22 replies on “Private debt, public debt, and crises”
“Figure 2 shows that inheriting high levels of public debt can lead to an enormous drag on the recovery, especially when this coincides with a sizeable private credit overhang. … When a private-sector credit boom is unwound, high levels (about 100% of GDP) of public debt turn out to be very problematic. Output remains severely depressed for many years, being far off the previous peak even in year five.”
Hope John McHale is reading.
@BCT
I did indeed read the piece before seeing your comment, and was a little surprised to see your reference to me.
I think the article is excellent. I fully agree that the source of the crisis lies in private-sector credit creation. The finding that the fiscal capacity of the government is central to being able to deal with the crisis also rings very true. Unfortunately, we didn’t have enough. While trying to regain that capacity in the midst of the crisis is far from optimal, it underlines the importance of regaining the borrowing capacity of the state.
Now it is legitimate to argue about the best way to restore this capacity. Please correct me if I am wrong, but from memory I think you believe that the best way to do this was through default. While a default will lower the debt, it comes with such likely consequences of further balance sheet damage throughout the economy, much tougher conditions on official support (if that support is forthcoming at all) and thus an even tighter forced fiscal stance, and potential reputational damage that could hinder future borrowing capacity (with knock on effects to the funding access of domestic credit institutions). My assessment has been that default is therefore likely to intensify the adverse feedback loops associated with the balance sheet recession that follows a credit-driven crisis. As painful as it is, a necessary condition for stabilising and then turning around the adverse feedback loops is to restore the fiscal capacity of the state. While we are far from out of the woods, the evidence is that this capacity is being restored in Ireland’s case. Knowing what you know now, if you could go back in time to 2011, would you still punt on the default option? (That was really rhetorical – I am pretty sure you would; we will have to disagree on it being the right call.)
There is no one source of the crisis but what’s unique about the current one in the post 1945 period is the length of the downturn.
In the long run in democracies, the levels of private and public debt reflect choices made by elected politicians.
Existing high public debt is a problem at the start of a recession as public debt usually rises in a recession period and Italy’s debt has, without having incurred significant bank bailout costs.
Even with low official rates, Italy’s debt servicing costs were at €80bn in 2012 – 5.5% of GDP, compared with 12% of GDP in 1993.
Default is sometimes discussed as if it’s akin to a commercial bankruptcy restructuring.
Felix Salmon has an interesting post here on the topic:
He says the IMF is considering a policy of forcing private sector defaults while it decides if it would give a country official support.
This would however be an impossible situation for the country if the IMF refused help.
We may not want to default, but we may not be able to avoid doing so. At least that is what Martin Wolf thinks, in this recent, and fascinating presentation. No one knows where the global economy is headed.
“After this ‘Minsky moment’, households (or companies) adjust their debt levels, repair their balance sheets, and retrench.”
Is that what happened?
From my understanding, official policy has been to insist that banks deleverage, meaning that households and companies had no choice except to reduce their non fixed term borrowings, with no prospect of replacement funding.
Banks in program countries were forced to deleverage assets at fire-sale prices, piling the losses onto the rump banks and onto the sovereigns. Surely it was not the high levels of private sector debt per se that caused the depression, but instead it was the rapid deleveraging of bank balance sheets that caused the collapse in consumption and investment, which in turn are the primary causes of high unemployment.
It is no coincidence that countries benefitting from deposit flight, resulting in high cash balances in banks, with consequently no need to deleverage, have fared very well in crisis; in fact they have benefitted from it.
The worst example of deleveraging in Ireland is NAMA paying back bonds before the due date on those bonds. Why is this?
Such an agreement was not, as I understand it, in the original bailout program, but has found its way into subsequent programs.
It should have been resisted by the Irish government.
These NAMA bonds, presumably held by Irish banks, should be excellent collateral for low cost ECB funds. Why agree to pay them down early? Why roll over on this?
NAMA after a very shaky start dumped its ‘sell everything now’ strategy is now a very profitable company, with almost 1 billion a year in pre-provision profit, most of it from good property rents.
If high private debts levels are a better indicator of a crisis, the logical thing to do ensure that any reduction in the high debts levels of the private sector is done very slowly, so as to damage the “real economy” (SIC : ECB, Note comprehensive assessment October 2013) as little as possible.
Either way, a policy of deleveraging was imposed, not because it made economic sense, but because the creditors wanted to get their money bank. That, it seems is how economic policy is determined in practice. Ireland, regrettably has rolled over time and time again to the creditors agendas.
@Joseph Ryan
Ireland, regrettably has rolled over time and time again to the creditors agendas.
One can and should recognize the subversion of the European Union to suit the needs of the creditor states but it just would not have happened if the economic and monetary policy making apparatus of the EU did not already have a shared political vision with the governments in power in the creditor states and if the governments in the GIPSI’s were not receptive to neoliberal positions. The EU has been involved in one long right wing consensus ratchet since at least 1998.
This helps explain the crucial missing political element of of John McHale’s position; Though our enthusiastic embrace of the German perspective (hard currency neoliberalism) has kept us in their good graces it has perpetuated the real problem – that countries in crisis in the EMU have to stay in Germany’s good graces.
This is untenable for Ireland. Germany no longer shares any economic interests with the GIPSIs, Ireland serves as a useful example compliant conquest whose fate can be favorably compared with countries which resisted German interests. We are working against our own long term political interests in Europe.
The European component of the global financial crisis simply will not end as long as Germany and the creditor states and their allies in the ECB and Commission are not confronted, even if the initial result of this confrontation is difficult positions and painful loss of status for our local centre right political elite.
Lastly the local surrender caucus (more Petainist than Quisling, in their defence) share class interests with the dominant European Union elite but they also honestly believe in all the baggage that comes with the cult of the market (I can just feel the confidence returning as we hit 160% debt/GDP in what is effectively a foreign currency). We need rid of them and when the next election comes I hope a division emerges between pro-EU and pro-Ireland parties.
Why did the private sector resort to so much credit creation? Because there would have been no growth otherwise.
Colm McCarthy made a good point a while ago about the worth of Irish GDP stats that were based on an asset bubble.
What if the global economy can’t function without large doses of credit ?
Babies born to drug addicted mothers go through desperate post natal detox. It seems as though the same is happening economically to the teenage and early 20s kids of the generation who mainlined credit prior to the great crash.
@JMcH
“..I fully agree that the source of the crisis lies in private-sector credit creation. The finding that the fiscal capacity of the government is central to being able to deal with the crisis also rings very true. Unfortunately, we didn’t have enough. While trying to regain that capacity in the midst of the crisis is far from optimal, it underlines the importance of regaining the borrowing capacity of the state..”
The last line in your statement above explains precisely why there has been no significant recovery and the prospects of there being one severely restricted.
