Sindo Editorial Does Not Speak For Us

I made passing reference in a thread yesterday to a disturbing anti-German/French editorial in yesterday’s Sunday Independent.   You can make up your own mind about the sentiments expressed if you haven’t seen it already.  It is available here.  

Paul Hunt has described the ugliness of the sentiments more eloquently than I ever could.   He has also convinced me that those who disagree should make their voices heard, however faint we are relative to the megaphone of a leading newspaper.   I must quickly add that I think the Sunday Independent has many outstanding journalists, and I am sure that few agree with the sentiments expressed.  They must be most embarrassed of all.   I would not see any point in this post if the Sunday Independent was not such a worthy newspaper.   Whoever penned and whoever approved the editorial has let the paper down. 

There is a danger in drawing additional attention by posting here.   But Paul and others have convinced me there is a bigger danger in staying silent. 

If you would like to note your disagreement with views expressed in the editorial, I would ask that you add your voice or even just your name in the comments below.   I know the majority of our readers do not usually make comments, but you might make an exception this one time.   It is important to let our partners in Germany and France –with whom of course we will continue to politely disagree from time to time — know that the editorial does not speak for us. 

Thanks, John McHale

McCarthy in the Sindo, again

There is another cracking column by Colm in today’s Sunday Independent.

Money quote:

The European economies have not been experiencing the worst recession since the Second World War because the retirement age is too low, or because there are national differences in corporation tax rates. Ireland is not in an IMF bailout because the budget deficit, in the years before the crisis, was outside the Eurozone parameters. There was exemplary compliance with the fiscal policy rules and all boxes were ticked, up until 2007, in Ireland and in most Eurozone countries. This is a banking crisis and it remains unresolved three years after the bubble began to burst.

Plan A*

Although he had a rough ride in Comments here, Lorenzo Bini Smaghi’s London Business School presentation provides a useful official take on the choice between the Plan A of fiscal adjustment and the Plan B of default. (From a narrowly Irish perspective, his identification of the costs of default probably puts too much emphasis on balance sheet contagion and too little emphasis on the reputational damage to an economy that is one of the world’s most dependent on international trade and investment. Understandably, he also does not dwell on possible costs of default for access to ongoing international assistance, not least from the ECB itself.)

However, I would put the case for Plan A in more dynamic terms – a Plan A* perhaps. The literature on the option value of waiting provides a useful dynamic angle on the default decision. This applies to a decision that is costly and irreversible and must be taken under uncertainty that will lessen with time. An outstanding feature of our present predicament is that there is unusual disagreement about whether we can stabilise the debt to GDP ratio and regain market access. There is a good chance that the range of this uncertainty will narrow substantially over the coming year. Four major sources of (diminishing) uncertainty stand out:

Continue reading “Plan A*”

A Flexible EFSF

In his latest speech, Lorenzo Bini-Smaghi provides some insights into how European financial stability can be improved.  Some key passages:

One objection to a more integrated banking system in Europe is the role of national budgets in crisis resolution. As long as budgets remain national – so goes the argument – crisis resolution has to remain national, and so does supervision. The crisis has shown that bank resolution and restructuring are more complicated for cross-border institutions, given that any fiscal costs have to be distributed across several host sovereigns. As Charles Goodhart has said, “…cross-border banks are international in life, but national in death”. [4]

As I see it, enhanced financial integration in the euro area does not necessarily imply a need for greater fiscal union – if that is understood as a pooling of tax revenues, harmonisation of tax rates or issuance of a common bond. Instead, we must develop the capacity at the area-wide level to address specific financial tensions that threaten to spill over to the area as a whole, minimising disruptions to market integration and supporting the transmission of monetary policy.

The recent crisis – and, in particular, developments in Ireland – have demonstrated that, despite the imperfect integration of the European financial system, very strong cross-border contagion takes place within the financial sector. The instruments available at present to block this contagion are not efficient and have side-effects. In practice, much of the burden to contain contagion has fallen on central banks. This is neither desirable nor appropriate.

In my view, the European authorities need to develop a capacity to conduct a ‘surgical strike’ on problematic financial institutions or market segments in the event of a financial crisis. Through such actions, the area-wide externalities created by specific problems can be contained. In practice, this means ensuring that programmes such as the European Financial Stability Facility (EFSF) or the European Financial Stabilisation Mechanism (EFSM) – and their envisaged permanent successors – are given sufficient financial resources and the required flexibility by the Member States to act as necessary to support financial stability. To do so, these bodies may also need to be able to support the recapitalisation of an ailing banking system, if its weakness threatens the stability of the area as a whole. All this of course comes with strict conditionality in the context of an overall EU/IMF programme.

This has been the case in both the Greek and Irish programmes, in which funds are dedicated to the recapitalisation of the weak banks. A more systematic approach should be pursued, making it easier for countries to implement such a scheme.

and

The recent crisis has demonstrated that the European financial system was insufficiently robust. Further measures to deepen integration and bolster stability are required. Looking forward, we have to identify any remaining weaknesses and seek to address them.

Until now, it has generally been argued that the main responsibility for financial supervision has to remain at national level. The consequences of failures in supervision ultimately fall on the taxpayers of the country where the bank resides. To align incentives and ensure appropriate accountability, nationally defined tax bases imply nationally defined supervisory institutions.

However, the crisis has demonstrated that the implications of supervisory failures extend well beyond national boundaries. First, cross-border contagion has been magnified by externalities and spillovers arising from greater area-wide financial integration. Second, experience has shown that, within a more integrated market, greater specialisation may imply that financial systems in one country outgrow the capacity of national taxpayers to support them.

The implications of this experience are profound. As I have argued, they point to the need for a much greater euro area and EU perspective in the supervisory and regulatory framework. While progress has been made in this domain, much remains to be done.

Moody’s Downgrades Unguaranteed Irish Bank Debt

Another day, another downgrade. However, the language in this one is particularly interesting.