Here.
Year: 2012
The annual festival where economics meets comedy in Kilkenny is on this year from 1st to the 4th of November. I’m speaking at it this year and really looking forward to it. The lineup looks good and the sessions will definitely be interesting. Here’s a video of the type of stuff that goes on. The festival has always sold out. I’m told the tickets are almost gone now so if interested, readers of this blog should book them now.
The following statement by Ajai Chopra, Deputy Director in the European Department of the International Monetary Fund (IMF) is issued in response to media queries regarding the recently published research in the IMF’s World Economic Outlook on the impact of fiscal adjustment on economic growth and its implications for the EU-IMF supported program in Ireland:
“Putting public finances on a sound footing and promoting a durable economic recovery are both imperative for Ireland’s future. To contain the impact of fiscal consolidation on growth, adjustment has been— from the start of Ireland’s EU/IMF-supported program—phased over several years. The composition of budget measures is determined by the government, with the IMF, together with the EC and ECB, emphasizing the importance of implementing high quality measures that are as growth friendly as possible.
“In the current discussion of the impact of fiscal adjustment on growth, it is important to note that no single fiscal multiplier is applicable to all countries and circumstances. And although there is uncertainty around any estimate of multipliers, there is no compelling evidence that a higher multiplier was at work in Ireland than the one assumed under the program. With overburdened bank, household and SME balance sheets, and weak growth in trading partners, a number of factors besides fiscal consolidation have been a drag on growth in Ireland.
“The pace of consolidation under the program has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress in reducing fiscal imbalances while protecting the still fragile economic recovery.”
Colm McCarthy expresses understandable frustration with the pace of developments in meeting the commitments made on June 29th(see here). Central to Colm’s criticism is what he sees as a fundamental inconsistency between the government’s claims of success in its crisis-resolution policies and calls for some form of official relief on banking-related debt.
Since the resort to an EU/IMF bailout in November 2010, the Government has pursued a strategy with two central components. The first is that Ireland’s debt is sustainable, since the economy is recovering and budgetary adjustment will be delivered on schedule. Ireland will re-enter the bond market and exit the programme at the end of 2013. The second is the pursuit of relief from a portion of the bank-related debt, on the grounds that it was improperly imposed.
Last week’s events should highlight once again the inconsistency of this strategy. If things are going fine, why is there any need for debt relief? The best case for debt relief (Greece was relieved of €100bn) is inability to pay.
The insistence that things are fine, that budget adjustments are on schedule, three-month Treasury bills can be sold and Ireland will exit the rescue programme next year, is a serviceable domestic political message. But it is also an open invitation to our European ‘partners’ to offer no assistance whatsoever outside the terms already agreed.
A better negotiating platform, and one with at least equal plausibility, is the following: that the debt is not sustainable and will reach 150 per cent of national income; the economy is flat and will remain so; the politics of further retrenchment are getting too difficult and debt relief is inevitable. The Government should quit behaving like the marketing arm of a debt-management agency.
Although I always hesitate to disagree with Colm, I don’t see the government’s strategy as fundamentally inconsistent. Since peaking at 15.81 percent on July 15, 2011, the yield on the benchmark 2020 bond has followed a strong downward trend to close at 4.53 percent on Friday (Bloomberg). Assuming a recovery rate of 50 percent in the event of a private-sector default, that the yield on the equivalent German bond represents the risk-free rate and risk-neutral investors, the implied probability of default peaked at 83.8 percent in July 2011 before more than halving to 39.7 percent on today.
Of course, a default probability of close to 40 percent is still very high. I think the main reason that the perception of default risk still remains so high relates to the uncertainty surrounding growth prospects. A poor outcome on growth could make the necessary fiscal adjustments to meet the conditions for official support without a private-debt restructuring politically – and possibly even economically – impossible. Adverse growth shocks will also do more damage to the ability to meet deficit- and debt-reduction targets the higher is the starting debt ratio.
Recognising the common interest in a successful return of Ireland to creditworthiness, there is a case for making adjustments to official policies that reinforces the improvements made so far. One such improvement would be to lengthen the period for paying down ELA and make continued access to that funding more reliable. By rewarding countries that meet their commitments rather than the opposite, such actions should also help to reduce official-lender concerns about moral hazard.
I worry that emphasising unsustainability under current conditions would suggest a weaker commitment to meet the conditions required for official support. Any resulting weakening of perceived creditworthiness could itself undermine growth by raising the spectre of Greek-style chaos. I believe it is better to emphasise that Ireland fully intends—and expects – to do what is necessary to avoid default, but there are certain factors that it simply can’t control. Recognising this, there is indeed a common interest in adjusting official support policies to further support a “well-performing adjustment programme.”
The Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, Fiona Muldoon, has been widely praised for her speech to the Irish Banking Federation, calling for faster action by the banks in dealing with the mortgage arrears crisis. The speech makes clear that the damaging nexus of the former Fianna Fail government, linking the politically connected property development industry to the banking industry and an overly compliant bank regulator, is no longer in place. The Irish Central Bank is now able and willing to stand up to the industry that it regulates in order to protect the public interest, and it is supported in this stance by the ruling coalition. This is an important positive outcome.
The speech was a step forward, but it was not an unusually brave speech, despite the impression one gets from the wide praise it received in media coverage. A truly brave speech would not be widely praised, since it would need to unsettle people rather than confirm their existing beliefs. The speech ignores a big part of the reason for the mortgage arrears crisis – the deep-seated Irish political aversion to house repossessions. Without facing up to this big part of the mortgage arrears crisis, there will be no solution. Here is an extra paragraph, offered with proper humility, which might have changed Fiona Muldoon’s partly brave speech into a truly brave speech. I have kept the “teenagers” motif, which was a clever oratorical device in the original speech.
“I cannot come here and give a speech about mortgage resolution without once mentioning repossessions; that would be cowering. The notion that 167,000 mortgages-in-arrears can be resolved without a substantial proportion of repossessions is delusional. We on the senior Central Bank staff could give speeches ignoring this reality, thereby pandering to political sentiment, but we will not do so. Meanwhile, the government’s most recent attempt at reforming Ireland’s repossession laws was a shambles, and virtually the entire law was declared invalid by the Justice Dunne ruling in July 2011. This has left Ireland, and it’s banking system, with virtually no repossession system at all since that date. Rather than fix this urgent legislative cock-up of its own creation, the government has chosen to ignore it and pretend that it will go away. The ruling coalition is acting like a bunch of teenagers; blaming everyone else in the household for their problems while neglecting to do their own homework.”