Profile of Olivier Blanchard; More on IMF and Irish Bailout

The Washington Post carries an extensive profile of Olivier Blanchard, now of PIIE after his period as IMF economic counsellor – here.

The section on the Irish bailout is interesting:

 

The one place European leaders were anxious for a bank rescue, however, was in Ireland, where by fall 2008 banks were already reeling from losses after the bursting of a giant real estate bubble. The Irish government had nationalized one big bank and bailed out several others, but the cost proved so high that two years later the government itself was on the verge of defaulting on its own debts and turned to the international community for help.

The IMF had convinced Irish officials that, as part of any rescue package, those who had lent money to the banks should be forced to share in the pain. But Jean-Claude Trichet, head of the European Central Bank and a key player in any rescue plan, was adamant that there be no “haircuts” for bank creditors.

Trichet’s motivation was not surprising. The biggest creditors of the bankrupt Irish banks were French and German banks that themselves could go under if forced to recognize such losses, requiring costly and unpopular bailouts from their own governments. He also feared that any debt restructuring, as it is politely called, might make it difficult and more expensive for other European banks to borrow. Trichet went so far as to threaten to cut all central-bank lending to Irish banks if their debts were restructured, the equivalent of a death sentence for the Irish banking system.

With no other options, Ireland agreed to guarantee all of its banks’ debts, paying for it with a $67 billion international loan package whose harsh terms would drive the Irish economy into a deep recession and saddle a generation of Irish taxpayers with the full cost of repayment.

Strauss-Kahn, desperate for the Fund to play a visible role in the crisis, agreed to go along with the terms of the bailout. In rationalizing its participation, the Fund was forced to issue what Blanchard and his colleagues knew were unrealistically optimistic predictions about the quick recovery of the Irish economy. It would not be the only time the Fund would buckle to political pressure from European governments that are among its largest shareholders.

“We were in a difficult position calling attention to the fact that the European banking system may have been insolvent,” Strauss-Kahn said in an interview from Morocco. “It was not our job to cause bank runs. Olivier’s intellectual authority on that matter was particularly helpful, if not totally successful.”

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27 thoughts on “Profile of Olivier Blanchard; More on IMF and Irish Bailout”

  1. Very helpful.

    Mad Oul Jozie_down_the_road now intends to call both Olivier and DSK as witnesses in her Brehon Law case based on ‘eric’ to the European Court of Justice vs The European Central Bank.

    As Jean-Claude will (presumably) appear for the defence the court transcript should prove to be illuminating. Methinks the present head of the IMF will also be a participant; not forgetting Herr Geithner and MerKozy.

    Good on yer Jozie! You got more balls than the present and previous Irish admins combined.

    @Colm McCarthy

    Blind Biddy, just back from an intergalactic vacation with Seven_of_9, would like to invite you to take afternoon tea to discuss affairs of mutual interest.

    @Irish Legal System

    Spose there is no chance of a pro-bono on behalf of the humble lumpen citizenry who got screw€d and had to put up the next generation as collateral for the ~100 Billion cost of said screw1ng? You made hay on the way up … and you continue to make it on the way down ….

  2. “It would not be the only time the Fund would buckle to political pressure from European governments that are among its largest shareholders.”

    Similarly to the failure to restructure the membership of the UN’s Security Council and its decision-making processes falling the implosion of the Soviet Union in 1991 – which has led to mayhem and carnage most recently, tragically and avoidably in Syria, the failure to restructure the shareholding of the IMF to reflect the global re-alignment of economic and financial activity was bound to throw up some casualties such as Ireland which, by virtue of the greed, stupidity and heedlessness of its business, political and policy-making elites (and of most of those alisgned with these elites), put itself needlessly in the line of fire.

    If the shareholding of the IMF had reflected the economic reality either the IMF would not have been involved – and the Eurozone and its members would have to clean up their own mess – or, if involved, it would have imposed appropriate debt restructuring.

    So there are two lessons: first, if you are a small country and you are a party to multinational arrangements that are sub-optimal don’t do stupid things and play where the elephants dance; and second, build coalitions with as many other small nations as possible to push for appropriate reforms of the multinational arrangements.