What has happened here and elsewhere but especially here in the RoI is that the powers have decided that the Govts balance sheet requires fixing before the citizens equivalent. This to me has been the most significant policy error overshadowing all others.
There is a belief within Govt circles that the Govt and Govt led initiatives will lead us through the crisis. This is a particularly bad analysis of the crisis when private credit creation and mal private investment sits at the heart of the paralysis. I find no logical explanation as to why a private credit problem will or can be solved by the restoration of the Govt credit rating. At the ground level the linkage between the two is almost nil.
We’ve been hoaxed into believing that there is in fact a strong correlation between the two to the detriment of real solutions as the Govt has effectively crowded out the ability of the indebted citizen to get ahead of their problem debt in any meaningful way. Govts, we are constantly told, create the environment for job creation and economies to recovery – what has happened here is almost the complete opposite particularly as it relates to the domestic market.
Govts insistence that it solves its own house keeping issues, significant and all as they are has insured everyone else waits and suffers because of an unproven belief that sound Govt finances are a prerequisite for economic recovery. When the citizens are in a significantly worse state in terms of debt saturation old recovery models such as mass and ongoing punitive austerity look outdated in terms of workable recovery solutions.
Good news!
“Ireland will make it. The country is highly competitive and has little in common with the others.”so says Citigroup as reported by Ambrose Evans-Pritchard
But alas “Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal”
I’m not sure there is anything ‘new’ here (in respect of the almost intractable financial problems that have been, and will continue to be, caused by the very large global gamblers in financial, innovative products).
As early as 2002 at least one blog commentator, Eric Janszen, was issuing warnings about the burgeoning problem of securitized debts. By 2007 there were (if rumours are to believed) 12 blogging commentators issuing warnings. Richard Bookstaber* – who must have been working on the financial derivatives issues for some time, published a chilling account of what was emerging.
What none of these commentators seemed to have considered, was the complete capitulation of sovereigns – who stepped in to volunteer their taxpayers (and their dependents) to backstop those reckless gambling losses. The looting of Cypriot bank accounts just about caps it. But I doubt it. Well see.
In the Salmon piece (h/t MH, above), the author muses about the invention of ‘new terms’ – “treatment” to be used in the place of “default”. So how about; “Reckless gamblers” is used in place of “markets”? Seems more appropriate somehow. At least it points to the human element involved.
*Bookstaber, Richard., PhD. (2007) ‘A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation’.
@Shay Begorrah
“This is untenable for Ireland. Germany no longer shares any economic interests with the GIPSIs, Ireland serves as a useful example compliant conquest whose fate can be favorably compared with countries which resisted German interests. We are working against our own long term political interests in Europe.
The European component of the global financial crisis simply will not end as long as Germany and the creditor states and their allies in the ECB and Commission are not confronted, even if the initial result of this confrontation is difficult positions and painful loss of status for our local centre right political elite.”
Your analysis makes sense to me and I have largely come round to that point of view.
The flashpoint, however, will probably not be in Ireland but when the flashpoint does ignite, lets hope we have all the ducks in row and take the opportunity to throw a little fuel on the flames.
Or at the very least, lets not take another one for the ‘team’. We seem to be very good at that.
@Joseph Ryan
The flashpoint, however, will probably not be in Ireland but when the flashpoint does ignite, lets hope we have all the ducks in row and take the opportunity to throw a litaddtle fuel on the flames.
Or at the very least, lets not take another one for the ‘team’. We seem to be very good at that.
As far as adding fuel to the fire it amazed and horrified me that our government seemed keen to help stop “contagion” of the financial crisis (aka “a rapid path to EMU reform ad burden sharing”) in 2008-2011 but class interests and liberal affect won out.
Do you think that are better odds now of there being a secret team of top civil servants working on “Operation Under-peasant” and the liberation of EMU? All I see and read indicates we have a defeated and co-opted local elite making common cause with the current failed EU economic consensus against the best interests of its own citizens.
Hope is not a policy.
uploadtest14:05:25thOct
@ Joseph Ryan
Paul Quigley provided a link above to a lecture by Martin Wolf in Toronto and the slides detail a grim situation.
A Martian might conclude that all the folk who were in positions of consequence, made things worse or at best failed to make things better while the armchair experts who mainly never had to make a decision of consequence in their professional lives, had most of the answers.
The common thread along the spectrum is that all these folk, irrespective of ideology, are from the well-heeled who have become accustomed to a pretty attractive apparently guaranteed life from cradle to grave.
In Ireland, before the 2011 general election, there was even a chance that Fintan O’Toole, a socialist, would make common cause with Shane Ross, a former stockbroker and erstwhile cheerleader of the most reckless bankers of the bubble, to lead the benighted country to the Promised Land or a Sinai desert of quicksand.
The issue that is avoided is that the pre-2008 bubble prosperity is not going to return.
This is a taboo subject as acknowledgement of it would require attention to difficult choices within countries.
You present Ireland as a victim while in recent years, it appeared to be common in Ireland to see Iceland as having the flexibility of its own currency to get rid of debt burdens and start anew.
I wrote a piece earlier on Iceland and the reality is somewhat different. There are no defaults without downsides.
From an Irish perspective, it would be good if Helmut Kohl was still around and able to write blank cheques.
From a European perspective Ireland was helped through the crash to largely maintain its standard of living intact. Absent significant natural resources like Iceland, without low interest rates and official support, we would have moved closer to Belgrade than Berlin much sooner than is likely to be the case in the current setup.
Half the sovereign support for banks which was used to refund Anglo depositors, has been restructured. Does even France support the refund of the rest of the legacy debt?
The government proclaims an impending return of sovereignty (is that a good thing?) while saying that despite the cash buffer that is costing a few hundred million euro, we need a mini-bailout as a backstop.
On the bank stress tests, I expect that the ESM will be available as the provider of capital of last resort for banks that cannot raise capital in the market or governments such as Greece and Cyprus, which are unable to assist.
You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.
As applied to Ireland in the early 1970s the EU has been a unique multilateral experiment that countries interested in joining, have never been rejected because they are poor and thereby a new potential burden.
Some fantasists claim that they needed our fish, as if we were that interested in the first place.
Enjoy the weekend.
@Michael Hennigan
The government proclaims an impending return of sovereignty (is that a good thing?)
Inside every reactionary is the sneaking belief that everything would be better if things were less democratic (or in the case of those who want to get rid of PR/STV in Ireland, the representatives were less representative).
Modern Troika fanciers are just a slightly more guarded version of Pinochet’s supporters in the seventies.
@Paul Quigley
Thanks for the link to the excellent lecture by Martin Wolf “A contained depression” and hats off to Kevin O’Rourke for being the first economist that Martin Wolf acknowledges for his excellent work on economic history.
