Simon Wren-Lewis on a different kind of Lender of Last Resort

Putting questions of immediate political feasibility aside, Simon Wren-Lewis asks in a new post if there is a better approach to establishing a fiscal Lender of Last Resort (LOLR) for the eurozone. 

As Simon notes, I expressed some sympathy for the Commission in a previous post.    The Commission recognises the fragility of the eurozone in the absence of a LOLR.   This follows from the well-know multiple equilibria problem (see here).   There is good equilibrium with low expectations of default and consequent low interest rates, creating a debt sustainability situation that validates the initial expectations.  But there is also a bad equilibrium with high expectations of default and consequent high interest rates, again creating a debt sustainability situation that validates the initial expectations.   In part to develop the political support for a fiscal LOLR to coordinate expectations around the good equilibrium (where it is thought to exist), the Commission has pushed the strengthening of fiscal rules and support programmes for countries in difficulty that lean heavily fiscal (and other) conditionality and intrusive surveillance.   

 Simon usefully asks it there is a better way, while recognising the huge political obstacles at present.   His proposal centres on a significant change in the approach to OMT.   Based on an assessment of debt sustainability by a collective of independent fiscal councils – effectively an assessment of whether a good equilibrium exists – the ECB would commit to the necessary bond market interventions to keep interest rates low.   Assuming no change in its mandate, the rationale for the ECB’s participation would presumably be that it would otherwise be unable to operate a single monetary policy where, without their own central bank capable of acting as a LOLR, many countries in the eurozone are susceptible to falling into a bad equilibrium, with the added risk the entire single currency project could unravel.   One question is whether countries facing debt sustainability concerns would be politically capable of making the necessary difficult adjustments without in the absence of programmes with explicit conditionality.

Another dimension of Simon’s proposal is that the fiscal rules should become more sensitive to the aggregate fiscal stance of the eurozone in the context of a zero lower bound on monetary policy, with the obligation to adopt less contractionary policies falling on countries with stronger fiscal positions. 

It is interesting to contrast this proposal with the recent widely discussed observations of Ashoka Mody on the relative merits of adjustment/assistance and default as a means of dealing with debt sustainability challenges (Morning Ireland interview here).    Ashoka’s view is informed by his reading of history of sovereign defaults as involving relatively low output costs.   A rather different reading of the history is given in this survey of the literature on sovereign defaults.    Moving to a regime with a low default trigger would also make private investors extremely wary of sovereign debt, increasing the fragility of market access.   For the long-term, such a low moral-hazard regime certainly has attractions — but it would be one hell of ride along the way.    

Euro Crisis Roundtable: TCD, April 18, 4pm

Euro Crisis Roundtable

Chair: Kevin O’Rourke, Chichele Professor of Economic History, University of Oxford

Speakers: Richard Portes, Hans-Werner Sinn, Alan Taylor

Date: Thursday, 18th April
Time: 4pm
Venue: The J M Synge Theatre, Room 2039, Ground Floor Arts Building, Trinity College Dublin

This is a jointly organised lecture by the IIIS and the Trinity Long Room Hub. This lecture series is an associated event of the Irish Presidency of the Council of the EU. The series will run from January to June. Admission is free and all are welcome.

A discussion of the future of the euro area with leading experts.  Hans-Werner Sinn is President of the CES-ifo Institute and one of Germany’s most prominent economists. Richard Portes is Professor at London Business School and President of the Centre for Economic Policy Research.  Alan Taylor is Professor of Economics at the University of Virginia and an expert in financial economics and economic history.

ESRI Research Seminar: “What Explains the German Labor Market Miracle in the Great Recession?”

Speaker: Michael Burda (Humboldt University of Berlin)
Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 25/04/2013, 4pm
Abstract available here
All welcome, no booking required.

Eurostat: Labour Costs

Eurostat have published their first estimates of hourly labour costs in 2012.  Ireland had the tenth highest hourly labour costs in the EU27 (eighth in the EA17), though is fifth highest for ‘wage and salaries’ (third in the EA17) due to lower than average ‘other costs’, which is primarily employers’ social contributions.