    It is clear that these lessons are far from being fully learned by Ireland’s decision-making elites (and the armies of consultants, advisers, media types, tame academics and other lackeys they retain – or who are happy to be camp-followers).

  3. “on the verge of defaulting on its own debts and turned to the international community for help”

    Somewhat inaccurate.

    (1) The Irish government was never remotely close to defaulting on its debts. This is true both for the FF government and the FG/Lab government. Both governments repeatedly said that the debts were eminently manageable and that they had every intention of paying them back. Subsequent events have proved this view to be 100 per cent correct.

    (2) The FF government at the time didn’t turn to the international community for help but, rather was frogmarched into seeking help, because the markets, the ratings agencies and the Eurozone authorities simply didn’t believe their (now proven to be true) claims that the debt was eminently manageable and that they’d repay it, but instead preferred to believe the crazies who dominated Irish public discussion and the Irish media and blogosphere at the time and who claimed on a daily basis that the debt was totally unmanageable, that Ireland couldn’t possibly repay it, and that a default was inevitable. This erroneous view of what was likely to happen lasted about 18 months before it became obvious to one and all that it was nonsense and, following thie realisation that it was nonsense, Irish government bond interest rates collapsed from 12% to 1%, super-growth resumed, the deficit dwindled to nothing (unlike the triple A United Kingdom where its still 5% of GDP) and the aforementioned crazies disappeared without trace.

  4. @ JTO

    The problem with the markets is that, even when they are “objectively” wrong, they are right. The lesson then, and which is equally true today, is that no country should put itself at their mercy by excessive borrowing either by the sovereign or the banks which it is supervising, especially if it is in a monetary union and putting others at the same – perceived – risk.

    The crisis is not confined to the euro and it is essentially about the markets’ perception of the solvency of both governments and banks. The two cannot be separated as the former has farmed out the process of money creation to the latter. The problem is that doing this in a virtuous positive loop hitherto has been replaced by a vicious negative one which is presented by politicians as representing a total divorce which is impossible to bring about (e.g. the contradictory admonitions that Irish bailed out banks pay back what was lent to them by the taxpayer while at the same time go easy on the mortgage rates which would enable them to do so).

    FF failed monumentally on both scores, in relation to government spending by relying on ephemeral boom time receipts and in relation to the banks by failing completely to supervise them, and IMHO the electorate is not likely to forget this any time soon.

    The FT had an interesting colour piece at the time.

    http://www.ft.com/intl/cms/s/0/c1236fbc-f41e-11df-886b-00144feab49a.html#axzz3nc9yEjdE

    It is wishful thinking – especially prevalent prior to an election – to think that the low rates from which Ireland is benefiting at the moment had much to do with Irish government actions. It is more reflection of the parlous situation in which markets are still perceived to be operating where governments of reasonably stable countries are seen as a safe haven; to the point of paying some for the privilege of lending to them..

  5. @Prof Philip Lane

    Blanchard’s statement that “The biggest creditors of the bankrupt Irish banks were French and German banks that themselves could go under if forced to recognize such losses, requiring costly and unpopular bailouts from their own governments.”

    Appears to be in direct contradiction to the Derek Scally article referenced at:
    http://www.irisheconomy.ie/index.php/2015/08/18/dont-blame-german-banks-for-the-irish-economic-crisis/

    In his article Scally says: “Figures for September 2008 show German interbank lending to Ireland was up 575 per cent on eight years previously. Is this the smoking gun? Central Bank analysts say not, because this data set is distorted by large capital inflows to IFSC-based German banks.”

    Scally relies in large part on research by Prof Philip Lane.

    My suspicion is that Blanchard is right (and Trichet was right and was likely lobbied by France and Germany) and that the interbank lending of German and French banks were a major problem. I suspect the proof of the pudding was in Trichet’s actions, presumably following on from lobbying. Of course it may well have been that it was Geithner who set Trichet’s pants on fire, based on concern for US or other banks.

    I would dearly like to have Prof Lane’s view as to what he thinks happened and whether Trichet really did act primarily to protect French and German banks or not.