Martin feels Ireland and the rest of the european periphery will default on their unsustainable debt.
Religious zealots come in many shades and the hardline faithful haven’t much to chew on today when the closest example of a significant country living classic nineteen century capitalism, is run by the Chinese communists.
@ All
Given the failures, there haven’t been many changes to acclaim in recent years but without prodding from the Troika, the record would likely be worse.
The systems to aid the long-term unemployed have been a joke but following external pressure, there is some likelihood of improvement.
The public drugs bill rises by €400m or 25% in 2008-2012 and at long last a measure to increase prescribing of generics has been passed.
Michael Williams wrote in The Irish Times last September that the King Inns motto, “Nolumus Mutari,” translates as “we don’t want to change.”
The Competition Authority has said:
“In November 2010, the Government signed a Memorandum of Understanding (MoU) with the EU/IMF. The MoU included a commitment that, by the end of the third quarter of 2011, the Government must establish an independent regulator and implement the outstanding recommendations of the Competition Authority. In October 2011 the Minister for Justice, Equality and Defence, Mr. Alan Shatter, T.D published the Legal Services Regulation Bill.”
Oct 2013: the Bill is parked in Limbo.
Interesting interview by Gillian Tett with Alan Greenspan in Saturday’s FT.
Greenspan doesn’t say Marx, Keynes or Minsky but does say: “A stable, moderately growing, non-inflationary environment will create a bubble 100 per cent of the time.” Which looks like Minsky’s stability breeds instability to me. Even the use of the word ‘bubble’ sets him apart from Fama.
Also confirms that the economic models didn’t have finance in them. I note that even recently the Irish Hermes model had Finance as TBC.
Naturally Krugman has a view ‘Greenspan: No Saving Grace’.
As we head towards the centenary of 1916, our institutional and constitutional order is going to be tested to the full. We are going to need to draw on all our historic reserves of social and cultural capital. And get some real leadership in our institutions.
Martin Wolf can see that we have hit an iceberg, but Doug Noland sees how big the hole is going to get.
‘One of these days the Fed and its flawed doctrine will be held accountable. For now, I guess, the Fed and Wall Street can continue to pretend this massive on-going monetary inflation makes sense. They can pretend that you can’t recognize a Bubble until after it bursts – that pegging short-term rates at zero for years doesn’t foment massive financial distortions and economic maladjustment – that this is not a redistribution of wealth on an unprecedented scale – that central bankers should rely on regulation instead of monetary policy to address mounting financial excess – and that aggressive reflationary measures can always be employed to counter bursting Bubbles.
They can pretend that we’re not witnessing the greatest financial Bubble in history – that trust in “money,” financial assets and central banking isn’t at stake. And they can pretend that they’ll retain effective tools for stabilizing the “system” the day this massive global Bubble begins to really unwind. If there is historic precedent for aggressive inflationism employed over an extended period without catastrophic consequences – that would be news to me’.
“You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.”
The European powers, and in particular their actions since 2008, should be viewed with jaundiced eye by all sensible people. Their actions have been found wanting and the full evidence and consequences of their ‘help’ can be seen from Malin head to Missolonghi.
What is their defence of the destructive policies mandated?
I accept Ireland’s degree of culpability in its own demise and I accept that Ireland’s response in allocating the burden of the crisis has been deliberately skewed away from those in power.
But I do not accept that EZ policies were enacted with anything other than the self-protection of major powers in mind, protection of major countries, both their banks and their bondholder, with a good dollop of old fashioned lecturing on moral hazard thrown in.
When their money has been extracted in the form of bond and deposits, the policy changed, again to suit their interests.
We have two prime examples of this:
Trichet, a well-placed stooge, on his own admission (Sunday Ind, McCarthy, McConnell) called ‘Jens’, to ascertain if bondholders were part of the capitalist system and subject to losses. Jens was adamant. Bank bondholders were not subject to the normal rules of capitalism, and their losses should be borne by somebody else.
Now, however, Jens has had a Pauline conversion.
Another Pauline conversion seems to have happened to Trichet’s erstwhile barkdog, Lorenzo Bini Smaghi, a careerist who lectured Ireland on its failures and its moral obligation, hoping it would enhance his career prospects.
The same Bini Smaghi is now singing a different tune:
“EU leaders last year sought to empower the European Stability Mechanism, the region’s bailout fund, to lend directly to banks. They are now emphasizing national responsibility for stabilizing lenders that need help.
“Without a resolution mechanism, we’re only halfway to resolving the sovereign-bank nexus,” said Lorenzo Bini Smaghi, chairman of Italy’s Snam SpA and a former member of the ECB’s executive board. “The principal factors needed to restore growth in the euro area are the easing of fiscal restrictions and credit contraction — banking fragmentation is key.”
This is the person who analysed the EZ problem in terms of reckless, feckless, peripheral idiots, a few short years ago. Not only did he analyse the problem, but he proceeded with Trichet to implement ‘solutions’ based on that analysis.
Now he wants bank resolution and ‘growth’.
Let me list a few items that bother me about EZ help over the past years;
1. Approx €50 billion in Irish banks fell due and were paid in August/Sept 2010. Knowing full well the Irish banks were bust at that stage, why did the ECB lend the money? Why did the ECB not insist on a bailout in early August 2010. The reason of course is that they knew full well that the banks would fold if they did that and that the bondholders would not get paid. So the manoeuvred to get the debt onto Irish State’s books.
Help?
2. The interest rate on the bailout monies were set at moral hazard levels, and only reduced because Portugal simply refused to pay such rates.
Help?
3. A bank deleveraging process was mandated, with the principal object being to get ECB money back. They did not care what losses were incurred. Initially, it was sell at any price.
Help?
4. The Merkozy sage, an illegitimate power grab, whereby elected people, including the Irish Taoiseach Kenny, were grilled in a process remeniscient of that meted out to Hacha of Czechoslovakia by Hitler and Goring.
Help?
5. NAMA bonds, the illegitimate offspring of the departing ECB protected bondholders, are now required to be paid back before the due dates on those bonds.
Help?
6. New conditions for a precautionary credit line. I wonder what they are, but its a safe bet that further deleveraging so that the ECB liquidity is reduced is one of them.
Help?
Seamus Coffey has done an excellent analysis of the banks on his blog http://economic-incentives.blogspot.ie/2013/10/the-state-of-banks.html
Bank lending in Ireland’s three limping banks (AIB/BOI/PTSB) has reduced by almost €30 billion in the past twelve. It has been used to pay down the ECB by almost exactly that amount.
One should be in no doubt, why the Troika came, what they came for, and who sent them.
