The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
The relevant documents published by the ECB are here.
Turns out Europe’s banks are €25 billion short. Let’s see if we can get the Irish to pay again.
Looks like good news from the AQR and stress test. Getting past this may help the eventual European recovery. My concern is whether the ECB will pass the Quality Review of this Asset Quality Review. In other words, is this a reliable AQR that they have performed? Hopefully so. The first attempt (a few years back) was badly rigged.
25 banks failed leaving capital shortfall of €24.6bn. That is at end-13 however, and since then 12 have raised the required sum leaving 13 with a current shortfall of €9.8bn.
AIB capital ratio falls to 6.9% under adverse stress, BOI is at 9.3% and Permo just 1% (pass rate is 5.5% under adverse stress.). Ulster also passed at 6.2%. In Italy 9 of 15 banks failed.
Is the increased estimate for non performing exposures a surprise? €136 billion here and €136 billion there, and pretty soon you’re talking about real money.
Just glancing through: for purposes of discussion.
From the document:
“The stress test was executed by the banks themselves, following a methodology designed and published by the EBA along with a baseline scenario founded on the European Commission’s Winter 2014 forecast and an adverse scenario developed by the ESRB in cooperation with the NCAs, the EBA and the ECB.”
Okay, so baseline is the EU Commission Winter forecast which can be found here:
In it we read (Overview Table 1)
Euro area (GDP 2014) 1.2% (GDP 2015) (Inflation 2014) 1.0% (Inflation 2015) 1.3% (Unemployment 2014) 12.0% (Unemployment 2015) 11.7%
How are those forecasts looking now?
The baseline scenario is discussed here:
“On average in the euro area, the adverse scenario leads to deviation of euro area GDP from its baseline level by -1.9% in 2014, -5.1% in 2015, and -6.6% in 2016. The euro area unemployment is higher than its baseline level, by 0.3 percentage points in 2014, by 1.2 percentage points in 2015, and by 2.2 percentage points in 2016. For most advanced non-euro area economies, including Japan, the UK and the US, the scenario results in a negative response of GDP ranging between 5% and 7% in cumulative terms compared to the baseline. Furthermore, while the adverse scenario does not strictly embody a prolonged deflationary
environment, it does entail material downward pressures on inflation. Thus, the scenario leads to annual inflation rates for the euro area below the baseline rates by 0.1 percentage points in 2014, by 0.6 percentage points in 2015, and by 1.3 percentage points in 2016. The implied adverse inflation rates amount to 1.0% in 2014, 0.6% in 2015 and 0.3% in 2016.”
But, and I read this as worrying, the systemic risks that are read as possibly leading to the adverse scenario are given as:
“The adverse scenario was designed to reflect the systemic risks
that were assessed as representing the most pertinent threats to the stability of the EU banking sector: (i) an increase in global bond yields amplified by an abrupt reversal in market participants’ risk perception, especially towards emerging market economies; (ii) a further deterioration of credit quality in countries with weak demand; (iii) stalling policy reforms
jeopardising confidence in the sustainability of public finances; and (iv) the lack of necessary bank balance sheet repair to maintain affordable market funding.”
Which reads at least partly ideological assumption to me. What do people think?
Morgan Kelly predicted this doomsday. Back in March in his infamous lecture he warned that the ECB would use the stress tests to bury Ireland. Or maybe the ECB were listening and they decided to thwart him.
It is interesting to see the difference between the capital ratios the banks actually reported at end-13 and that assessed by the ECB after the AQR, which in most cases are lower. The average difference in most countries is fairly low (02 -0,5 percentage points) but in some is big, including 2.9% in Greece, 1.4% in Cyprus, 2.26% in Slovenia and 1.1% in Italy.
MK’s punditry was discussed at the time:
No point repeating it here.
MK specialises in predictions. Obviously no point in repeating a discussion around whether his predictions will come true now that the race is run. But surely worth noting that he got this entirely wrong if for no other reason than to caution his fan club waiting for his next spectacular doom monger.
I would respectfully suggest you leave it before there is a thread all about who admires or detests some economics teacher.
PTSB has a CET1 (Common Equity Tier One Ratio) of 12.8%, where 8% is the required minimum. A good result in most peoples book.
Yet the adverse test scenario, leaves PTSB with only a 1% CET1 Ratio, for what appears to be a further impairment loss of 1.3 billion, and additional pre-impairment operating losses of almost 882 million. Whatever about impairment losses, pre-impairment losses of almost one billion seem outlandish.
In order to insure against this doomsday scenario, the government intends, apparently, to fire-sale whatever value is left in PTSB, plus its investment so far including the €400 million COCO bond. It seems a nonsensical and ludicrous cost of a contingency repair.
In addition, if the adverse scenario does actually happen, is it not better for the government to be the arbitrator of what happens to the €30 billion in assets that the PTSB now has, rather than having empty pockets and empty hand and being told;
‘The assets are none of your business just pay the liabilities (mostly ICB/ECB), like the last time’.
It almost seems now that the very first rule within government and public service is now to avoid responsibility for the management of anything, no matter now much it costs the public to farm it out to somebody else.
PTSB should be managed back to profitability. We have had enough fire-sales at public expense.
Lets take on some responsibility for a change, and forget the bonus’.
At the risk of pointing out the obvious, the Economist may be quoted; “How the markets reaction will be key (the test results were released on Sunday for that reason).” (“Reaction” must be a new verb!).
As the ones that matter are not open yet, the answer must rest as a “known unknown”. Given how far the states involved have come from their initial positions, it would be something of a surprise if the reaction turns out to be negative.
