Panel comments by Governor Patrick Honohan at BIS Conference on “Sovereign Risk: A World without Risk-free Assets”

This post was written by Philip Lane

Paper here.

6 Responses to “Panel comments by Governor Patrick Honohan at BIS Conference on “Sovereign Risk: A World without Risk-free Assets””

  1. Fiatluxjnr Says:

    The Gov is complaining about the spread on Irish long end and then says..”"The Irish financial situation is relatively extreme, and as such illustrates clearly some of the key problems that have been faced also in other stressed parts of the euro area.”

    ”The pernicious feedback loop from banks to sovereign and from sovereign to banks that re-emerged in the crisis remains strong and damaging,” Mr Honohan said.”

    If the Irish financial situation is “relatively extreme” then the 300 points spread does not reflect the risk associated with our long term bonds….or am I misreading the situation?

  2. DOCM Says:

    @ Flj

    You are spot on! Note, however, the use of the word “relatively”. As usual, this is a beautifully structured and intelligent contribution but situated in that rarefied world occupied, it seems, exclusively by central bankers.

    For a dip into the real world cf.

    The case is overstated but it is closer to the reality.

  3. John Gallaher Says:

    the accompanying slides are here,may be a ‘yank’ thing they were not available in link above.

  4. paul quigley Says:

    @ DOCM

    Terrific link.

    ‘In effect, by assuming that their cost of funds would not deviate much from the ECB policy rate, the banks exposed themselves to a very large “basis risk”. In principle, they could escape this trap if there were a willing purchaser (public or private) with access to funding at a cost that is not contaminated by the sovereign stress. Until such a purchaser comes forward, the banks will have to continue to fund this portfolio at a loss, even on performing mortgages, whose effects will spill over onto their customers and their owners (not least the State).’

    Santa Claus perhaps ?

  5. Paul W Says:

    @ DOCM
    Clearly explains the ideological basis of the current crisis in Europe. I wonder though whether those like John McHale & co. who fervently supported the Fiscal Compact yes vote in Ireland, would accept that ideological ‘pigeonholing’ of their position(s)…?

    “The SGP requires balanced budgets over the course of the cycle. Unless offset by strong-enough private borrowing or export surpluses, fiscal policy is thus afflicted by an anti-growth bias. At best, the SGP allows for the free working of automatic stabilizers. In practice, it does not, and fiscal policy in Euroland is procyclical as a result, which is making the growth predicament even worse. Add the ECB’s asymmetry and hence inherent anti-growth bias in monetary policy into the picture, and it becomes clear why Euroland is unlikely to enjoy long booms, but more likely to get stuck in protracted domestic demand stagnation instead. Growth will largely depend on the strength of global growth and the euro exchange rate.”

    Given the inherent anti-growth bias in the system, what real chance is there for the all important growth that Ireland needs to alter its current disastrous sov debt trajectory? Global growth is faltering /uncertain, while the euro exchange rate is also not supportive at present. Add in also the disastrous social consequences unfolding in Europe and it becomes very difficult to be optimistic about the current path.

  6. DOCM Says:

    @ PQ and PW

    The case is still overstated as it assumes that the Bundesbank is running the ECB. The president of the former would hardly agree.

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