I would also add that Germany bears a severe responsibilty for the problems in Europe today. I have no problems with Germany deciding policies in her interest. But it is an entirely different matter when policies crucial to even attempting a resolution of the crisis are blocked time and again by Germany.
The fact is that most people living in peripheral Europe, living out their inconsequential lives, have to live with the consequences of decisions made by people of consequence, who bear little responsibility for the consequences of those decisions; even though those consequential decisions destroy the lives of millions of inconsequential people.
@Michael Hennigan
“You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.”
The European powers, and in particular their actions since 2008, should be viewed with jaundiced eye by all sensible people. Their actions have been found wanting and the full evidence and consequences of their ‘help’ can be seen from Malin head to Missolonghi.
What is their defence of the destructive policies mandated?
I accept Ireland’s degree of culpability in its own demise and I accept that Ireland’s response in allocating the burden of the crisis has been deliberately skewed away from those in power.
But I do not accept that EZ policies were enacted with anything other than the self-protection of major powers in mind, protection of major countries, both their banks and their bondholder, with a good dollop of old fashioned lecturing on moral hazard thrown in.
When their money has been extracted in the form of bond and deposits, the policy changed, again to suit their interests.
We have two prime examples of this:
Trichet, a well-placed stooge, on his own admission (Sunday Ind, McCarthy, McConnell) called ‘Jens’, to ascertain if bondholders were part of the capitalist system and subject to losses. Jens was adamant. Bank bondholders were not subject to the normal rules of capitalism, and their losses should be borne by somebody else.
Now, however, Jens has had a Pauline conversion.
Another Pauline conversion seems to have happened to Trichet’s erstwhile barkdog, Lorenzo Bini Smaghi, a careerist who lectured Ireland on its failures and its moral obligation, hoping it would enhance his career prospects.
The same Bini Smaghi is now singing a different tune:
“EU leaders last year sought to empower the European Stability Mechanism, the region’s bailout fund, to lend directly to banks. They are now emphasizing national responsibility for stabilizing lenders that need help.
“Without a resolution mechanism, we’re only halfway to resolving the sovereign-bank nexus,” said Lorenzo Bini Smaghi, chairman of Italy’s Snam SpA and a former member of the ECB’s executive board. “The principal factors needed to restore growth in the euro area are the easing of fiscal restrictions and credit contraction — banking fragmentation is key.”
This is the person who analysed the EZ problem in terms of reckless, feckless, peripheral idiots, a few short years ago. Not only did he analyse the problem, but he proceeded with Trichet to implement ‘solutions’ based on that analysis.
Now he wants bank resolution and ‘growth’.
Let me list a few items that bother me about EZ help over the past years;
1. Approx €50 billion in Irish banks fell due and were paid in August/Sept 2010. Knowing full well the Irish banks were bust at that stage, why did the ECB lend the money? Why did the ECB not insist on a bailout in early August 2010. The reason of course is that they knew full well that the banks would fold if they did that and that the bondholders would not get paid. So the manoeuvred to get the debt onto Irish State’s books.
Help?
2. The interest rate on the bailout monies were set at moral hazard levels, and only reduced because Portugal simply refused to pay such rates.
Help?
3. A bank deleveraging process was mandated, with the principal object being to get ECB money back. They did not care what losses were incurred. Initially, it was sell at any price.
Help?
4. The Merkozy sage, an illegitimate power grab, whereby elected people, including the Irish Taoiseach Kenny, were grilled in a process remeniscient of that meted out to Hacha of Czechoslovakia by Hitler and Goring.
Help?
5. NAMA bonds, the illegitimate offspring of the departing ECB protected bondholders, are now required to be paid back before the due dates on those bonds.
Help?
6. New conditions for a precautionary credit line. I wonder what they are, but its a safe bet that further deleveraging so that the ECB liquidity is reduced is one of them.
Help?
Seamus Coffey has done an excellent analysis of the banks on his blog http://economic-incentives.blogspot.ie/2013/10/the-state-of-banks.html
Bank lending in Ireland’s three limping banks (AIB/BOI/PTSB) has reduced by almost €30 billion in the past twelve. It has been used to pay down the ECB by almost exactly that amount.
One should be in no doubt, why the Troika came, what they came for, and who sent them.
I would also add that Germany bears a severe responsibilty for the problems in Europe today. I have no problems with Germany deciding policies in her interest. But it is an entirely different matter when policies crucial to even attempting a resolution of the crisis are blocked time and again by Germany.
The fact is that most people living in peripheral Europe, living out their inconsequential lives, have to live with the consequences of decisions made by people of consequence, who bear little responsibility for the consequences of those decisions; even though those consequential decisions destroy the lives of millions of inconsequential people.All people of little consequence should feel free to voice a protesting opinion, if they have one.
@Michael Hennigan
Given the failures, there haven’t been many changes to acclaim in recent years but without prodding from the Troika, the record would likely be worse.
Say what you like about the Troika, they made the trains run on time. We need strong rule (from abroad), someone to take on the Unions, the effete academics and the welfare state and make Ireland safe for the heroic entrepreneur again. Same ole same ole.
The systems to aid the long-term unemployed have been a joke but following external pressure, there is some likelihood of improvement.
Yup, the Troika are most insistent that Ireland implements better policing of the unemployment crisis they are helping to prolong. Aggressive “labour activation” policies should keep the lower orders too shell shocked to organize or protest.
Uno mercato, una voce!
@ Joseph Ryan
Ideally it’s better that countries solve their own problems for better or worse as the foreigners will always be resented.
Ireland unilaterally guaranteed bank debt in Sept 2008. Two years later when bank bonds could have been defaulted, several countries were in crisis and there were no bailin procedures. There was by then a multilateral rescue fund but it wasn’t sufficiently funded to bailout Spain and Italy.
As for the [consequences of their ‘help’ can be seen from Malin head to Missolonghi], there is an argument that less ‘help’ in Ireland could have improved the chances of putting the economy on a sustainable basis as for example less CAP dole for farmers could also be a positive thing.
As for Greece, leaving it go bust, may have improved its chances long-term.
Should truckloads of cash have been delivered to be stolen by the elites?
The bitter truth is that Germany, France and other countries were not in a position to bailout all the banjaxed countries with massive transfers.
It’s easy to point at others but solidarity for Ireland is a one-way street.
It has been OK for Ireland to facilitate the erosion of the corporate tax bases of other countries until there is now no choice but to pretend support for change.
You’re possibly more bitter towards Angela Merkel than the real culprits in your midst including their many cheerleaders – – they’re were lots and lots of them!