    I would appreciate a prompt response in case the Professor is appointed Governor of the Central Bank in which case he may not be free to express his true opinion 🙂

  6. @JtO

    The debts were manageable by individual tax-payers who had not borrowed the money. The taxpayers are paying not only for the debts (racked up by private banks and bankers without any personal liability for their banks’ losses) but also for the bankers’ pensions.

  7. @ JTO

    The words “the need for” should have been inserted prior to “a total divorce”.

    On the “fully funded” argument with which FF attempted to fend off the evil day, the Greeks initially attempted the same tactic. No doubt Varoufakis will explain all when he speaks at Kilkenomics.

    Their current situation is now much worse than their previous one. How he is proposing to explain that, remains to be seen. It seems, however, that the market for specious argument is limitless.

    http://www.ekathimerini.com/202195/opinion/ekathimerini/comment/greek-bank-recap-is-race-against-time

  8. The IMF’s involvement in Greece was very curious. Why? The EZ had enough money to fix it and India, Sth Korea etc had no interest in subsidizing EZ political ineptitude. Poor Ireland got ‘fixed’ too. Great power politics.

  9. “The problem with the markets is that, even when they are “objectively” wrong, they are right …”

    Eh? There are no markets – except on the pages of undergrad texts. They are a theoretical (virtual) construct used to explain how a theoretical supplier and a theoretical demander might interact with a theoretical price – sans interference, of course.

    As the term “markets” is so regularly (mis)used, it falls into the category of Psychic Balm. Something to sooth the sweated brows of the ill-informed. Calms the Folk. The Invisible Hand fits.

    So, if there are no “markets” – who, or what is the cause of our current financial and economic malaise? Nobody? Somebody? Anybody? Naming those responsible is now possible. We know who they are. We know what they did. Maybe caution is necessary here – so just lets blame it all on the “markets”. Soothing. Nothing to explain. So, lets just move along then. Indeed.

    Do you really believe that raising our domestic mortgage rate would resurrect our zombie banks? It might if the mortgage borrowers all got 40% income increases. ??? Wishful thinking? Maybe not. Rule nothing in, rule nothing out.

  10. Trichet went so far as to threaten to cut all central-bank lending to Irish banks if their debts were restructured, the equivalent of a death sentence for the Irish banking system.

    Wha?

    Trichet went so far as to threaten to cut all central-bank lending to Irish banks if their debts were restructured, the equivalent of a death sentence for the Irish banking system.

    He did wha?

    Trichet went so far as to threaten to cut all central-bank lending to Irish banks if their debts were restructured, the equivalent of a death sentence for the Irish banking system.

    Legitimate force used to be the final option of legitimate states, and a property of said states only. No longer …. Financial Systems have now, illegitimately, taken this power, the ability to wage total war, to themselves. Democracy becomes an illusion. The b@stards! Let’s follow Jozie ….

  11. @DOCM

    Greetings from Doc Magilligan’s Irish bar and restaurant, Niagara Falls, Canada, where I’m enjoying my breakfast omelette under a picture of the signatories of the 1916 Proclamation (which would probably have the owners blacklisted or even arrested if they were doing it in modern liberal Ireland).

    “The problem with the markets is that, even when they are “objectively” wrong, they are right.”

    No, they are not. When they are “objectively wrong”, they are wrong. Period.

    example: England hot favourites with bookies a fortnight ago to reach RWC final.

    The markets and the ratings agencies and the politically-motivated Irish commentariat got it totally wrong about Ireland’s economic outlook in 2010/11 and JTO got it right. This is now indisputable.

    There should be an investigation into why they got it wrong and what part the deluge of hysterical propaganda in the media at the time played in them getting it wrong. In 2010/11 every lunatic in Ireland was given space in the Irish Times or the Guardian to proclaim to the world the inevitability of Ireland going bust and the impossibility of Ireland returning to growth for a generation. It is absurd to say that this played no part in the refusal of people to lend to Ireland at the time (which would actually have been one of their most lucrative investments ever if they hadn’t been taken in).

  12. @DOCM

    An integral part of the deception referred to in my previous posts was the claim that there were 350k empty houses in Ireland, with a disproportionate number of these outside Dublin.