Ok I’ll give MK a break. But I presume MN is fair game. When asked in March what he thought of MK’s prediction he said “I always take Morgan seriously”. Let’s hope this serves to alter this assessment by our MOF.
The markets are doped out on Whatever it takes, the wonder drug from Draghi labs. What will count longer term is how the stress tests conform to reality especially under deflation. Europe has too many banks for a deflating future.
Not in the EZ but you could have a look at Credit Suisse to see the nature of the problem. 2005 KPIs were 130 bps interest margin and 50% costs to income on inv banking.
This year the KPIs are 30 bps on interest margin due to ZIRP and 70% costs to income. A lot of banks are on a similar scraw and have to feed overlarge balance sheets with large dollops of credit risk. It might all work out but it really needs zero shocks for the next 5 years.
@ The second
The race is never run. Tail risk is unpredictable and depends on how imbalances build up. Draghi bought time but didn’t do much else. I wouldn’t crow just yet.
MK made a very clear and short term prediction – that the ECB would stab us in the back with these stress tests. That race is run. MK’s bet came unstuck. I was really surprised he set such a hostage to fortune. Most economists are like you, they do not give definite timelines, they are always able to say “just you wait” no matter how silly they look in the short run.
Of course , the doomsayers may yet have their day – they may win the war, but they have spectacularly lost this battle.
Kelly was wrong because he underestimated how bad the situation was on the continent. They couldn’t sink Ireland because it would raise too many questions about the other countries
Unicredit passed the test
It’s a long way from the optimism of 2005
they need a fair wind for a long time to come
We are still a long way form normal.
While awaiting the verdict on the stress tests of those in a position to actually give one, this contribution by Tony Barber of the FT on Greece makes for interesting reading.
Leaving aside sunshine, there are quite a few parallels in the historical experiences of the two countries, in particular occupation for centuries and interference by foreign powers.
“Greek clientelism, and the selfishness of the rich, survived everything the 20th century threw at them – two world wars, foreign occupation, a civil war and a domestic military dictatorship. Do not be surprised if they outlive the troika, too, after Greece’s latest foreign overlords take their leave.”
He is wrong in his conclusion IMHO. In the case of Ireland and Greece, the troika may have left or be about to leave, but the currency for which it is, for the most part, responsible has not.
Clientelism in Ireland never quite reached the levels achieved in Greece. The country may simply have been changing one set of political cowboys for another since independence but, as long as the euro as a currency stays, their room for manouevre in the future will be severely limited. Whether the same holds true of Greece remains to be seen.
From the background tab at the link given above :
“Aims to the comprehensive assessment (sic)
Enhance the quality of information available on the condition of banks
Identify problems and implement necessary corrective actions
Assure all stakeholders that banks are fundamentally sound and trustworthy”
Transparency is way overrated in terms of guaranteeing stability IMO. In a system of booms and busts where markets run on emotion how the books looked 2 weeks ago is not enough.
Any chance of a real system that can guarantee that banks are fundamentally sound ie
• Banking union with a single supervisor
• a single resolution authority
• a common safety net involving
o Deposit insurance
o fiscal backstops
o burden sharing and
o a credible Lender of Last Resort
And Gavyn Davies has a big one on why trend growth is going to be very low going forward ..
Most of these problem banks expanded their balance sheets pre 2008 when credit fuelled growth of 4% plus was going to last forever.
Some of the stuff is quite funny
“Comparison with other similar exercises
This comprehensive assessment is considerably broader and tougher than any previous exercises.”
And some of it is really serious
“The ECB is responsible for:
◾managing the exercise
◾planning the design and strategy
◾monitoring execution in close cooperation with the national supervisors
◾performing quality assurance on an ongoing basis
◾collecting, consolidating and publishing the results
◾finalising and disclosing the overall assessment
◾supervising banks and monitoring capital raising as of 4 November 2014”
Ultimately the ECB is responsible for the safety of deposits in EZ banks
I read the Gavyn Davies article with interest. Where do you stand on secular stagnation?
I’ve generally taken the persistent over-estimation of growth over the last five years as being roughly due to the inability to grasp the impact of a financial crash (as the Dork once memorably pointed out, their models don’t have finance in them), the collective affects of austerity, etc.
But Davies (and Picketty) are pointing at a thirty year trend including a low rise in productivity – 1945-1975 is the exception rather than the norm. This does seem to indicate that the thirty year experiment with free markets doesn’t seem to have worked.
And, I am also conflicted. It is not clear to me that permanent high growth is desirable. I like the notion of ‘steady state economics’. Plus secular stagnation could be seen as the coming of that happy state of plenty (in the West at least) talked about by Keynes, in which case the issue is more one of equality than how to boost growth. What do you reckon?
Here is part of the secular stagnation story.
The other (structural balance) aspect of the secular stagnation problem. The knee bone connect to the thigh bone.
‘If the prospect of a sustained euroglut, on the other hand, causes enough trade intervention and beggar-thy-neighbor retaliation that prevents Europe from running the proposed surpluses, a wave of European defaults, including sovereign defaults, is almost certain (and I am certainly not the first person to have noticed that a massive wave of defaults has historically been one of the most efficient, if brutal, ways of resolving huge savings excesses). The only alternative would be even higher unemployment, which would certainly bring the savings rate down, but at a cost that is probably politically unacceptable.’
Thanks, Paul. Very lucid.
I think the last 34 years of morning in America and Thatcherism in Europe were driven by credit and that that seam is now exhausted.
There is a nice graph here called “average price of a mews house in London” which encapsulates for me what happened :
Oil is very expensive and all the easily accessible stuff has been drilled.