22 replies on “Private debt, public debt, and crises”
“Figure 2 shows that inheriting high levels of public debt can lead to an enormous drag on the recovery, especially when this coincides with a sizeable private credit overhang. … When a private-sector credit boom is unwound, high levels (about 100% of GDP) of public debt turn out to be very problematic. Output remains severely depressed for many years, being far off the previous peak even in year five.”
Hope John McHale is reading.
@BCT
I did indeed read the piece before seeing your comment, and was a little surprised to see your reference to me.
I think the article is excellent. I fully agree that the source of the crisis lies in private-sector credit creation. The finding that the fiscal capacity of the government is central to being able to deal with the crisis also rings very true. Unfortunately, we didn’t have enough. While trying to regain that capacity in the midst of the crisis is far from optimal, it underlines the importance of regaining the borrowing capacity of the state.
Now it is legitimate to argue about the best way to restore this capacity. Please correct me if I am wrong, but from memory I think you believe that the best way to do this was through default. While a default will lower the debt, it comes with such likely consequences of further balance sheet damage throughout the economy, much tougher conditions on official support (if that support is forthcoming at all) and thus an even tighter forced fiscal stance, and potential reputational damage that could hinder future borrowing capacity (with knock on effects to the funding access of domestic credit institutions). My assessment has been that default is therefore likely to intensify the adverse feedback loops associated with the balance sheet recession that follows a credit-driven crisis. As painful as it is, a necessary condition for stabilising and then turning around the adverse feedback loops is to restore the fiscal capacity of the state. While we are far from out of the woods, the evidence is that this capacity is being restored in Ireland’s case. Knowing what you know now, if you could go back in time to 2011, would you still punt on the default option? (That was really rhetorical – I am pretty sure you would; we will have to disagree on it being the right call.)
There is no one source of the crisis but what’s unique about the current one in the post 1945 period is the length of the downturn.
In the long run in democracies, the levels of private and public debt reflect choices made by elected politicians.
Existing high public debt is a problem at the start of a recession as public debt usually rises in a recession period and Italy’s debt has, without having incurred significant bank bailout costs.
Even with low official rates, Italy’s debt servicing costs were at €80bn in 2012 – 5.5% of GDP, compared with 12% of GDP in 1993.
Default is sometimes discussed as if it’s akin to a commercial bankruptcy restructuring.
Felix Salmon has an interesting post here on the topic:
http://blogs.reuters.com/felix-salmon/2013/10/21/the-imf-revisits-sovereign-bankruptcy/
He says the IMF is considering a policy of forcing private sector defaults while it decides if it would give a country official support.
This would however be an impossible situation for the country if the IMF refused help.
We may not want to default, but we may not be able to avoid doing so. At least that is what Martin Wolf thinks, in this recent, and fascinating presentation. No one knows where the global economy is headed.
http://www.nakedcapitalism.com/2013/10/martin-wolf-on-the-contained-depression.html.
“After this ‘Minsky moment’, households (or companies) adjust their debt levels, repair their balance sheets, and retrench.”
Is that what happened?
From my understanding, official policy has been to insist that banks deleverage, meaning that households and companies had no choice except to reduce their non fixed term borrowings, with no prospect of replacement funding.
Banks in program countries were forced to deleverage assets at fire-sale prices, piling the losses onto the rump banks and onto the sovereigns. Surely it was not the high levels of private sector debt per se that caused the depression, but instead it was the rapid deleveraging of bank balance sheets that caused the collapse in consumption and investment, which in turn are the primary causes of high unemployment.
It is no coincidence that countries benefitting from deposit flight, resulting in high cash balances in banks, with consequently no need to deleverage, have fared very well in crisis; in fact they have benefitted from it.
The worst example of deleveraging in Ireland is NAMA paying back bonds before the due date on those bonds. Why is this?
Such an agreement was not, as I understand it, in the original bailout program, but has found its way into subsequent programs.
It should have been resisted by the Irish government.
These NAMA bonds, presumably held by Irish banks, should be excellent collateral for low cost ECB funds. Why agree to pay them down early? Why roll over on this?
NAMA after a very shaky start dumped its ‘sell everything now’ strategy is now a very profitable company, with almost 1 billion a year in pre-provision profit, most of it from good property rents.
If high private debts levels are a better indicator of a crisis, the logical thing to do ensure that any reduction in the high debts levels of the private sector is done very slowly, so as to damage the “real economy” (SIC : ECB, Note comprehensive assessment October 2013) as little as possible.
Either way, a policy of deleveraging was imposed, not because it made economic sense, but because the creditors wanted to get their money bank. That, it seems is how economic policy is determined in practice. Ireland, regrettably has rolled over time and time again to the creditors agendas.
@Joseph Ryan
One can and should recognize the subversion of the European Union to suit the needs of the creditor states but it just would not have happened if the economic and monetary policy making apparatus of the EU did not already have a shared political vision with the governments in power in the creditor states and if the governments in the GIPSI’s were not receptive to neoliberal positions. The EU has been involved in one long right wing consensus ratchet since at least 1998.
This helps explain the crucial missing political element of of John McHale’s position; Though our enthusiastic embrace of the German perspective (hard currency neoliberalism) has kept us in their good graces it has perpetuated the real problem – that countries in crisis in the EMU have to stay in Germany’s good graces.
This is untenable for Ireland. Germany no longer shares any economic interests with the GIPSIs, Ireland serves as a useful example compliant conquest whose fate can be favorably compared with countries which resisted German interests. We are working against our own long term political interests in Europe.
The European component of the global financial crisis simply will not end as long as Germany and the creditor states and their allies in the ECB and Commission are not confronted, even if the initial result of this confrontation is difficult positions and painful loss of status for our local centre right political elite.
Lastly the local surrender caucus (more Petainist than Quisling, in their defence) share class interests with the dominant European Union elite but they also honestly believe in all the baggage that comes with the cult of the market (I can just feel the confidence returning as we hit 160% debt/GDP in what is effectively a foreign currency). We need rid of them and when the next election comes I hope a division emerges between pro-EU and pro-Ireland parties.
Why did the private sector resort to so much credit creation? Because there would have been no growth otherwise.
Colm McCarthy made a good point a while ago about the worth of Irish GDP stats that were based on an asset bubble.
What if the global economy can’t function without large doses of credit ?
Babies born to drug addicted mothers go through desperate post natal detox. It seems as though the same is happening economically to the teenage and early 20s kids of the generation who mainlined credit prior to the great crash.
@JMcH
“..I fully agree that the source of the crisis lies in private-sector credit creation. The finding that the fiscal capacity of the government is central to being able to deal with the crisis also rings very true. Unfortunately, we didn’t have enough. While trying to regain that capacity in the midst of the crisis is far from optimal, it underlines the importance of regaining the borrowing capacity of the state..”
The last line in your statement above explains precisely why there has been no significant recovery and the prospects of there being one severely restricted.
