Author: John McHale

Fit For Purpose Bailouts

One of the disappointing things about the bailout and associated adjustment programme is that it has done little to lower the perceived probability of an eventual Irish default. I know that many readers believe Ireland is fundamentally insolvent, and so are not overly surprised. At this stage, however, there is growing recognition that the structure of the European bailouts also makes it difficult for countries to regain market access. Key European policy makers have indicated a willingness to revisit the arrangements, though this will have to go beyond the relatively straightforward option of increasing the size of the support funds.

I grapple with the reasons why the current structure of the bailouts is itself an impediment to regaining creditworthiness in a piece for the business section of today’s Irish Times (article here).

Buiter Vs. Krugman on European Rigidities

This is really just a sub-thread on Greg’s Krugman post and Kevin’s earlier Buiter post.   

A significant part of Paul Krugman’s case against the Euro relates to the resulting loss of macro flexibility.   As he explains, nominal exchange rate devaluations/depreciations are effective in lowering the real exchange in an economy with substantial nominal rigidities.   However, Willem Buiter and co-authors argue that European countries tend to display real rigidity rather than nominal rigidity, making changes in the nominal exchange less effective in producing improvements in cost competitiveness.   Interestingly, however, Buiter holds out Ireland as a possible exception to the European pattern.    

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Olli Rehn in the FT

Olli Rehn has an interesting piece in the FT this morning.   One noteworthy part is the admission that the current and proposed financial support measures are not up to the task.

In parallel, we must ensure that the financial support mechanisms put in place last May are fit for purpose. The effective lending capacity of the current European financial stability facility should be reinforced and the scope of its activity widened. Here we need to review all options for the size and scope of our financial backstops – not only for the current ones, but also for the permanent European stability mechanism too.

President Signs Bank Stabilisation Bill Into Law

Irish Times story here.  Irish Examiner story here.

Did the Council of State really reassure the President of the Bill’s constitutionality?  Or is it that the risks of financial instability are seen (by the Council and/or the President) as outweighing constitutionality concerns?

Reputation

Some blog readers have bristled at invoking “reputational damage” as an argument against policies such as defaulting on bank liability guarantees. I have sympathy with this reaction given the elasticity of the concept, and because it is often thrown out as a sort of argument stopper. But there is still no getting away from the fact that Ireland’s reputation for institutional soundness matters for both domestic and international investment. It is hard not to worry that this reputation is being damaged by some recent crisis management policies.

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