In 2008, Irish labour costs were 112.5% of the EA17 average and in 2012 this had fallen to 104.0%.  Over the same five years, hourly labour costs in Ireland are estimated to have been largely unchanged (+0.8%) compared to rise of nearly 9% in the EA17.  Only Greece in the EA17 recorded a decline (-11%) over the five years and all of that occurred in the last two years.

For Ireland, non-wage costs are estimated to be 14% of hourly labour costs, compared to an EA17 average of 26%.  Only Luxembourg (13%) and Malta (8%) are lower.

Reminder: Gaspar Lecture, TCD, 9am tomorrow

reminder about tomorrow’s event – all welcome.

Address by Vitor Gaspar “Adjusting in the euro area: the Portuguese case”
Date: Thursday, 11th April
Time: 9am – 10am
Venue: The Thomas Davis Theatre, Room 2043, Ground Floor Arts Building, Trinity College Dublin

Portugal’s Finance Minister Vitor Gaspar will deliver an address on “Adjusting in the euro area: the Portuguese case” at 9am on Thursday April 11. The lecture will be followed by a Q+A session.

Prior to his current position, Mr Gaspar had a distinguished economics career at the European Central Bank, the European Commission and the Central Bank of Portugal.

Workshop on Industrial Policy in Comparative Perspective, Thursday April 25th:

Whither Industrial Policy? The Future of Public Institutions and Economic Development

3-6 pm, Thursday April 25th 2013
Institute of Bankers, 1 North Wall Quay, Dublin 1
Sponsored by NUI Maynooth (NIRSA/ Sociology) and UCD Geary Institute

Globalisation, regional economic clusters, open systems of innovation, financialisation, legal restrictions on state aid and a range of other factors appeared to have consigned industrial policy and the developmental state to history. However, as economies struggle to restore growth and seek models of sustainable prosperity, there is renewed interest in the role of public institutions in promoting industrial and regional development. Moreover, recent decades have seen significant experiments with new forms of ‘old’ institutions – ranging across the industrial development agencies of Israel and Taiwan, the state investment banks of Germany and Brazil and the diverse network of agencies promoting innovation in the US.

This workshop explores the new forms of industrial and innovation policy that have emerged in recent decades. It examines their distinctive features, limitations and potential and asks what futures there might be for a developmental role for public institutions. Further details below.

Continue reading “Workshop on Industrial Policy in Comparative Perspective, Thursday April 25th:”

Milk Powder Restrictions

Most of the major retailers have introduced customer restrictions on the purchase of infant formula.  See this BBC report. The restrictions also apply in their Irish divisions.

Although the last month mightn’t testify to it, Ireland has an advantage when it comes to a key factor in the production of high-quality powdered cow’s milk – a generally mild, moist climate conducive to grass growth.

When thinking about the future one question that will always perplex is “where will the growth come from?”.  The removal of EU quota restrictions on milk production in 2015 is one potential source but 15,000 additional jobs may be overstating it.

Perhaps the Irish Dairy Board, which today announced €2 billion of sales for 2012,  would consider adding a new product to its Kerrygold range.

Cash Balances > €30 billion

The Q1 2013 Funding of the Exchequer Balance note published by the NTMA on Friday contains the following:

31/03/13 Balances of €33,049m (31/12/12: €23,997m) were held in Departmental Funds & Other Accounts, including the Exchequer A/C.

These balances are now equal to 20% of GDP.  Of the total, €3.9 billion is accounted for by notes from the Housing Finance Agency which still leaves €29 billion in the Exchequer and Other Accounts (though presumably the HFA notes could be sold).

The Exchequer Borrowing Requirement (EBR) for the remainder of 2013 could be around €10 billion (depending on the outcome of the IBRC liquidation) and there is bond of just over €4.5 billion maturing in a little over a week’s time.  The full-year EBR for 2014 is projected to be around €8 billion with a €7.5 billion bond maturing in the middle of January.  These total €30 billion and could be met from existing resources but it is expected that additional funding will be sought.

There is still around €10 billion of funds to be drawn from the €67.5 billion total available under the EU/IMF programme as €57.3 billion had been forwarded to Ireland by the end of March. 

The NTMA has announced an intention to raise €10 billion through the issue of new government bonds in 2013.  Three-quarters of this has already been achieved with €2.5 billion raised from a 2017 bond in January and €5 billion from a 2023 bond in March.