What has happened here and elsewhere but especially here in the RoI is that the powers have decided that the Govts balance sheet requires fixing before the citizens equivalent. This to me has been the most significant policy error overshadowing all others.
There is a belief within Govt circles that the Govt and Govt led initiatives will lead us through the crisis. This is a particularly bad analysis of the crisis when private credit creation and mal private investment sits at the heart of the paralysis. I find no logical explanation as to why a private credit problem will or can be solved by the restoration of the Govt credit rating. At the ground level the linkage between the two is almost nil.
We’ve been hoaxed into believing that there is in fact a strong correlation between the two to the detriment of real solutions as the Govt has effectively crowded out the ability of the indebted citizen to get ahead of their problem debt in any meaningful way. Govts, we are constantly told, create the environment for job creation and economies to recovery – what has happened here is almost the complete opposite particularly as it relates to the domestic market.
Govts insistence that it solves its own house keeping issues, significant and all as they are has insured everyone else waits and suffers because of an unproven belief that sound Govt finances are a prerequisite for economic recovery. When the citizens are in a significantly worse state in terms of debt saturation old recovery models such as mass and ongoing punitive austerity look outdated in terms of workable recovery solutions.
Good news!
“Ireland will make it. The country is highly competitive and has little in common with the others.”so says Citigroup as reported by Ambrose Evans-Pritchard
But alas “Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal”
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025913/citi-forecasts-greek-devastation-unstoppable-debt-spirals-in-italy-and-portugal/
I’m not sure there is anything ‘new’ here (in respect of the almost intractable financial problems that have been, and will continue to be, caused by the very large global gamblers in financial, innovative products).
As early as 2002 at least one blog commentator, Eric Janszen, was issuing warnings about the burgeoning problem of securitized debts. By 2007 there were (if rumours are to believed) 12 blogging commentators issuing warnings. Richard Bookstaber* – who must have been working on the financial derivatives issues for some time, published a chilling account of what was emerging.
What none of these commentators seemed to have considered, was the complete capitulation of sovereigns – who stepped in to volunteer their taxpayers (and their dependents) to backstop those reckless gambling losses. The looting of Cypriot bank accounts just about caps it. But I doubt it. Well see.
In the Salmon piece (h/t MH, above), the author muses about the invention of ‘new terms’ – “treatment” to be used in the place of “default”. So how about; “Reckless gamblers” is used in place of “markets”? Seems more appropriate somehow. At least it points to the human element involved.
*Bookstaber, Richard., PhD. (2007) ‘A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation’.
@Shay Begorrah
“This is untenable for Ireland. Germany no longer shares any economic interests with the GIPSIs, Ireland serves as a useful example compliant conquest whose fate can be favorably compared with countries which resisted German interests. We are working against our own long term political interests in Europe.
The European component of the global financial crisis simply will not end as long as Germany and the creditor states and their allies in the ECB and Commission are not confronted, even if the initial result of this confrontation is difficult positions and painful loss of status for our local centre right political elite.”
Your analysis makes sense to me and I have largely come round to that point of view.
The flashpoint, however, will probably not be in Ireland but when the flashpoint does ignite, lets hope we have all the ducks in row and take the opportunity to throw a little fuel on the flames.
Or at the very least, lets not take another one for the ‘team’. We seem to be very good at that.
@Joseph Ryan
As far as adding fuel to the fire it amazed and horrified me that our government seemed keen to help stop “contagion” of the financial crisis (aka “a rapid path to EMU reform ad burden sharing”) in 2008-2011 but class interests and liberal affect won out.
Do you think that are better odds now of there being a secret team of top civil servants working on “Operation Under-peasant” and the liberation of EMU? All I see and read indicates we have a defeated and co-opted local elite making common cause with the current failed EU economic consensus against the best interests of its own citizens.
Hope is not a policy.
uploadtest14:05:25thOct
@ Joseph Ryan
Paul Quigley provided a link above to a lecture by Martin Wolf in Toronto and the slides detail a grim situation.
A Martian might conclude that all the folk who were in positions of consequence, made things worse or at best failed to make things better while the armchair experts who mainly never had to make a decision of consequence in their professional lives, had most of the answers.
The common thread along the spectrum is that all these folk, irrespective of ideology, are from the well-heeled who have become accustomed to a pretty attractive apparently guaranteed life from cradle to grave.
In Ireland, before the 2011 general election, there was even a chance that Fintan O’Toole, a socialist, would make common cause with Shane Ross, a former stockbroker and erstwhile cheerleader of the most reckless bankers of the bubble, to lead the benighted country to the Promised Land or a Sinai desert of quicksand.
The issue that is avoided is that the pre-2008 bubble prosperity is not going to return.
This is a taboo subject as acknowledgement of it would require attention to difficult choices within countries.
You present Ireland as a victim while in recent years, it appeared to be common in Ireland to see Iceland as having the flexibility of its own currency to get rid of debt burdens and start anew.
I wrote a piece earlier on Iceland and the reality is somewhat different. There are no defaults without downsides.
Iceland’s economy is recovering but still in crisis
From an Irish perspective, it would be good if Helmut Kohl was still around and able to write blank cheques.
From a European perspective Ireland was helped through the crash to largely maintain its standard of living intact. Absent significant natural resources like Iceland, without low interest rates and official support, we would have moved closer to Belgrade than Berlin much sooner than is likely to be the case in the current setup.
Half the sovereign support for banks which was used to refund Anglo depositors, has been restructured. Does even France support the refund of the rest of the legacy debt?
The government proclaims an impending return of sovereignty (is that a good thing?) while saying that despite the cash buffer that is costing a few hundred million euro, we need a mini-bailout as a backstop.
On the bank stress tests, I expect that the ESM will be available as the provider of capital of last resort for banks that cannot raise capital in the market or governments such as Greece and Cyprus, which are unable to assist.
You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.
As applied to Ireland in the early 1970s the EU has been a unique multilateral experiment that countries interested in joining, have never been rejected because they are poor and thereby a new potential burden.
Some fantasists claim that they needed our fish, as if we were that interested in the first place.
Enjoy the weekend.
@Michael Hennigan
Inside every reactionary is the sneaking belief that everything would be better if things were less democratic (or in the case of those who want to get rid of PR/STV in Ireland, the representatives were less representative).
Modern Troika fanciers are just a slightly more guarded version of Pinochet’s supporters in the seventies.
@Paul Quigley
Thanks for the link to the excellent lecture by Martin Wolf “A contained depression” and hats off to Kevin O’Rourke for being the first economist that Martin Wolf acknowledges for his excellent work on economic history.
Martin feels Ireland and the rest of the european periphery will default on their unsustainable debt.
