Tommaso Padoa-Schioppa was a major figure in the creation of the euro; he died just before Christmas.
Lorenzo Bini-Smaghi provides a very interesting overview of his career in this speech.
Author: Philip Lane
A useful explanation of QE is available here.
Last night’s Prime Time contained some interesting material. A reader has provided a summary of some of the main points, reproduced below:
Transcripts below of remarkable comments by the ECB’s Executive Board
member, Lorenzo Bini-Smaghi, and Fine Gael’s Leo Varadkar.
The stark contrast in the two viewpoints is a good summary of today’s
difficulties in Europe… Something has got to give, will give. And
probably in favour of the governments generally, not the ECB.
Leo Varadkar was asked on Prime Time what Ireland’s opposition Fine Gael
will be saying to the European Commission at their meeting today in
Brussels.
Leo Varadkar – “They will be saying that Ireland does want to pay, that
we do want to take responsibility for our sovereign debt. They are going to
be saying that is a European problem, not just an Irish problem, that there
are flaws in the system in Europe. We are making it very clear to them,
which is very important, that at the current rate of 6%, we won’t be able
to pay. If they insist on this deal, on this interest rate, there will come
a point when Ireland won’t be able to honour its debts. And the money that
has been lent to us, we will be unable to pay, you know”.
Lorenzo Bini-Smaghi was interviewed by Prime Time –
“The amount of senior bonds is so small compared to the overall amount that
if you give a haircut to the bonds, immediately you would have a run on the
banks, by the Irish themselves by the way, because they would not trust
anymore their liabilities, their assets held in the banks are safe. So you
would have immediately a run on the bank, a collapse of the banking system
so the banks would not lend anymore to corporations. They would have to
restructure their own liabilities with the Irish citizens. So the Irish
people in the end would pay, pay for it, in the same way as the Americans
paid for the collapse of Lehman”.
“The government engages a country when it signs a agreement. .. The
programme is there has been signed and has to be implemented”
Arthur Beesley has an interesting article in today’s Irish Times which reports on the views of Nouriel Roubini and Ken Rogoff in relation to Ireland’s debt situation. One element in the article is a passing reference by Rogoff to Romania’s determination to pay off its external debt under the Ceausescu regime.
Readers may interested in more details on this case.
It is obviously true that a lower interest rate on the EU loans to Ireland would help debt sustainability. As written by Karl and highlighted in the FT today:
The overall cost of funding from the EU sources appears likely to be over 6% per year. If this is the rate that the Irish state will be paying in coming years, the national debt will grow by 6% each year even if the state is running a zero primary deficit (the headline deficit minus interest payments.) This would require a 6% growth rate in nominal GDP to stabilise our debt-GDP ratio even when we are not running a primary deficit. In other words, an interest rate of 6% will make debt stabilisation far more difficult in the coming years than an interest rate that doesn’t carry a large profit or risk margin.
This is an important point to make and is a standard way to illustrate the impact of the interest rate on debt sustainability.
However, for the 2011-2015 period, it is important to appreciate that the impact of a lower interest rate on this source of funds would be limited:
- There is a lot of Irish government debt outstanding, much of it funded at substantially lower interest rates. There is about €81 billion outstanding, maturing at various dates between 2011 and 2025 (see the interest rates and maturity dates at the NTMA website).
- Also, there is short-term debt outstanding and John Fitzgerald has pointed out that the NTMA could do more short-term debt financing under the ‘umbrella’ of the EU/IMF deal
- A substantial amount of the new borrowing needs of the Irish sovereign will be met by drawing down cash balances and the assets of the NPRF
Putting these factors together means that the projected average interest rate on Irish sovereign debt over 2011-2015 will be 3.9%, 4.0%, 5.3%, 5.3%, 5.4% (according to the IMF’s December 2010 Ireland report) so that the near-term impact of shifts in the marginal cost of funds from the EU will be limited. (Still nice to have a lower rate, however!)
In addition, Karl’s illustrative example focuses on a zero primary deficit. The IMF projections are that Ireland will run primary surpluses of 1.2% in 2014 and 1.5% in 2015 – of course, this assumes that the fiscal plan is implemented and that nominal output growth meets the IMF’s projections. A different way to express the same point is that, for a given path for nominal GDP growth, the higher the average interest rate, the higher the primary surplus that will be required to stabilise or reduce the debt/GDP ratio.