Since 2008 contributions to the national savings schemes have increased significantly.  At the end of 2007, these schemes had attracted a total of €4.5 billion.  In 2012, around €2.2 billion was placed with the schemes and the total had increased to €14.5 billion by the end of the year.  These contributions have continued in 2013 with the NTMA Funding note showing that a further €0.6 billion was added in the first quarter.

The Treasury Bill programme was resumed last July and there is now €1.5 billion in issue across three €500 million tranches (maturing April 22, May 20 & June 24) with monthly auctions likely to continue.

Just over €1 billion was paid into the Exchequer Account in January as a result of the sale of BOI contingent capital notes.  A further €1.3 billion will be received when the sale of Irish Life is completed.

This means that cash balances could be maintained at around €30 billion in December 2013 if the EU/IMF draw downs, bond/bill issues, and savings contributions set out above are made which would roughly cover twice over the €15.5 billion gross financing need for 2014.  Whatever significant difficulties the economy faces, the government running out of cash in the near term is not one of them.

New from Central Bank

The new QB provides an update on its analysis and forecasts – here.

There are two interesting signed articles:

(the latter indicates a very big payoff to pushing further the move to electronic payments systems, with cheques still playing a large role in Ireland)

and also a new Economic Letter:

IIIS-TCD Special Event. Vitor Gaspar “Adjusting in the euro area: the Portuguese case”

Address by Vitor Gaspar “Adjusting in the euro area: the Portuguese case”
Date: Thursday, 11th April
Time: 9am – 10am
Venue: The Thomas Davis Theatre, Room 2043, Ground Floor Arts Building, Trinity College Dublin

Portugal’s Finance Minister Vitor Gaspar will deliver an address on “Adjusting in the euro area: the Portuguese case” at 9am on Thursday April 11. The lecture will be followed by a Q+A session.

Prior to his current position, Mr Gaspar had a distinguished economics career at the European Central Bank, the European Commission and the Central Bank of Portugal.

Finance Conference Announcement

2013 FMC2 Finance Conference

May 1, 2013, Dublin, Ireland

The Financial Mathematics and Computation Cluster (FMC2) is pleased to announce that the 2013 FMC2 Finance Conference will be held in Dublin on May 1, 2013.

Papers will cover the areas of real estate risk, asset pricing, trading and portfolio performance.  The speakers include Andrew Karolyi, Matt Spiegel and René Stulz, The FMC Scientific Advisory Board (see below for membership) will be present at the conference.


08.30 – 8.50 Registration (tea and coffee)

08.50 – 9.00 Opening remarks

09.00 – 13.00 Talks

09.00 – 09.55      G. Andrew Karolyi (Cornell), The Role of Investability Restrictions on Size, Value, and Momentum in International Stock Returns

09.55 – 10.50      Semyon Malamud (Swiss Finance Insitute) Decentralized Exchange

10.50 – 11.10 Break (tea and coffee)

11.10 – 12.05      Matthew Spiegel (Yale) Human Capital and the Structure of the Mutual Fund Industry

12.05 – 13.00      René Stulz (Ohio State) Why did financial institutions sell RMBS at fire sale prices during the financial crisis?

13.00 – 14.00 Lunch and networking

REGISTRATION: Registration for the conference is free.  To book a place at this conference please complete this form

CONFERENCE ORGANISERS: Chair: John Cotter (University College Dublin);

Vice-Chairs: Anthony Brabazon (UCD), Gregory Connor (NUIM), David Edelman (UCD), Paolo Guasoni (DCU), Michael O’ Neill (UCD);

FMC2 Scientific Advisory Board: Douglas Breeden (Duke), Michael Brennan (UCLA), Maureen O’ Hara (Cornell), John McConnell (Purdue), Matthew Spiegel (Yale), René Stulz (Ohio State), Hassan Tehranian (Boston College).

SJI Socio-Economic Review 2013

The 2013 socio-economic review from Social Justice Ireland was published yesterday.  The 360-page document called What Would Real Recovery Look Like? Securing Economic Development, Social Equity and Sustainability can be accessed here (5MB).

The report was preceded by this piece in The Irish Times on Monday.  The Irish Examiner ran a less-than-complimentary editorial yesterday which I imagine led to this reply today.