    Now news out today that house prices outside Dublin rose by 13% in the past year (compared with 2.3% in Dublin).

    http://www.rte.ie/news/2015/1006/732666-property-prices/

    So, how does tally with the claim that rural Ireland is awash with empty houses?

    Where are these alleged empties and why aren’t they impacting on the market?

  13. @ JTO

    To quote Mark Twain, ‘I didn’t have time to write a short letter, so I wrote a long one instead.’ The long version of this post seems to have disappeared into the ether.

    Now the short version!

    You would make no money on your view of how the markets function. To quote Keynes “The market can stay irrational longer than you can stay solvent.”.

    Well located houses outside Dublin are selling. To conclude from this that there are not many empty unsold houses in the wrong locations is a leap of imagination, not logic.

  14. @DOCM

    Au contraire. Anyone betting against the markets by buying Irish government bonds in 2010/11 would have made a fortune. Judging by your posts on here at the time, I assume you weren’t one of them.

    As for housing, your belief that Ireland is awash with empty houses isn’t shared by the government.

    http://www.irishtimes.com/business/economy/housing-shortage-a-concern-says-government-economist-1.2381560?mode=sample&auth-failed=1&pw-origin=http%3A%2F%2Fwww.irishtimes.com%2Fbusiness%2Feconomy%2Fhousing-shortage-a-concern-says-government-economist-1.2381560

    If the politically-motivated cognoscenti are to be believed, Ireland went overnight from an economy allegedly based entirely on housebuilding and a resultant surplus of 350k empty houses to having a housing shortage. Nothing came in between, apparently.

  15. In rationalizing its participation, the Fund was forced to issue what Blanchard and his colleagues knew were unrealistically optimistic predictions about the quick recovery of the Irish economy.

    Wha?

    In rationalizing its participation, the Fund was forced to issue what Blanchard and his colleagues knew were unrealistically optimistic predictions about the quick recovery of the Irish economy.

    They did wha?

    They LI€D.

    Precisely.

    Spose this one will have to go to Den Hague? ICJ.

  16. @ JTO

    I did indeed think that we were about to go down the tubes. To my great relief, the “fully funded” FF masters of the universe were outmanouevred by those providing the money, saw the light and took the necessary medicine.

    You are jumping from Billy to Jack. I am not saying that there is not a shortage of housing. There is where the demand exists. YOB has most of the reasons right IMHO. What he is overlooking is the role played by politicians in fostering the illusion that the right to a roof over one’s head, the minimum of any civilised society, does not mean that you have to own it. All three major political parties failed in their duty to maintain an appropriate level of collectively owned social housing. Half a billion euros is being spent on rent supplement as a result. This has a further distorting impact on the market, lining further the pockets of private landlords, quite a few of whom might be said to be suitably politically connected.

  17. @DOCM

    “I did indeed think that we were about to go down the tubes”.

    If you’d analysed the data for Ireland 1986-2007 better, you wouldn’t have come to that conclusion and maybe made yourself some money. The belief that Ireland was about to go down the tubes in 2009/10 springs from the fraudulent analysis of the Celtic Tiger growth made by certain politically-motivated commentators, whereby they portrayed it as based entirely on house-building. Anybody who studied the data properly would have seen that it was bunk.

    There were very low levels of homelessness in Ireland recorded in the 2011 census, despite the population having risen by over one million between 1996 and 2011. The reason is that FF made sure enough houses were built for the rapidly-expanding population, for which naturally the same politically-motivated commentators roundly condemned them.

    http://www.cso.ie/en/media/csoie/census/documents/homelesspersonsinireland/Homeless,persons,in,Ireland,A,special,Census,report.pdf

    However, despite increasing since FF left government, homelessness in Ireland is still lower than in most western countries. According to the BBC there were 100,000 children homeless in England alone in 2014. Out of memory, I think the corresponding figure in Ireland in about 2,000. The U. Kingdom, of course, has had a very low level of house-building for about 35 years. Last year, it only built 100k new houses, which corresponds to about 7k in Ireland. Ireland has only had a very low level of house-building for about 3-4 years.

    http://www.bbc.com/news/uk-34346908

    I’m on holiday in USA, in Washington DC at the moment. I saw scores of people sleeping on the street last night. On Friday last in London, en route to New York, I walked from Oxford Circus to Marble Arch. There was someone sleeping in a doorway at virtually every street corner.