@ Shay Begorrah
The lefty Alf Garnett strikes again!
http://www.youtube.com/watch?v=GPgm69pMRUU
Religious zealots come in many shades and the hardline faithful haven’t much to chew on today when the closest example of a significant country living classic nineteen century capitalism, is run by the Chinese communists.
@ All
Given the failures, there haven’t been many changes to acclaim in recent years but without prodding from the Troika, the record would likely be worse.
The systems to aid the long-term unemployed have been a joke but following external pressure, there is some likelihood of improvement.
The public drugs bill rises by €400m or 25% in 2008-2012 and at long last a measure to increase prescribing of generics has been passed.
Michael Williams wrote in The Irish Times last September that the King Inns motto, “Nolumus Mutari,” translates as “we don’t want to change.”
The Competition Authority has said:
Oct 2013: the Bill is parked in Limbo.
Interesting interview by Gillian Tett with Alan Greenspan in Saturday’s FT.
http://www.ft.com/intl/cms/s/2/25ebae9e-3c3a-11e3-b85f-00144feab7de.html
Greenspan doesn’t say Marx, Keynes or Minsky but does say: “A stable, moderately growing, non-inflationary environment will create a bubble 100 per cent of the time.” Which looks like Minsky’s stability breeds instability to me. Even the use of the word ‘bubble’ sets him apart from Fama.
Also confirms that the economic models didn’t have finance in them. I note that even recently the Irish Hermes model had Finance as TBC.
Naturally Krugman has a view ‘Greenspan: No Saving Grace’.
http://krugman.blogs.nytimes.com/2013/10/24/greenspan-no-saving-grace/
I haven’t read ‘The Map and the Territory’
Thanks Gavin good to see you still in biz
As we head towards the centenary of 1916, our institutional and constitutional order is going to be tested to the full. We are going to need to draw on all our historic reserves of social and cultural capital. And get some real leadership in our institutions.
Martin Wolf can see that we have hit an iceberg, but Doug Noland sees how big the hole is going to get.
‘One of these days the Fed and its flawed doctrine will be held accountable. For now, I guess, the Fed and Wall Street can continue to pretend this massive on-going monetary inflation makes sense. They can pretend that you can’t recognize a Bubble until after it bursts – that pegging short-term rates at zero for years doesn’t foment massive financial distortions and economic maladjustment – that this is not a redistribution of wealth on an unprecedented scale – that central bankers should rely on regulation instead of monetary policy to address mounting financial excess – and that aggressive reflationary measures can always be employed to counter bursting Bubbles.
They can pretend that we’re not witnessing the greatest financial Bubble in history – that trust in “money,” financial assets and central banking isn’t at stake. And they can pretend that they’ll retain effective tools for stabilizing the “system” the day this massive global Bubble begins to really unwind. If there is historic precedent for aggressive inflationism employed over an extended period without catastrophic consequences – that would be news to me’.
http://www.prudentbear.com/2013/10/fighting-good-fight.html
@Michael Hennigan
“You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.”
The European powers, and in particular their actions since 2008, should be viewed with jaundiced eye by all sensible people. Their actions have been found wanting and the full evidence and consequences of their ‘help’ can be seen from Malin head to Missolonghi.
What is their defence of the destructive policies mandated?
I accept Ireland’s degree of culpability in its own demise and I accept that Ireland’s response in allocating the burden of the crisis has been deliberately skewed away from those in power.
But I do not accept that EZ policies were enacted with anything other than the self-protection of major powers in mind, protection of major countries, both their banks and their bondholder, with a good dollop of old fashioned lecturing on moral hazard thrown in.
When their money has been extracted in the form of bond and deposits, the policy changed, again to suit their interests.
We have two prime examples of this:
Trichet, a well-placed stooge, on his own admission (Sunday Ind, McCarthy, McConnell) called ‘Jens’, to ascertain if bondholders were part of the capitalist system and subject to losses. Jens was adamant. Bank bondholders were not subject to the normal rules of capitalism, and their losses should be borne by somebody else.
Now, however, Jens has had a Pauline conversion.
Another Pauline conversion seems to have happened to Trichet’s erstwhile barkdog, Lorenzo Bini Smaghi, a careerist who lectured Ireland on its failures and its moral obligation, hoping it would enhance his career prospects.
The same Bini Smaghi is now singing a different tune:
http://www.bloomberg.com/news/2013-10-22/banking-balkanization-prevails-in-europe-on-eve-of-review.html
“EU leaders last year sought to empower the European Stability Mechanism, the region’s bailout fund, to lend directly to banks. They are now emphasizing national responsibility for stabilizing lenders that need help.
“Without a resolution mechanism, we’re only halfway to resolving the sovereign-bank nexus,” said Lorenzo Bini Smaghi, chairman of Italy’s Snam SpA and a former member of the ECB’s executive board. “The principal factors needed to restore growth in the euro area are the easing of fiscal restrictions and credit contraction — banking fragmentation is key.”
This is the person who analysed the EZ problem in terms of reckless, feckless, peripheral idiots, a few short years ago. Not only did he analyse the problem, but he proceeded with Trichet to implement ‘solutions’ based on that analysis.
Now he wants bank resolution and ‘growth’.
Let me list a few items that bother me about EZ help over the past years;
1. Approx €50 billion in Irish banks fell due and were paid in August/Sept 2010. Knowing full well the Irish banks were bust at that stage, why did the ECB lend the money? Why did the ECB not insist on a bailout in early August 2010. The reason of course is that they knew full well that the banks would fold if they did that and that the bondholders would not get paid. So the manoeuvred to get the debt onto Irish State’s books.
Help?
2. The interest rate on the bailout monies were set at moral hazard levels, and only reduced because Portugal simply refused to pay such rates.
Help?
3. A bank deleveraging process was mandated, with the principal object being to get ECB money back. They did not care what losses were incurred. Initially, it was sell at any price.
Help?
4. The Merkozy sage, an illegitimate power grab, whereby elected people, including the Irish Taoiseach Kenny, were grilled in a process remeniscient of that meted out to Hacha of Czechoslovakia by Hitler and Goring.
Help?
5. NAMA bonds, the illegitimate offspring of the departing ECB protected bondholders, are now required to be paid back before the due dates on those bonds.
Help?
6. New conditions for a precautionary credit line. I wonder what they are, but its a safe bet that further deleveraging so that the ECB liquidity is reduced is one of them.
Help?
Seamus Coffey has done an excellent analysis of the banks on his blog
http://economic-incentives.blogspot.ie/2013/10/the-state-of-banks.html
Bank lending in Ireland’s three limping banks (AIB/BOI/PTSB) has reduced by almost €30 billion in the past twelve. It has been used to pay down the ECB by almost exactly that amount.
