The Irish Economy

The Politics of Sovereign Debt
The Helix, Dublin City University, 12 June 2013

The debt crises in Ireland and Europe require a combination of political
and economic analysis.  This conference includes cutting-edge papers from
leading international scholars.

950-1040: Dr Lauren Phillips, London School of Economics and Political Science
Chair: Paschal Donohoe, TD
Paper: Lauren Phillips, Politics, Policy and Sovereign Debt Market Volatility
in Advanced Economies

1040-1130: Dr Michael Bechtel, University of St Gallen
Chair: Stephen Donnelly, TD
Paper: Michael Bechtel, Jens Hainmueller, Massachusetts Institute of Technology,
Yotam Margalit, Columbia University, Studying Public Opinion on the Eurozone
Bailouts

1150-1250: Prof Marc Flandreau, Graduate Institute, University of Geneva
Chair: Prof Gary Murphy, DCU
Paper: Marc Flandreau, Causes and Consequences of Bondholders? Organizations
in the Nineteenth Century: A Revisionist View and a Research Agenda

140-230: Dr Roman Goldbach, University of Dresden
Chair: Dr Tim Hicks, Trinity College Dublin
Paper: Roman Goldach and Christian Fahrholz, Friedrich Schiller University,
Jena, The Euro Area?s Common Default Risk: Evidence on the Commission?s Effect
on Uncertainty

230-320: Dr Iain McMenamin, DCU
Chair: Dr Niamh Hardiman, University College Dublin
Paper: Iain McMenamin, Michael Breen, Juan Muñoz-Portillo, DCU, Elections,
Institutions and Sovereign Debt

340-430: Dr Joachim Wehner, London School of Economics and Political Science
Chair: Dr Donal de Buitléir, publicpolicy.ie
Paper: James Alt, Harvard University, David Lassen, University of Copenhagen
and Joachim Wehner, The Politics and Economics of Fiscal Gimmickry in Europe

The conference (including lunch and coffee) is free.  However, pre-registration
is necessary.  Please email juan.munozportillo2@mail.dcu.ie to pre-register.

The ESRI has just posted two Research Notes on credit constraints. The Note on Measuring Credit Constraints for Irish SMEs shows that finding customers has been the largest problem for SMEs. The analysis suggests that roughly one in nine SMEs faced credit constraints between April and September 2012. Micro firms, those not exporting and those in the construction, real estate, hotels and professional services sectors are most affected. The latest ECB data indicate that in recent months concerns about access to finance have become more wide spread. 

The Note on Younger and Older Households in the Crisis shows that between 2005 and 2010, average income and consumption dropped for younger Irish households, but rose for older households. The Note shows that younger households are most affected by unemployment, arrears and negative equity. It argues that credit constraints arising from these prevent younger households from smoothing consumption. Deleveraging helps to exit credit constraints arising from negative equity.

The FT has some important articles

• Op-ed by Wolfgang Schäuble Banking union needs firm foundations
• Accompanying news article here
• Details of the evolving position of various European institutions here

Following the influential work of Paul De Grauwe and Yuemei Ji, the idea that bond yield crises in the eurozone reflect liquidity (i.e. multiple equilibia) rather solvency has taken hold.   (See, for example, Paul Krugman linking to a post by Joe Weisenthal.)  The main evidence is the synchronised fall in yields when the ECB strengthened the LOLR regime with the annoucement of Outright Monetary Transactions (OMT), and also (indirectly) with the LTRO programme.   This leads to the view that the tough fiscal adjustment programmes are not required for countries to regain creditworthiness.   Here is Joe Weisenthal’s conclusion:

So we can trace the two peaks of Eurozone debt stress directly to two times the ECB intervened. Austerity has had nothing to do with the improvement in borrowing costs.

But is this account too simple?   In one sense I would possibly go even further than De Grauwe and Li: in the context of monetary union, vulnerable countries will not be able to avoid the bad equilibrium without a credible LOLR.   However, I also think it is important to recognise that what is fitfully emerging is a conditional LOLR.    Countries will only get support if they are undergoing required adjustments (OMT description here).   The announcement of OMT would then not help a country if investors believed it would not take the actions that would make it eligible.   The LOLR and the adjustments are then both necessary to prevent or reverse the slide to a bad equilibrium.   

Of course, it could still be argued that the explicit or implicit conditionality is inappropriately demanding (e.g., focusing too much on reductions in the actual deficit as opposed to the structural deficit).    But given the regime as it is, the existence of OMT does not obviate the need for fiscal adjustments to steer clear of the bad equilibrium trap.

The new pilot scheme by the Irish Central Bank, specifying the claim priority of residential mortgage debt and unsecured consumer debt, is worth a brief mention here. It alters the features of Irish consumer debt contracts in terms of security and seniority. I have no legal training and I am unsure of my interpretation, so comments are welcome.