some will be left behind on this particular safety valve too.

    Meanwhile the state class continue to protect boom time wages and expenses.

  31. Michael Hennigan - Finfacts Says:

    The easiest part is for the struggling economies to ask the rest to provide transfers.

    So vision and courage is expected of others. However, it’s a different story when it comes to the balance of interests within the struggling countries. They are not the only countries with this problem.

    In Spain it was young temporary workers who were mainly the victims of the recession.

    Among core countries, there are also issues of contention: there is a margin of 20% in labour force participation of 55-64 year olds between France and Germany as a lot of French men retire early - - the Germans would ask why they should subsidise them?

    As for growth, the rise in finance coincident with deregulation offset industrial decline from the late 1980s in the UK but several other European countries struggled until the US tech and credit booms.

    The global market was much smaller than today in for example 1990 and as it expanded, manufacturing prices declined for decades.

    Today, there is much more competition for jobs in several sectors.

    Business services productivity growth in Europe has been zero since 1980.

    Ireland’s workforce has expanded by almost 400,000 since 2000 but no jobs have been added in the internationally tradeable sectors of the economy.

  32. brian lucey (@brianmlucey) Says:

    Grumpy
    Thats exactly what ib been saying for three years. There is a good argument - it might not be accepted but its a good solid one. The issue is however can we argue it? Heirs of Richeleu and Bismark v a nice union official and a teacher. On whom would you place your bet?
    BTW - where are all the game theoreticians gone…if anything cried out for a GT analysis this one does.

  33. rf Says:

    “BTW - where are all the game theoreticians gone…if anything cried out for a GT analysis this one does.”

    http://www.latribune.fr/getFile.php?ID=5314959

  34. David O'Donnell Says:

    off thread CARTOON OF THE DAY The New “Austere” Dutch Admin

    Netherlands
    A happy marriage
    30 October 2012 NRC Handelsblad Rotterdam

    http://www.presseurop.eu/en/content/cartoon/2971411-happy-marriage

    Wonder who the ‘hopefully new’ finance minister will be …?

    @Brian Lucey

    Cooperative Game Theory one presumes!

    @eamonn moran

    I would not get too excited about Donal Donovan’s op-eds in the Times ….. his early efforts, noted on this blog, were somewhat wacky and of the conflationist fallacy variety of ’suck it up’ and ‘grin and bear it’ for the lumpen plebs.

  35. David O'Donnell Says:

    MUST READ

    Brian Hayes glows with quiet pride. Ireland could serve as an example for other states in crisis, the Minister of State at Ireland’s Department of Finance said recently in Berlin. Despite high deficits and debt, rising unemployment and falling wages, Ireland has in fact been getting pats on the back from all sides for months now. It has, after all, something going for it: export surpluses. Ireland is selling its wares around the world and putting its own house in order at the expense of other countries. And gradually, the other members of the eurozone are falling into step with Ireland. In the Americas and Asia, observers are watching this unfold with unease.

    http://www.presseurop.eu/en/content/article/2968981-we-can-t-export-our-way-out-crisis

    OMG!

  36. Gtfaway Says:

    Is he any relation to the Hayes fellas said last week the debt was unsustainable?

  37. Robert Browne Says:

    @ Yields or Bust
    + 1 “it is so blatantly obvious…”

  38. paul quigley Says:

    @ Brian lucey

    ‘Heirs of Richeleu and Bismark v a nice union official and a teacher’

    There is a comforting fantasy that we have developed a modern state and a modern economy. All the evidence is that what we ‘have’ is a foreign dominated entrepot and a set of reform-proof domestic institutions. We aren’t going to win any economic world cups and we won’t even be qualifiying under the present ‘management’.

  39. David O'Donnell Says:

    PMI, GDP, Consumer sentiment EU - no optimism in these graphs …..

    http://soberlook.com/2012/10/eurozone-survey-indicators-look.html?utm_source=BP_recent

    FT: - A poor week for the German economy will focus more eyes on the latest data from the eurozone heartland, the GfK consumer sentiment index released on Friday.

    While stable numbers are expected from the German consumer, caution is the watchword after the surprise this week of the Ifo business confidence gauge hitting two-and-a-half-year lows and German PMI data declining for a sixth straight month. Could Germany become a bigger worry in the eurozone?

    h/t nakedcapitalism for link to soberlook.com

    @Minister of State Brian Hayes

    May we have a link to the ‘Berlin Speech’ please?

  40. DOCM Says:

    @ All

    If this blog post is read in conjunction with the Der Spiegel interview with Draghi and the article by Donal Donovan, one has, IMHO, an overview of all the aspects of the euro crisis, and Ireland’s role in it.

    The job of the FAC is, incidentally, if I am not mistaken, to offer impartial advice on the government’s budgetary choices. It has nothing whatever to do with deciding the government’s EU negotiating strategy and its members are as free to express their opinions as anyone else in this context. Donal Donovan happens to be right and, according to a recent IT poll, three out of four of the population agree with him. His worries about unrealistic expectations are, therefore, unnecessary.