Tech is not going to drive economies very far- it has killed a lot of decent paying jobs in book and record shops and replaced them with $10 an hour and no pensions chez Amazon.
I would tend to agree with the Monthly Review crowd , that stagnation is always there is the background and with Minsky, that the system is prone to bubbles which collapse spectacularly.
One of the points Gavin Davies makes about past growth was the influence of population growth as a driver. I think we are seeing signs that people in various countries -eg the UK, CH – feel that immigration is a serious issue and that what may be good short term for the economic model is not necessarily appreciated by the people who are already part of the system.
Increased population puts lots of stress on existing infrastructure and neoliberalism isn’t so fond of replacing ageing infrastructure. The end result is a deterioration in quality of life. Maybe it was unrealistic to think things could continue as they were forever but this is quite an important driver of political sentiment.
And it does raise questions about how certain systems such as pensions will be funded if population growth stops or reverses.
Plutocrats won’t be happy with steady state either.
Another aspect is the sheer volume of money created in the last 30 years and what someone called ” the “risk mouths” that need to be fed and what it means for the evolution of interest rates long term .
It seems to me that the system has reached its model limits and that what might make sense for individual players is incoherent system wide.
And this from Updike seems to be very relevant . From Rabbit at rest.
Pru and Roy and Nelson retreat into their room and he sits a while and watches while Judy, the remote control in hand, bounces back and forth between The Cosby Show, some ice capades, and a scare documentary about foreigners buying up American businesses, and then between Cheers and a drama about saving a fourteen year-old girl from becoming a prostitute like her mother. So many emergencies, Harry thinks, so much canned laughter, so many actors’ tears, all this effort to be happy, to be brave, to be loved, all this wasted effort. Television’s tireless energy gnaws at him.
Tireless but directionless. Zizek calls it “compulsive purposeless dynamism”.
Maybe something will turn up – stranger things have happened – but I think the next few years have the potential to be very volatile.
Can’t Morgan Kelly defend himself?
I see no reason why he needs people on here to defend him.
I fully expected an article in the Irish Times this morning giving Morgan Kelly’s response to the stress tests.
Either an article by The Special One himself or at least an interview.
But, hey, not a bit of it.
This is all too typical of Ireland’s doom economists.
They make ridiculous hysterical predictions that damage Ireland’s reputation, become international celebrities for 15 mins on the back of them, collect lots of hefty fees from the media. Then, when their predictions fail to come true, there is neither sight nor sound of them. They disappear into the ether, never to be heard from again. Morgan Kelly is the worst of them, but by no means the only one.
On the other hand, I am not sure any more that Morgan Kelly actually exists. My faith has been shaken. I await a sign. Has any one from this site ever seen him? Its looking more and more that he’s a fictional spoof character like Private Eye’s Dave Spart.
Regarding secular stagnation, the paper linked to by PQ has valid points.
Looked at globally, there is no secular stagnation. But, there is a particular problem in Europe and one or two others (Japan). That problem relates mainly to demographics. I have referred to it many times in posts here (including last Friday). After half a century of militant anti-religion anti-family onslaught, Europe has lost the will to breed. It is geriatric. There are few young people. I’m actually thinking of moving to Germany or Italy as at my age (65), I’d be considered a spring chicken. Millions have been incinerated in abortion factories. Birth and fertility rates are at rock bottom. I’m no doctor, but I wouldn’t mind hazarding a guess that the exceptionally low and catastrophic fertility rates in Europe now are not just due to choice (although that’s part of it), not just due to more women having to or choosing to work (although that’s part of it), but also the spin-off from far higher incidences of sexually-transmitted diseases. According to the article PQ linked to, Germany has a median age of 46. A country with a media age of 46 will be as dynamic and successful as a rugby team with a median age of 46.
In many (possibly most) European countries, there are now more deaths than births annually. Ireland is the exception, 2.5 times as many births as deaths, although it has slipped recently.
The U.S has suffered these trends to a much less extent than Europe. Religion is still strong, and its demographics are much better. So, its economy has done better. Ireland too has suffered these trends to a much less extent than Europe, hence its far higher growth in the past 30 years and today.
As if this wasn’t bad enough, in many European countries the left-liberal war on their traditional religion and culture, allied to the shortage of young people, is accelerating mass immigration of fanatic extremists from Islamic countries (which needs to be distinguished from mass immigration of Poles, Lithuanians etc which is beneficial). Whole areas of cities in western Europe are now breeding-grounds for Al Quaeda. Add to this mix the ludicrously high taxes in many European countries, and is it any wonder that much of continental Europe is in secular stagnation. But, lots of places outside continental Europe are clearly not (including Ireland, although it too is harmed by continental Europe’s stagnation).
The core objective of Obamaism is to replicate these disastrous European trends in the U.S. And the core objective of Dublin 4 loopy-liberalism is to replicate these disastrous European trends in Ireland. Only time will tell if they succeed.
Regarding my comments on Friday Week (Oct 17) on crime in Ireland, it looks sadly like I’m being borne out. I count 9 murders in the last 9 days. In the whole of 1963 there were 4. Obviously, I can say no more as they are sub judice. Naturally, the loopy-liberal Minister for Justice is far more interested in having enquiries into what went on in 1936 than in reducing the number of murders today.
All going smoothly; so far!
Maybe commentators will now turn their attention to a topic being rather overlooked i.e. the fall in commodity prices and especially oil (Brent crude down 24%!). This must be giving a boost generally as punters fill up at their local station.
