Category: EMU

RTE: Nation to Be Spared From Promissory Note Deal

RTE’s Nine O’Clock news are reporting Enda Kenny as explaining that promissory note negotiations are totally separate from the question of will the Irish people vote for the Fiscal Compact Treaty and that the Irish people will not bribed to vote for the Treaty.

RTE also noted that the latest Council meeting was “dominated by jobs and growth” which sounds like great news. And, best of all, reporter Tony Connelly helpfully explained that it was now felt that asking for a better deal on promissory notes was actually a bad idea because it would send a bad signal to financial markets that we were not able to cope with our debt burden and that there was no way this issue would be dealt with any time before the summer.

Ok, so be it. But I suspect that “the Irish people won’t be bribed” may prove to be the worst referendum slogan in history.

Briefing Paper for Oireachtas Finance Committee

I’m appearing at the Oireachtas Finance Committee this afternoon, along with Brian Lucey and Stephen Kinsella, to discuss ELA and promissory notes. Here‘s a copy of a briefing paper I have provided to the committee and here are my opening remarks.

I’m told that the meeting can be watched live online at this link by choosing Committee 4 and also on UPC channel 801.

Cost-effective Eurozone firewalls and the buyback boondoggle

John McHale has a recent thread on the probability of a Greek default.  In this thread I want to consider a different but related question.  Only some of the promised Greek bailout funds are intended for funding Greek government expenditures; the rest of the funds are intended to pay back outstanding Greek sovereign bonds. Conditional upon a Greek default, how should the bond-payback-earmarked Greek bailout funds be spent by the Eurozone?  Let X denote the total sum of Eurozone bailout funds intended for Greece, Y the amount earmarked for Greek government expenditures, and Z the funds available to pay back Greek bondholders.  Define a disorderly Greek default as one in which a private sector involvement (PSI) agreement is not in place or is inoperative. My question is:

In the event of a disorderly Greek default, how should the EU spend Z?

There is a historical precedent for massive wastage of taxpayer funds in analogous situations. Bulow and Rogoff call it the “buyback boondoggle.” The buyback boondoggle refers to the tendency of fiscally-distressed states to demonstrate their newfound fiscal discipline by handing over large quantities of taxpayer funds to outstanding bondholders, even when there is no fiscal benefit in doing so. In reality, the payment of funds to existing bondholders by states in fiscal distress can actually lower rather than raise the future borrowing prospects of the state (see the paper above and this related paper).    

Continue reading “Cost-effective Eurozone firewalls and the buyback boondoggle”

The ESM Treaty and PSI

There is some discussion of this issue in the comments but it’s worth putting on the front page. A much-heralded part of December’s EU negotiations was the decision to change the language on Private Sector Involvement (PSI) in the ESM Treaty.

On December 9, Herman van Rumpoy said

our first approach to PSI, which had a very negative effect on debt markets is now officially over.

It was being replaced with the following

from now on we will strictly adhere to the IMF principles and practices

Sure enough, the new ESM Treaty states

In accordance with IMF practice, in exceptional cases an adequate and proportionate form of private sector involvement shall be considered in cases where stability support is provided accompanied by conditionality in the form of a macro-economic adjustment programme.

Some are arguing that this is effectively a commitment to limit PSI to Greece. I don’t see how this is a tenable assumption. As this FT Alphaville post discusses, there is no sense in which IMF procedures rule out PSI. Furthermore, bond markets are also clearly not interpreting the new ESM treaty in this fashion since Portuguese bond yields are still effectively pricing in a default.

It’s very hard to see how, if the stars end up aligning sufficiently badly for Ireland, that “an adequate and proportionate” haircut won’t get applied to private sovereign bond holders.

New ESM Treaty

A newly-modified ESM Treaty has been signed. Documents are available here. One key aspect:

It is acknowledged and agreed that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the TSCG by the ESM Member concerned.

Viewers of the Vincent Browne show take heed!