    Incidentally, the guide on my Washington tour yesterday told us that the average house price in Washington is $500,000 and the average monthly rent is $2,200. I haven’t been able to check yet if his figures are accurate. He also said that over 1,000 people sleep on the street in Washington each night. But, its not all gloom. He also told us that Hillary Clinton is going to end up in prison (but that might just have been wishful thinking).

  18. So, now the rag known as the Irish Times is moaning that Ireland isn’t building enough houses and demanding that Ireland follow other countries in stimulating house-building.

    http://www.irishtimes.com/business/economy/how-other-countries-seek-to-stimulate-house-building-1.2385437

    Between 1997 and 2011, there were maybe a thousand articles in the Irish Times claiming that government was in the pocket of the builders, that far too many houses were being built and that every city and town in Ireland was awash with empty houses.

    My solution to the housing shortage: appoint Bertie Ahern as housing tzar, with a mandate to get the annual number of new houses built up to 30k asap.

  19. Whatever is driving house prices it isn’t credit this time round; mortgage drawdowns for house purchase account for around half the level of transactions judging by the PPR. Moreover, the mortgage market is slowing; approvals in the 3 months to August rose by an annual 1.1% and in August alone the annual change was -4%.

  20. Any conclusions based on the assumption that the housing market in any particular country is somehow homogeneous is so much at odds with reality as to hardly require comment. Ireland is no different cf. the latest Daft.ie report from Ronan Lyons.

    http://www.daft.ie/report

    He is almost certainly correct that CBI credit restrictions have halted the growth in prices in Dublin. In short, credit is more in line with the capacity to repay loans, and, one assumes, buyers in Dublin are cutting their cloth according to their financial measure i.e. moving to the surrounding regions.

  21. @ JTO

    Since the dates you mention, as I am sure you are aware, a Residential Property Price Register has been introduced.

    http://www.daft.ie/price-register/?pagenum=1

    Instead of estate agents’ guff, there is now real information available on what houses are selling for and on the stock on offer, the latter courtesy of the dominant website. It, not unexpectedly, dwells on the data relating to houses that are selling. It is easy to establish, however, that it has nearly 200,000 dwellings on offer and that some 10,000 have been actually sold since the start of 2015.

  22. @DOCM

    The most recent CSO figures show no sign of house prices falling.

    The annual increase was 9.5% in August and 2.3% in August alone.

    There may have been a cooling-down in Dublin, with the annual increase down to 8.2%. But, this was more than compensated for outside Dublin where the annual increase rose to 10.8%.

    The Daft report (that you link to) shows similar. Price rises slowing down in Dublin but accelerating outside Dublin.

    There is no sign whatever in any survey of a nationwide fall in house prices.

    Supply and demand rules, whatever the Central Bank think.

    http://www.cso.ie/en/releasesandpublications/er/rppi/residentialpropertypriceindexaugust2015/

  23. @ JTO

    You keep tilting at windmills of your own construction. Neither I, nor anyone else as far as I can see, has claimed that house prices are falling.

  24. @JtO, DOCM

    House prices! Einstein’s Insanity. The Insanity and False Economic Ideology that got us to the original focus of this thread in the first place.

    House prices!! Jayzus! Nietzsche wept!

  25. (i) “House prices in August” as reported by the CSO are a rolling 3 month average of mortgage draw-down amounts, reported after the fact. Mortgages are drawn down something like 3 months or so after a purchase has been agreed.

    So there is about a 4 month lag in the figures, and they are smoothed.

    This means that “House prices in August” are actually housing transactions agreed in very rough terms in May or thereabouts, or even earlier.

    (ii) The dominant housing market is Dublin and its commuter belt. There there has been an excess of demand over supply for over 2 years. When this is the case, the supply or availability of money available to buy properties is obviously going to effect the price each property is bid up to before there is only one bidder left.

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