    Draghi’s interview is a masterpiece of exposition. It is readily understandable irrespective of the level of technical knowledge of whoever happens to be reading it. It is clear that his is the central role at the moment. He is in the position of Gullivar.

    The gameplan between now and Christmas at a European level is clear at least as far as Berlin is concerned.

    The problems that Irish politicians have with their budget are just that; their problems!.

    Their European counterparts are little better.

    Will the gameplan work?

    Ultimately, it is a question of which leader will dare to collapse it. It is clear that Berlin has to be more accomodating and to relinquish some of the advantages which other larger states foolishly conceded to Germany under Schroeder. If Merkel wishes to prove that she can fill the shoes of Kohl, now is her moment.

    Draghi makes clear that the ECB is acting strictly in the context of monetary policy; its exclusive competence where governments have ceded full sovereignty. However, he also refers to transfers of sovereignty with regard to budgetary matters. There is the rub! It is clear from the Lisbon Treaty that countries have agreed only to coordinate their economic policies and the EU has been making do with general internal market provisions of the treaties tao adopt reguations in relation to the Six Pack and the Two Pack. Enter stage right the Stability Treaty and the Pringle challenge before the ECJ! Assuming that the treaty does not contravene any commitments that countries signing up to it have under the Lisbon Treaty, it should be plain sailing. But irrespective of the judgement of the court, the basic problem remains viz. a treaty change appears necessary.

  41. David O'Donnell Says:

    @Brian Lucey

    Shapley Nobel Resurrects Von Neumann Versus Nash Debate

    Leonard who recounts how Shapley was working at RAND in 1948 and successfully challenged von Neumann on a mathematical point. As a result, von Neumann reportedly offered Shapley a stipend to attend Princeton, which got him there to contest with Nash intellectually and personally. However, while Tucker was Shapley’s major prof, his real mentor, von Neumann, was not formally a member of the math dept., but rather of the Institute for Advanced Studies nearby. In particular, he followed von Neumann in becoming a deep student and advocate of the use of cooperative game theory, which usually ends up being the study of coalition formation and interaction. This would lead him to develop the idea of the core in economic theory, as well as some of his other major ideas, including the Shapley value from his thesis, and his analysis with Shubik of power relations in groups. He would later coauthor a book with Robert Aumann on these matters in 1974, with Aumann publicly proclaiming him “the greatest game theorist of all time.”

    http://econospeak.blogspot.ie/2012/10/shapley-nobel-resurrects-von-neumann.html
    h/t nakedcapitalism

  42. brian lucey (@brianmlucey) Says:

    Yes, I knew the “euro breakup” work. I think the game now is : does ireland walk from the prom notes, and if so unilaterally or in some cooperative manner.

  43. John Foody Says:

    @ B.Lucey

    Do you mean how ‘the game’ should be or how the game is, because I doubt anyone in government is considering walking away from Prom Notes unilaterally.

  44. Joseph Ryan Says:

    @DOCM

    The FAC’s job, well paid presumably, is to offer independent advice on budgetary matter.
    But there should be no Chinese walls for a member who publicly rubbishes the prospects of the government however incompetent, in the middle of negotiations of some sort, of securing a monetary advantage for the country.

    The article is unforgivable, in the context of a person on the public payroll.

  45. John Foody Says:

    @ Irisheconomy.ie admin

    Your clock needs changing.

  46. Fiatluxjnr Says:

    Interesting snippet from a forthcoming book by the former French finance minister…
    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_30/10/2012_468029

    Democracy?

  47. David O'Donnell Says:

    fyi

    ‘Jolly’ Karl Whelan’s take for Forbes ….

    If the deadlock over a bank debt deal lingers on and the Irish economy continues to flounder, financial markets may start to change their minds about Ireland’s long-term prospects.

    http://www.forbes.com/sites/karlwhelan/2012/10/28/after-mrs-merkels-irish-jig-are-irelands-problems-solved/

  48. Fiatluxjnr Says:

    @DOD
    Re Karl’s article..how do you spin positively and negatively at the same time?
    Maybe PR Guy could help out.

  49. David O'Donnell Says:

    He musta read Hegel before becoming an economist.

    Alternatively one could mimic a quark with the aid of a Higgs_bosun generator, or check out Schroddinger’s cat, or simply join the PDs or Fianna Fail!

  50. Robert Browne Says:

    As regards Donal Donovan breaking ranks. Give me a realist any day of the week rather than confidence fairies and pulling on the green jersey. Maybe if more economists actually told the truth about the state of the country, the impending mortgage crisis, employment crisis, looming pensions crisis, the inability of the state to collect enough taxes from a shrinking economy etc we might find ourselves higher up the list of our EU partners priorities.

    The best boys in the class were told yesterday to go away and come back with, preferably after the German elections, a rather imaginative essay titled “Why We Are Truly Special”. Meanwhile, the head of Dublin City Council CC earns more than the German Chancellor? Plenty of ammunition then to prove we are indeed “special”. This country is insolvent and the sooner we admit it the sooner we can start to solve our problem by basing them on premises that are not fictitious.