“Can’t Morgan Kelly defend himself? ”
You remind me of Gerry Hannon
Secular Stagnation? Is this the new thing that our intellectually challenged chattering class will dine out on? Might be amusing, except their daily reading may be somewhat restricted to the usual fluff-n-guff.
Its simple. You just cannot expect a physical system which consumes finite resources, to continuously and relentlessly trend upward at >3% per annum compounding, as you can for compounding interest – and not expect that at some point that 3% inflects over toward 1%.
Simple folk seem to understand this built-in limitation. Its the so-called Big Men* who cannot grasp it, due precisely to its logical simplicity. Not to mention its un-mentionability in polite PC circles!
This author, edwardhughtoo, referenced above by PQ, concentrates on the demographics. And these are indeed a major problem – but not the base cause – which is actually our insatiable demand for raw energy to sustain that rate-of-growth >3%. Absent that relatively inexpensive source of raw chemical energy (aka: economically affordable) and accessible (low energy cost of extraction and delivery to customers) our modern industrialized economies WILL falter and stagnate. The situation with a financialized economy is no different – you just have to extend the time-line by a decade or so.
DOCM mentioned the fall in crude prices. This is a complete catastrophe. It means that investments in exploration will be reduced and existing production either reduced or closed out (its already happening). Think about that. It takes time, a lot of credit and a lot of raw energy to bring new fields into production. Once they are in production costs are lowish. But the problem for the producers is that the rate-of-return is low also – absent high energy prices. But higher energy prices means economic rate-of-growth declines. Hence the current dash for gas and coal. Easier and cheaper – so far! And please do not let the PR hype about the US being self-sufficient in oil products and being a nett exporter of Nat Gas: rubbish! This is so obvious (if’n you look carefully) that it needs little explanation.
There is a very rough rule-of-thumb, which says that for each unit of raw energy consumed a technologically advanced economy will advance by one and one half units. Its when that ratio of energy consumption to GDP output declines to 1:1, secular stagnation will show up.
So what do our Big Men do? They continuously alter the manner in which GDP is measured to make the ratio 1:1.5 again! And why might QE not be working? Well, it seems that Lord Keynes was influenced by something Herr Marx wrote about there being a genetic abnormality in Monopoly Capitalism which would make a secular stagnation inevitable. Funny how this seems to have been airbrushed out. – and we get Keynes Lite.
Mind you, neither Marx or Keynes experienced a financialized economy. Interesting times.
* I believe our Big Men do indeed grasp it! Mendacious they may be, but fools they are not.
Thomas Molloy has a very good gallop over the fences in the Indo.
With the publication of the stress tests and AQRs – or rather their seemingly calm acceptance by the markets – another hurdle has been overcome. However, it would be optimistic in the extreme to imagine that the burgeoning political problems can be resolved without a parallel solution to the economic ones. It is in this context that the fall in the price of oil – not mention the persistence of exceptionally mild weather across Europe – can be helpful. The FT had extensive coverage on the topic some time ago.
The Indo also had this article by David Blair from the Telegraph regarding the Ukraine and Putin’s supposed betting on General Winter to enable him to tighten the screws on all those opposed to him. However, while Putin may attempt to rattle cages all around Russia’s borders, he is not, one would imagine, in a position to control international commodity markets.
It is illogical for BW to be in favour of low house prices but in favour of high oil prices. High oil prices are worse for Ireland as it produces no oil.
Both operate under the rules of supply and demand and have a natural cycle.
The cycle involves lower prices => lower production => higher demand => rising prices => rising production => eventually higher prices => higher production => lower demand => falling prices = back to square one
I’d like to see both as low as possible, but I accept the cycle.
I have no idea how long this phase of the oil cycle will last – maybe a month, maybe 10 years – but, the longer the better for Ireland. If oil stays at $80 next year (no idea if it will or not), it will add approx. 1 per cent to Ireland’s national income over and above that achieved from growth.
John, I do not know whether I am wasting time ….
Those cycles you mention. The economic one is a virtual one, the energy one is not. One is an endless carousel, the other a physical torus. You do not want to encounter the latter. In the limit its a Black Hole!
“Both [high house and oil prices] operate under the rules of supply and demand and have a natural cycle.”
Nope, John. This is a very easy mistake to make. I’m in favour of ‘lowish’ home prices – very definitely. Low oil prices? Did I say that? I fancy not.
Oil only works its GDP magic if there is a constant, a relentless, consumer-led demand. Such demand is a tad dependent upon a disposable income being available – aka: the consumer can afford.
The consumer has to consume both oil + credit – in parallel. Otherwise its not much fun. Consume oil and you emit environmental pollutants. Consume credit and you emit a financial pollutant – debt. Difference? When you stop consuming oil the effluents stop. However, when you consume credit the emitted debt just keep on expanding and will, if left unattended, consume your entire future income – before you can even get the cheque into your hand*. That’s interesting – to say the least.
* Sweezy, P. and Magdoff, H. 1984. ‘The Two faces of Third World Debt’., in, Economic History as it Happened: Stagnation and the Financial Explosion, pp 176-185. Monthly Review Press Classics IV. – see Table 1.
@Brian Woods Snr
Do you have evidence to support the idea that economic growth depends on increased energy use? You have advanced this proposition previously.
I think this relationship may have held 50 yrs ago but no longer.If you want education of healthcare or software that’s twice as good, do you really need to double energy inputs?
Of course if you flood an economy with a lot of cheap energy you will raise growth figures temporarily but that is not the same as saying that economic growth requires increased energy input. Apart from anything else we can see wildly varying levels of energy intensity between similarly rich economies (eg US and Switz)
see many papers like this that examine if growth depends on energy use
“However, when you consume credit the emitted debt just keep on expanding and will, if left unattended, consume your entire future income.”
