Year: 2012

Spain, Ireland, and austerity.

Spain’s banks are getting a series of loans. Hooray. The rather vague Eurogroup statement on Spain is here. It’s being reported that Spain will require up to 100 billion euro for its banks, which will be added to its national debt. The money will come in tranches, first from the EFSF, and then later from the ESM. There aren’t specific austerity measures attached to this series of loans. People in Ireland are sure to lose their minds over the fact that there won’t be specific conditionality attached to these loans, and the IMF will be ‘observers’ rather than actually part of a Troika of funders. The talk generally is likely to be something like ‘why couldn’t we get such a deal’, and apparently Minister Noonan will be bringing this up with his colleagues at a later date.

It should be noted however that Spain is already enduring a fair bit of austerity, has already signed up to the Fiscal Treaty, and so will have to produce a `programme’ of sorts under its own steam. Spain’s economy is also in pretty rough shape. I made the chart below from FRED to show household debt as a percentage of GDP (left hand axis) and unemployment in Spain (right hand axis), two variables we should be interested in. Clearly with an unemployment rate heading for 25%, a very indebted household sector, and a set of bunched bank balance sheets, the Spaniards have their work cut out for them even without a further programme of adjustment.

A few things to consider:

1. Will treating Spanish banks separately (in some sense) to the sovereign prevent its bond yields from spiking?

2. What will the effect on the EFSF and ESM balance sheets from a large scale Spanish ‘withdrawal’?

3. Will everyone now immediately target Italy (or Belgium) as the next domino to fall?

Mistakes/self interest versus European pressure

Dan O’Brien examines the grievance-based case for debt relief here.

More evidence of Irish success

The CSO press release on the latest Irish employment and unemployment statistics is here. They are pretty terrible.

As Colm has frequently pointed out, it is very difficult to credibly ask for a new deal on bank-related debt when you are simultaneously telling the people in charge in Brussels and Frankfurt how well we are doing (i.e. how successfully their strategy has been working in Ireland).

Perhaps it’s time to ignore Johnny Mercer and start accentuating the negative, even at the risk of a little pandemonium?

Seamus Coffey on Resolving the Euro Zone Banking Crisis

Seamus Coffey has an excellent article on resolving the euro zone banking crisis in today’s Irish Independent (HT DOCM).   For the Irish situation, Seamus puts the proper focus back on the case for extending the maturity of the promissory notes/ELA arrangements as the correct focus of negotiations.   The idea that the ESM would retrospectively cover already crystallised losses in the Irish banking system looks fanciful, and only serves to create confusion about what Ireland needs – and could realistically be provided – in order to further the shared objective of getting Ireland off external assistance.  

In the certainty of attracting vitriol in comments, I think Seamus is being a bit hard on the ECB.    The problem that the ECB faces is a bank creditworthiness crisis across a significant part of the euro zone.    In fairness, they have been willing to meet their proper function of acting aggressively as a lender of last resort to stem deposit flight.   But they can only do this if the banks they are lending to are solvent.   They have insisted that the banks be recapitalised, preferably directly from centralised bailout funds, but failing that by governments, with money borrowed from those funds.  

I think most analysts agree that the future stability of the euro zone will require a form of banking union, with centralised supervision, centralised deposit insurance and a centralised resolution regime that allows for losses to be imposed more broadly on certain classes of bank creditors.   The challenge is how to get from here to there.  In the short term, putting creditors at greater risk of losses reduces bank creditworthiness further, potentially causing the crisis to escalate.   Moreover, given the differences in the solvency of the banks in different euro zone countries, any move towards centralised deposit insurance has potentially large distributional implications across euro zone countries.   If a deposit insurance regime could be agreed behind a “veil of ignorance”, with negotiators not knowing which country they represented, it should be relatively easy to agree to such arrangements.   But alas this “ignorance” is not available.   The messy and fragile two-way process involving greater risk sharing and more credible assurances of mutual discipline will continue. 

Daniel Gros, Dirk Schoenmaker: a Sense of Urgency

Today’s proposals from the EU Commission on banking union offer a draft directive whose operative date would be January 1st. 2015, by which time the game will be well and truly over. It would also apply to the EU as a whole, and has that familiar, watered-down, look to it. 

Here’s a slightly more urgent suggestion from Daniel Gros and Dirk Schoenmaker:

http://www.voxeu.org/index.php?q=node/8069

In Greece, they argue, the sovereign has brought down the banks, while in Spain the banks are about to bring down the sovereign, as happened in Ireland, with a little help from the ECB.

The new ESM needs to be deployed to re-capitalise the Spanish banking system, pronto, as soon as the stress tests have been completed. Placing the burden on the sovereign, before the stress tests, is insane. We have been here before.

They also have a better idea for stopping the bank run in Greece.