    In terms of writing debt write off we need what Greece has already achieved but the mantra on our politicians lips is we are not Greece we are not Iceland we are “special”.

  51. Michael Hennigan - Finfacts Says:

    @ Robert Browne

    +1

    @ Joseph Ryan

    In a system where spin is so pervasive, it’s good to have people like Donal O’Donovan — because such people are far outnumbered by the spoilsmen and those who go with the flow.

    Members of the IFAC do not get a salary.

    We mustn’t have much of a case if the article sabotaged the Irish position.

    I note that Arthur Cox, purveyors of legal services to the State and multinationals, have deleted their brochure, ‘Uses of Ireland for German Companies,’ from their web server (it’s still available on Google docs).

    It would make interesting reading for Drs Merkel and Schäuble.

    Intellectual Property: There are numerous advantages for multi-national companies with large Intellectual Property (”IP”) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property. The Irish IP regime is broad and applies to all types of IP. A generous scheme of capital allowances as well as a tax credit for money invested in research and development in Ireland offer significant incentives to companies who locate their activities in Ireland.

    A well-known global company recently moved the ownership and exploitation of an IP portfolio worth approximately $7 billion to Ireland.

    i.e. Accenture.

    When evasion/avoidance becomes a multi-billion dollar issue it becomes a problem.

    Google UK and Starbucks executives have been asked to appear before a House of Commons committee next week to explain why they pay low taxes or none in the UK.

    Google made another loss in 2011 in the UK even though it is their biggest overseas market.

  52. DOCM Says:

    @ All

    FYI

    The options for the various protagonists for the meeting of the European Council on 22 November.

    http://www.cy2012.eu/index.php/en/file/7iV7gepKq3D2nxXo9+AUZw==

    Did somebody mention the possibility of cuts to the CAP? (The Irish media has awoken!).

    http://www.independent.ie/business/eu-governments-fail-to-agree-on-areas-longterm-budget-3278220.html

    The justification for this link in the context of the present thread is the impact that agreement might have in improving economic sentiment and the certainty of the negative impact on sentiment in the event of failure to do so.

  53. eamonn moran Says:

    @ Robert browne
    I am only asking why John McHale and Donal Donovan claim to acting realisticly by telling us we are not getting any bank bail out and then invoke the need for a confidence fairy to justify remaining positive about our chances of default “The fear of default lowers growth”?
    They damn the confidence fairy one minute and invoke it the next.

    It seems odd to me.

    @ michael hennigan
    You should take a look at the presentation Conor McCabe gave on the Shadow banking system recently. Similar stuff to what you are mentioning above.
    Whats your take on this IFSC lobby group?
    http://www.irishtimes.com/newspaper/ireland/2012/1008/1224325015200.html

  54. David O'Donnell Says:

    @John McHale

    Two excellent and very relevant threads. Engagement appreciated.

    @all
    Text from Blind Biddy: Not my debt.

  55. Joseph Ryan Says:

    @Michael Hennigan

    We will have disagree both on the merits of Donal Donovan’s article and on the principle of whether a person paid to advise the government on critical budgetary matters, should publicly rubbish the State’s stated case to improve those budgetary matters.

    re;Remuneration of PAC;
    You need to have a closer read of the documentation.
    http://www.fiscalcouncil.ie/funding/.

    In addition there is the high profile that attends such appointments, thereby enhancing other sources of income.

    One way or another it now seems that we are headed for a bad deal on bank related debt. Official Ireland has tut-tutted any approach other than abject surrender, yet again.
    But they would do that, wouldn’t they. Things are going swimmingly for them in financial terms.
    Ireland will again surrender, to keep its elite in clover.

    That Simon Johnson article from 2009 (posted here recently) got it exactly right in terms of how elites protect themselves when the IMF arrives. In fact it seems that the very purpose of IMF arrival is in fact to protect existing elites.

  56. Michael Hennigan - Finfacts Says:

    @ eamonn moran

    Bank of Ireland classified €35m worth of spending in 2010 as R&D. That compared with Glanbia’s worldwide total of €13m.

    The FDI lobby is pushing an open door — it’s not enough to have a low tax rate, spending including the kitchen sink gets a 25% R&D tax credit. Every year, they get more.

    The big risk with the facilitation of massive tax evasion (why are only some accounting manipulations bad?) which beyond law firms, does not give much of a return to Ireland, is that other European countries will call time on it at some stage, impacting other incentives.

  57. Fiatluxjnr Says:

    The RTE report on the appearances before the Finance committee says that Anglo owes the Central bank 43 billion And is repaying it from assets sales…however Richard Woodhouse says they are selling 100m a month of assets. Therefore it would take about 36 years of asset sales ( at the present rate) to repay the Central Bank. ???????

  58. DOCM Says:

    @ All

    FYI a commentary by Pat McArdle.

    http://www.independent.ie/business/the-ecb-is-our-best-bet-for-any-alleviation-of-financial-burden-3279416.html

  59. eamonn moran Says:

    @John Foody.

    Thanks john. Yep you are right. I am trying to get some traction on this but its very difficult. Lots of those who should be interested have vested interest in staying quiet.

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