I took out a 95 per cent mortgage in the late 1980s. Interest rates were then around 12-14% (this was UK). Finished the mortgage payments a couple of years ago. Now nothing more to pay for my accommodation until I die. And for the decade before the repayments were just 5-8% of my income. So, it didn’t exactly “consume my entire future income”.
Greatly helped, of course, by the fact that oil prices fell by over 50 per cent in 1986/87 from $30 to 14$ and stayed at that low level for 15 years. That was one of the reasons for the relatively good performance of the global economy in the 1990s. Hopefully history will now reeat itself regarding oil prices, but I have no idea if it will.
Hi Ossian, very, very simple exercise (though please do not attempt this unless an adult is present). No need for any paper. Raw energy consumption + GDP growth are a Siamese Twin. Whither one goes, so goes the other.
Shut down ALL oil deliveries. Then retire a safe distance. OK?
Its the affordability question. The disposable income question. What can the consumer afford to pay for energy?
Look: There are allegedly, 6,000+ units of oil in ground. We can expect to extract 3,500 or so. We have, since 1859 and up to 1997, used 1,200. The doubling time was (at 3% p/s compounding) 23 years. So by 2020 we would have – “at present rate of use” consumed AN ADDITIONAL 1,200+ units.
1,200 + 1,200 = 2,400. That leaves (3,500 – 2,400) or 1,100 left to consume. Please, (no offense) go figure!
Fortunately, the rate-of-consumption in the developed economies has declined to 1.5 % p/a (estimated). That’s one reason for lower prices – lower demand – in our developed economies (US, UK, EU and Japan. Not so in the major producers. Their internal consumption is increasing, exponentially – its their demographics.
It is estimated (Using the Export-land Model) that by 2023 there will be insufficient global crude oil supply available for the nett importers – to fuel our economies at our CURRENT usage – so God help us if we all recover and start growing.
We have entered a secular stagnation cul-de-sac. Money may buy you love, but it sure as hell will not buy you an increasing amount of a dwindling raw energy supply.
“If you want education of healthcare or software that’s twice as good, do you really need to double energy inputs? ”
Where are the graduates with those super-duper educations going to live? In Switzerland they live in the “agglo”, the super villages in the countryside and they drive to work and it’s petrol all the way.
In Ireland younger people are shunted out beyond the M50. Petrol again.
Throw in a car for the missus/mister. Very few cars can function without petrol. Modern economies are all about time and saving time and connections made possible by petrol.
Even $80 a barrel is expensive.
Software that’s twice as good online means massive server farms that eat energy.
For all the efficiency claims of modern life tonnes of oil equivalent measures of energy consumption are still very, very high. We are still totally dependent on oil.
Meanwhile over at the FT
11 hours ago
ZERO HEDGE: As we previously reported, the ECB’s latest stress test was once again patently flawed from the start. Why? Because as we noted earlier, in its most draconian, “adverse” scenario, the ECB simply refused to contemplate the possibility of deflation
Would you mind setting up a dummy thread where people who want to comment about MK or anyone else they regard as some sort of media personality can do their thing without boring everyone else.
If you try to make a point by quoting zero hedge, don’t be surprised if no one takes you seriously.
Who else is on your sh8tlist?
The ECB has a long history of underwhelming delivery and this comprehensive test could be another one in the series especially with deflation at the door.
An interesting comment on Italy from the WSJ.
Remember that secret letter that, curiously, Ireland is has been very reluctant to publish – even though it is said to prove the state was forced to hand over many billions of euro, wrongly in the view of its government at the time?
Morgan Kelly deserves plaudits for his outstanding work on the Irish housing bubble prior to 2007. I hope if a similar situation ever recurs in this country, there will again be economists who are prepared to call it for what it is, and ignore the accusations of doom-mongering and “undermining confidence”.
Haven’t noticed anything about PTSB or Italian banks, nor the question of whether there are implications for looser lending policies at the other Irish banks, or loan demand…fascinating and really useful insights into who likes Morgan and who doesn’t though.
From the WSJ blog comment!
“The Bank of Italy seemed to agree, as it went on the defensive after the results of the stress test. In a statement, it argued that the stress test’s adverse scenario implies a much more extreme outcome for the Italian economy than its neighbors, implying “a collapse of the Italian economy.” What’s more, it said that unlike other eurozone countries, Italy provided only a modest amount of state aid to its banking sector since the financial crisis struck—only some €4 billion compared to €250 billion in Germany’s case.”
The figures in respect of France must also be available as any support had to be cleared through the competition directorate of the Commission.
As to the infamous ECB letter, it must turn out to be a damp squib as many appear to have had sight of it and have survived the experience. Of course, we could always sue!
The government’s worries are elsewhere. (Just an excuse to post a text – from Roscommon – which I thought would have surfaced already!).
Day after day, day after day,
We stuck, nor breath nor motion;
As idle as a painted ship
Upon a painted ocean.
Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.
As a postscript, from 2006 to 2011, Draghi was head of the Bank of Italy.
One could say that Italy’s major advantage is that it has a government that does not work (i.e. a large black economy) while France’s major disadvantage is that it has one that does (i.e. small black economy).
An aspect of the ECB review that has also received little attention is the fact that quite a few banks are subsidiaries of banks, notably UK and Swedish (in respect of the Baltic States), that are domiciled in countries that are NOT members of the Euro Area.
The desire to get back on the euro train when it is perceived to be, once again, picking up steam, is evident.