One should be in no doubt, why the Troika came, what they came for, and who sent them.
I would also add that Germany bears a severe responsibilty for the problems in Europe today. I have no problems with Germany deciding policies in her interest. But it is an entirely different matter when policies crucial to even attempting a resolution of the crisis are blocked time and again by Germany.
The fact is that most people living in peripheral Europe, living out their inconsequential lives, have to live with the consequences of decisions made by people of consequence, who bear little responsibility for the consequences of those decisions; even though those consequential decisions destroy the lives of millions of inconsequential people.
@Michael Hennigan
“You may have a jaundiced view of the European powers because we have been accustomed to rattling the tin ponny since 1973 and having it filled, but despite rules and admonitions, when help is really needed they are not found wanting.”
The European powers, and in particular their actions since 2008, should be viewed with jaundiced eye by all sensible people. Their actions have been found wanting and the full evidence and consequences of their ‘help’ can be seen from Malin head to Missolonghi.
What is their defence of the destructive policies mandated?
I accept Ireland’s degree of culpability in its own demise and I accept that Ireland’s response in allocating the burden of the crisis has been deliberately skewed away from those in power.
But I do not accept that EZ policies were enacted with anything other than the self-protection of major powers in mind, protection of major countries, both their banks and their bondholder, with a good dollop of old fashioned lecturing on moral hazard thrown in.
When their money has been extracted in the form of bond and deposits, the policy changed, again to suit their interests.
We have two prime examples of this:
Trichet, a well-placed stooge, on his own admission (Sunday Ind, McCarthy, McConnell) called ‘Jens’, to ascertain if bondholders were part of the capitalist system and subject to losses. Jens was adamant. Bank bondholders were not subject to the normal rules of capitalism, and their losses should be borne by somebody else.
Now, however, Jens has had a Pauline conversion.
Another Pauline conversion seems to have happened to Trichet’s erstwhile barkdog, Lorenzo Bini Smaghi, a careerist who lectured Ireland on its failures and its moral obligation, hoping it would enhance his career prospects.
The same Bini Smaghi is now singing a different tune:
http://www.bloomberg.com/news/2013-10-22/banking-balkanization-prevails-in-europe-on-eve-of-review.html
“EU leaders last year sought to empower the European Stability Mechanism, the region’s bailout fund, to lend directly to banks. They are now emphasizing national responsibility for stabilizing lenders that need help.
“Without a resolution mechanism, we’re only halfway to resolving the sovereign-bank nexus,” said Lorenzo Bini Smaghi, chairman of Italy’s Snam SpA and a former member of the ECB’s executive board. “The principal factors needed to restore growth in the euro area are the easing of fiscal restrictions and credit contraction — banking fragmentation is key.”
This is the person who analysed the EZ problem in terms of reckless, feckless, peripheral idiots, a few short years ago. Not only did he analyse the problem, but he proceeded with Trichet to implement ‘solutions’ based on that analysis.
Now he wants bank resolution and ‘growth’.
Let me list a few items that bother me about EZ help over the past years;
1. Approx €50 billion in Irish banks fell due and were paid in August/Sept 2010. Knowing full well the Irish banks were bust at that stage, why did the ECB lend the money? Why did the ECB not insist on a bailout in early August 2010. The reason of course is that they knew full well that the banks would fold if they did that and that the bondholders would not get paid. So the manoeuvred to get the debt onto Irish State’s books.
Help?
2. The interest rate on the bailout monies were set at moral hazard levels, and only reduced because Portugal simply refused to pay such rates.
Help?
3. A bank deleveraging process was mandated, with the principal object being to get ECB money back. They did not care what losses were incurred. Initially, it was sell at any price.
Help?
4. The Merkozy sage, an illegitimate power grab, whereby elected people, including the Irish Taoiseach Kenny, were grilled in a process remeniscient of that meted out to Hacha of Czechoslovakia by Hitler and Goring.
Help?
5. NAMA bonds, the illegitimate offspring of the departing ECB protected bondholders, are now required to be paid back before the due dates on those bonds.
Help?
6. New conditions for a precautionary credit line. I wonder what they are, but its a safe bet that further deleveraging so that the ECB liquidity is reduced is one of them.
Help?
Seamus Coffey has done an excellent analysis of the banks on his blog
http://economic-incentives.blogspot.ie/2013/10/the-state-of-banks.html
Bank lending in Ireland’s three limping banks (AIB/BOI/PTSB) has reduced by almost €30 billion in the past twelve. It has been used to pay down the ECB by almost exactly that amount.
One should be in no doubt, why the Troika came, what they came for, and who sent them.
I would also add that Germany bears a severe responsibilty for the problems in Europe today. I have no problems with Germany deciding policies in her interest. But it is an entirely different matter when policies crucial to even attempting a resolution of the crisis are blocked time and again by Germany.
The fact is that most people living in peripheral Europe, living out their inconsequential lives, have to live with the consequences of decisions made by people of consequence, who bear little responsibility for the consequences of those decisions; even though those consequential decisions destroy the lives of millions of inconsequential people.All people of little consequence should feel free to voice a protesting opinion, if they have one.
@Michael Hennigan
Say what you like about the Troika, they made the trains run on time. We need strong rule (from abroad), someone to take on the Unions, the effete academics and the welfare state and make Ireland safe for the heroic entrepreneur again. Same ole same ole.
Yup, the Troika are most insistent that Ireland implements better policing of the unemployment crisis they are helping to prolong. Aggressive “labour activation” policies should keep the lower orders too shell shocked to organize or protest.
Uno mercato, una voce!
@ Joseph Ryan
Ideally it’s better that countries solve their own problems for better or worse as the foreigners will always be resented.
Ireland unilaterally guaranteed bank debt in Sept 2008. Two years later when bank bonds could have been defaulted, several countries were in crisis and there were no bailin procedures. There was by then a multilateral rescue fund but it wasn’t sufficiently funded to bailout Spain and Italy.
As for the [consequences of their ‘help’ can be seen from Malin head to Missolonghi], there is an argument that less ‘help’ in Ireland could have improved the chances of putting the economy on a sustainable basis as for example less CAP dole for farmers could also be a positive thing.
As for Greece, leaving it go bust, may have improved its chances long-term.
Should truckloads of cash have been delivered to be stolen by the elites?
The bitter truth is that Germany, France and other countries were not in a position to bailout all the banjaxed countries with massive transfers.
It’s easy to point at others but solidarity for Ireland is a one-way street.
It has been OK for Ireland to facilitate the erosion of the corporate tax bases of other countries until there is now no choice but to pretend support for change.
You’re possibly more bitter towards Angela Merkel than the real culprits in your midst including their many cheerleaders – – they’re were lots and lots of them!