“The desire to get back on the euro train when it is perceived to be, once again, picking up steam”
all change at Deflation
Are ye right there, Mario, are ye right?
Do you think that we’ll be there before the night?
Ye’ve been so long in startin’
That ye couldn’t say for certain
Still ye might now, Mario
So ye might!
What is the point of endless prediction of some doom or other just around the corner; even if it is Halloween?
Good question. Here’s one I have: What’s the point of insisting that the medicine is always “structural reform” no matter what the illness?
The question relates to prediction, not defence of a particular point of view. I would make the same comment – but in reverse – were it a case of insistent prediction of impending success (just around the corner!).
Deflation isn’t some prediction of doom. It’s something the Eurowallahs have ended up with as a result of policy.
How are they going to engage it ?
If one takes the results at face value, then they seem very positive.
Most banks (all?) passed the base scenario test. The necessity for an EU wide adverse test scenario begged some ugly question of the people ‘running’ the EU.
Everybody tries, if possible to have some contingency for adversity, but why after six years is it still necessary to make provision for adversity on a continent wide basis?
An adverse scenario can be avoided if there is a willingness to avoid it. If there is not a willingness to avoid deflation or zero growth, then any capital buffers will quickly evaporate, and debt write-downs and a re-balancing of wealth will be the order of the day. It will no longer be possible to protect wealth, by making the grunts work harder. Which seems to have been the only policy employed so far.
At the end of the day, the stress tests were about protecting wealth, and banks have been shored up, often at public expense, to protect the wealth of a minority.
That should not have been a priority, but now that the protection of wealth at public expense seems to a fait accompli, can we move along to providing a future for those without any assets but who still can have productive lives ahead of them.
Your guess is as good as mine!
Mine would be that the institutional strength – much under-estimated – of the EU will see it through.
There is, of course, another approach currently being tried in Europe.
In fairness to Tracy Alloway she never writes as Pollyanna
I saw that German exigence beat Valls and hollande. Ca va encourager les autres. Surtout Marine.
Zero hedge may be OTT but AEP has the same story with lots of backup.
No reports of Irish corporate lending falling off the cliff…I wonder why….
Moreover. ‘structural reform’ always seems to hinge on such monumental changes as liberalizing the taxi market, charging for domestic water usage, and increasing competition among legal eagles.
How enthusiastic were the Germans when Uber tried to gain a foothold (tyrehold) there?
Now that he stress tests are concluded maybe it would be wise to contemplate the real problem(s)……
In 1990 the implementation of Basel 1 meant in practice that European banks could hold sovereign bonds irrespective of risk without impacting their capital – which was good news for cash strapped governments.
JTO had raised elsewhere the issue of the causes of the current crisis pre-dating the launch of the euro.
As the architecture of the single currency was being developed in the early 1990s, France experienced the biggest jump in public debt since 1970.
Dreams of European Growth: France and Italy facing pre-euro economic problems
Every plus has an associated minus in a free trading and financial flow world.
China’s version of ghost estates underlines the fact that it is the drop in Chinese raw material demand that is at the root of the overall fall in commodity prices.
This comment by Gavyn Davies could hardly be improved upon in terms of summing up the present shaky state of affairs and the action that needs to be taken.
“Mario Draghi, the ECB president, told European leaders on Saturday that a combination of fiscal, monetary and structural reforms are needed, on top of the banking measures. He is right on all counts.”
The EBA published the results of the stress tests including capital ratios under a fully loaded Basel 111 basis, which is getting some coverage in the media today. Under that definition AIB’s ratio falls to 1.69% under the base and to -3,39% on the stress, BOI’s ratios are 7.9% and 2.9% with Permo at 6.3% and -2.76%.
Can you make your mind up? SVP (Si il vous plait not Schweizer Volks Partei)
Is the bank stress test the start of a new dawn .. ” back on the euro train when it is perceived to be, once again, picking up steam” or is Davies right to hedge his bets and point out the big risks which are well beyond banking capital ?
“Mario Draghi, the ECB president, told European leaders on Saturday that a combination of fiscal, monetary and structural reforms are needed
– how does that fit with saluting the PTB for getting France to bend over on the deficit ?
If the bank assessment is the dog’s boll#cks when can we expect EZ banks to start lending to SMEs again ?
And what is Draghi going to do to get demand in France and the wider EZ going ?
The difference in market sentiment vs 2 years ago probably means no one will be interested. CET1 stuff is likely to be generally regarded as just pesky regulators trying to get in the way – and only in 2019 anyway, by which time NPLs will be non-existent!
We are already back on the familiar ground where a regulator attempting to limit access to what Alan Greenspan referred to as “the democratization of credit” is fair game for for the irony-free pitchfork and torch-bearing crowd – many of whom no doubt were indignant critics of prior banking supervisory attitudes.
Speaking of risks
I was referring by definition to those countries not on the euro train but whose banks – or at least their subsidiaries – are. As for the rest, I agree with Gavyn Davies. Who wouldn’t? Action on all the fronts that both Draghi and he identify is clearly necessary. The game of pass the parcel has to stop. How things will turn out, I do not know.
On the point raised by Dan McLaughlin, this coverage from the Indo is of interest.
There is nothing that is really new in it e.g. the weak capital position of German (and, of course, Irish) banks under the new Basel III rules. It may be noted that non-euro countries are way ahead of the game with regard to implementing them.
“The game of pass the parcel has to stop. How things will turn out, I do not know.”
you must have a good idea how the Germans are likely to react, no ?
the EZ has a far lower collective debt to GDP ratio than either the US or the UK . This slide into deflation is completely avoidable if the will is there.
The pity of it all.
Comparing the EZ to two sovereign states, each with control of its own currency, is an entirely pointless exercise when one thinks about it. It is like comparing chalk and cheese. But you are far from alone in making the comparison.
Both Paris and Berlin “bend the knee” i.e. recognise their responsibility to abide by democratically agreed rules, in the matter of EU and Euro Area budgetary procedures.
The alternative approach is while mean also being demonstrated elsewhere in Europe.
The glorious advantages of being part of the United Kingdom and not the Eurozone:
“Both Paris and Berlin “bend the knee” i.e. recognise their responsibility to abide by democratically agreed rules”
What happened to the “democratically agreed” 60% debt to GDP limits? Why are some rules expendable and others not ?
Oops! The reference to Berlin should, of course, read Rome.
One set of rules at a time, if you do not mind! It is the way the world, and not just the EU, works.
Not much to choose between them, in other words!
jto: if there is a glorious advantage it is that the Uk has political freedom to alter course and take advantage of the offers of ultra cheap credit available to it. In the EZ it would be a breach of the treaties to move away from “austerity”. It’s a matter of reserving political choice.
ringfencing health is nuts in NI .
The UK doesn’t have that much flexibility to load up on cheap debt – total debt ex financials is around 270% of GDP as shown in the chart at this link
What you say is a total misreading of what has been agreed, not in the treaties but under their provisions. What these agreements imply as far as Ireland is concerned is set out in a recent magisterial commentary by Brendan Keenan.
When one has a prime minister of a country that is as near broke as makes no difference intervening to undermine the efforts of the country’s central bank to ensure that the situation does not get even worse – in the matter of imprudent bank lending, that is – a certain pessimism is permissible.
I just had a look at that FT article on France and Italy taking their beatings.
Italy took the money from a tax cut fund.
“In a meeting with a small group of reporters on Monday night, Karel De Gucht, the outgoing trade commissioner, chastised Paris, calling their explanations for missing EU targets “simple bullshit”.
A moules et Frites man. Straight talking Flemish. Sometimes you need a bit more nuance.
Neither France nor Italy are growing at any rate enough to reduce their debt loads and most Belgian voters don’t understand that.
Belgium is hardly setting the world on fire either
I appreciate the importance of rules to conservative types but there’s a big danger that the wood gets lost while the trees are in focus.
Martin Wolf on the general topic.
When did banks drive anything other than the bonuses of their top staff?
You are missing the political point. You must compare what Hollande was saying prior to the stand-off with the outcome. Renzi was much too smart to make the same mistake. The bottom line is that both accept that the rules apply. How strictly remains to be seen.
The point is that the Good Ship Euro is leaking , DOCM and it really doesn’t matter about the deckchairs and whether or not they are arranged within 3% limits. Those Belgians are going to get deflated as well.
Politics and economics are intertwined. It’s the economy that should decide the politics in this case, not the other way around.
Martin Wolf doesn’t pull any punches
Demand problem. Banks not going to drive growth. Germans in denial.
So much for DOCM and the primacy of politics.
The day economics trumps politics, you must let me know!
The masters of economy, the systems of corporate & financial power, have been trumping politics, of all shades, for quite some time now.
“The day economics trumps politics, you must let me know!”
Take your pick
Thanks for the above.
Good article from Ashoka Mody.
‘Are the Eurozone’s fiscal rules dying?
– if so: good riddance’
“The European Commission and European Council have blinked. Reprimanding France and Italy for their transgressions of the fiscal rules was too risky. With face-saving measures, France and Italy will now break the eurozone’s prized fiscal rules.
“…the hope that France and Italy are in the vanguard of rendering these rules obsolete should be a matter of cheer. Delors was right: centralization of fiscal rules makes neither economic nor political sense. Persisting with centralized fiscal rules despite their evident costs—because all other options have been ruled out—is a grievous error.”
Swiss economy slowing down, linked to the EZ mess. I’m sure they are delighted that France and Italy followed the letter of the law.
Delors is an interesting character. He was a young highflyer during “les trente glorieuses” , the Keynesian years post ww2 that ended with the oil crisis and was involved in a lot of France’s central planning that delivered stuff like the TGV and the alpine ski resorts.
France really needs a structure like that now given that competition between companies is bringing deflation.
There’s an interview with him on this subject in this magazine which is worth a read
He has a very informed view of the flaws of neoliberal logic because he knows there is always an alternative.
The 1945-1974 postwar period cannot be replicated in France.
Unemployment was at 2% in 1970 and the main world market consisted of US, Canada, Western Europe, Japan and Australia.
The unemployment rate has been above 8% since 1982.
A Delors II would have to magic up lots of innovative companies to close the trade gap as there is a limit to what value could be got from public projects.
Climate change is on the way and it hit the US by 3% annualised in q1. There is more energy in the atmosphere, it’s not complicated. France could start to get ready for it. Interest rates will be low for a very long time given the increase in money supply since the 70s.
Neoliberalism has run out of road. Most MBA courses are crap.
France is hosting an international hydrogen project but who knows, Germany’s conversion to renewables may look inspired in time.
We have evidence today that the Irish recovery needs full-time jobs with reasonable pay and or lower household debt.
Retail sales volume was stagnant in September and ex-vehicles also flat in the third quarter.
The value of annual sales was up 1% suggesting discounting.
A lot of housing in the high income countries is crap as well.
And most pension fund assets may not earn much over the next 10 years….
I don’t see anything new in BK’s piece. I was, as briefly as possible, making the rather broader point that EZ membership does not allow a swift alteration of course away from the SGP whereas the UK and others do have option – subject, obviously, to market access and FX volatility – should the economic, electoral, and investor consensus suggest that should be done.
Your point reminds me of George Osborne’s prediction of a Gilts strike back in 2008.
Your statement “In the EZ it would be a breach of the treaties to move away from “austerity”.”has no basis in fact. There is no mention, to my knowledge, of the word austerity in the treaties. It is, however, regularly confused with the provisions relating to the SGP as amended by various later elements of adopted legislation (so-called Six Pack and Two Pack).
What the concept means in practice is open to discussion. Certainly, there are many in Ireland that have not experienced it in any real sense, notably politicians and senior public servants (including university professors).
“Your point reminds me of George Osborne’s prediction of a Gilts strike back in 2008.”
Which one? That pension funds won’t earn much?
How much do they get in gilts at the moment ? Irish 10 year is sub 2%.
Risk free, apparently.
And equities are way overvalued. FTSE at record levels given the outlook? Pull the other one.
I don’t think interest rates are going anywhere.
This was very good
Ollie Rehn and a former French finance minister on the stand-off between Berlin, Paris and Rome.
The most sobering extract and the one that must give rise to the most pessimism as to future developments.
“But genuine reforms in France are still pending. The reshuffled government does not have the support of its Socialist majority. The republic’s rigid institutional system prevents Prime Minister Manuel Valls and Emmanuel Macron, economy minister, from co-operating with like-minded elements in the opposition, making it impossible to abandon the 35-hour working week or suffocating taxes on producers and companies. Ultimately, without reforms, the social system cannot continue to be financed by salaries; the burden must be shifted to consumption, in the form of a “social value added tax”, for instance.”
Ann Cahill’s extensive interview with Barroso.
The train seems to have left without Olli Rehn
Buiter is back with arched eyebrow
Remember what he wrote back in 2011
The crisis is likely to return with a vengeance .
For what they have done and have failed to do
Are you sure you have the right passenger(s) and the right train?
From Buiter’s 2011 opus (page 57).
“Ireland is the prime example of a country where the sovereign is at material risk of default because of the support extended by the sovereign to the banking sector, through guarantees of unsecured debt and through large injections of capital. Like Iceland, the banking sector in Ireland was too large to save. Unlike Iceland, the Irish sovereign, when faced with the likelihood that it would not be possible to make whole both the banks’ unsecured creditors and its own creditors, did not leave the banks to sink or swim on their own but extended bank guarantees for initially up to €440bn worth of bank unsecured liabilities. With the consolidated sovereign and banking sector likely insolvent, in our view, the key remaining question is whether it will be the banks who default, the sovereign or both.”
The ECB bought time and reformed nothing.
Martin Wolf says there are 3 key facts
1 the eurozone is in a depression
2 lack of demand has played a crucial role
3 The European Central Bank has failed to deliver on its own price-stability target
“The market’s judgment, is that a crisis that collapsed governments in Portugal, Italy, Ireland, Greece and Spain, and contributed to savage recessions in most of those countries, has ended, without concrete action
by the European Central Bank, without any of the structural reforms once thought necessary yet put in place and with little growth in the economy”
And you think 2011 is history ?
And another thing, DOCM
Irish 10 year now 1.79% or 52 bps below US 10 year. That is insane given the debt situation.
With debt not far off 150% of GNP it’s way too early to say the risk of a default is zero especially if the EZ goes into Japan mode and the US doesn’t make it to exit velocity.
3 key points in that Buiter 84 pager from 2011
“There are no absolutely safe sovereigns — ‘rates analysis’ has to be done
simultaneously with ‘credit analysis’ for all sovereigns, including the G3.
There are likely to be several sovereign debt restructurings in the euro area
(EA) .. Liquidity support should not stop this; only
permanent bail-outs would.
The sovereign debt crises of the euro area periphery interact with banking
sector weaknesses throughout the EU. Both need to be addressed for a lasting
In both the case of the EZ and that of the US the urge to reform the system to make it safer was jettisoned in favour of liquidity.
Without growth crisis will return.
You linked to an extensive paper by Buiter as if it was something to which particular attention should be paid in the matter of prediction. I leave it to others to judge how accurate Buiter was in relation to Ireland. He was no more accurate, incidentally, on many other issues. (His current FT piece is pure fantasy land).
More than incidentally, the one really surprising element IMHO in the article by Rehn was his open reference to the need for QE.
You will recall the apocryphal comment from the Chinese leader who was asked about the consequences of the French Revolution. He said it was too early to say.
Buiter is a former member of the UK Monetary Policy Committee. He may be talking his Citibank book, but he is nobody’s fool. There remains a significant, albeit not immediate, risk of bank and/or sovereign default in Europe. Debt/GDP trajectory in Ireland is not rosy. Debt/GNP is worse.
The historically unprecedented monetary interventions from central banks can’t last forever. Where is the riskless yield these days ? This one ain’t over ’til its over.
I am not into the prediction business, as you know. That there are major risks is evident. Buiter may be a fine economist but what he proposes is, in political terms, IMHO totally unrealistic. (He is by no means unique within his profession in this respect cf. debate on other thread with regard to the teaching of economics).
Another link that may interest you and other bloggers on the elephant in the room; shadow banking.
Buiter is indeed no fool. But his pronouncements on the Eurozone crisis have generally been either inaccurate, or just downright wrong. Greece was supposed to have exited the EZ long ago according to him. Ireland was to need a second bailout. Italy was to have needed external assistancel. And so on and so forth…
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