Schauble Proposes Greek Maturity Extension

It’s being discussed in the comments already but it’s worth giving German Finance Minister Wolfgang Schauble’s letter to the ECB, IMF and Ecofin ministers its own thread. The key proposal:

This means that any agreement on 20 June has to include a clear mandate — given to Greece possibly together with the IMF — to initiate the process of involving holders of Greek bonds. this process has to lead to a quantified and substantial contribution of bondholders to the support effort, beyond a pure Vienna initiative approach. Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence.

Just to be parochial about this for a minute, this raises an interesting question. If this approach was implemented successfully and did not trigger a financial crisis (I know some disagree — this is a hypothetical question) what are the chances that a similar restructuring would not be part of any potential second EU-IMF deal for Ireland?

IIEA Talk on Sovereign Debt

Given that Irish politicians and media have decided that Leo Varadkar’s comments about Ireland probably having to get a second EU-IMF deal is some kind of faux pas, it is perhaps worth pointing out that this opinion is widely shared by pretty much everyone I have to talked to in recent months.

Anyway, given that this issue is being discussed, now might be a good time to put up a link to this talk that I gave at the IIEA a few weeks ago. I discuss the risks relating to the current EU-IMF plan the likelihood of the need for a new deal. The slides for the talk are also on the page.

Business and Finance Article on Debt Sustainability

Here‘s an article I wrote for Business and Finance on the question of whether Ireland’s fiscal debt is sustainable.

One correction I’d add to the article is that I miscalculated the average interest rate on existing Irish debt and reported it in the article as about 3 percent. The correct figure, as calculated by the EU Commission, is 4.6%.

Video from EUI Conference on Sovereign Default

As promised a few weeks ago, here is a link to the video of EUI’s workshop “Life in the Eurozone With or Without Sovereign Default?” held a few weeks ago. All of the presentations were interesting but I’d particularly recommend Martin Hellwig’s presentation in part 2 and sovereign debt lawyers Mitu Gulati and Lee Buchheit’s presentations in part 3. Unfortunately, there doesn’t seem to be video of Charles Calomiris’s thought-provoking presentation but his slides (and the other presentations) can be found by clicking on the links here.

Buchheit and Gulati on Greek Debt

Today’s article by Wolfgang Munchau is a summary of the dinner talk that he gave at last week’s EUI workshop on sovereign default. A very interesting counterpart to Munchau’s article is this paper by veteran sovereign debt lawyer Lee Buchheit (lead negotiator for Iceland! with its creditors) and Mitu Gulati (Duke law professor) which discusses other scenarios for Greek debt. Buchheit and Gulati gave very interesting presentations on this and other relevant topics at the EUI conference (a podcast is due to go up this week and I will pass on the link when it does). It perhaps goes without saying that this paper has a lot of relevance for Ireland.

Garret Fitzgerald: Silly Markets and “Celebrity Economists”

In today’s Irish Times, Garret Fitzgerald dons the green jersey and bravely confronts Public Enemy Number One: Celebrity economists who “talk down the economy” and “scare the horses”.

The conservatism of the assumptions that underpin this study certainly ought to command the respect of the markets. It remains to be seen, however, to what extent it actually does so.

Factors that could work against this include last year’s undermining of confidence in our banking system; the lack of any specialised knowledge of the Irish economy both on the part of those who rate our debt and those who buy sovereign bonds; and the damage done to our financial reputation by some of our more vocal domestic commentators.

Part of our problem has been, and regrettably still is, the fact that “the markets”, (ie the international firms which evaluate credit risks as well as those which buy bonds issued by sovereign states), lack the capacity to assess adequately the financial situation of smaller states like Ireland. It is only in relation to larger sovereign borrowers that these firms employ specialists with detailed knowledge of the economy of a particular state.

For smaller states like Ireland they depend on second-hand information. This includes often ill-informed media reports, which in our case have involved reports of some of the “celebrity economists” who have been seeking publicity by claiming that our problems are so great that we will eventually have to default.

Some have indeed proposed that we should take that course now despite the impact this could have on our only current source of future borrowing – the EU-IMF bailout.

The damage to our standing abroad by such irresponsible statements has been incalculable. It is difficult enough for our own people to distinguish between serious economic commentators in Ireland and irresponsible voices – it is impossible for foreign observers of our finances to do so.

Frankly, I have no idea why Dr. Fitzgerald thinks that “the markets” lack capacity to assess the Irish financial situation. This has not been my experience over the years when dealing with ratings agencies or financial market investors: I have come across many international market investors who have a detailed knowledge of the Irish economy and financial situation.

And indeed, it’s not too hard to figure out why this is. Ireland’s gross government debt is over 100% of GDP, so the stock of outstanding debt is now over €150 billion. At current exchange rates, this means that the stock of outstanding debt is now larger than the market capitalisation of Microsoft or IBM. Does Dr. Fitzgerald think that financial markets consider these companies too small to bother collecting information on?

Over the last few years, Irish economic policy has been based on systematically overly-optimistic premises and Dr. Fitzgerald has supported these premises throughout. That Ireland’s debt situation is now extremely serious is simply undeniable. Attacking those who believe Ireland will default as trouble-making publicity seekers is pretty risible.

Moody’s “Negative to Stable” Comment Refers to the Rating Not the Economy

I have heard various RTE reporters state in three different reports that despite yesterday’s ratings downgrade, the good news is that Moody’s changed their “outlook for the Irish economy” from “negative to stable”. I know the vast majority of our readers know that this is incorrect. But, just in case anyone has been mislead by this, here’s where Moody’s use the phrase stable:

On 19 July 2010, Moody’s announced its decision to downgrade Ireland’s government bond ratings by one notch to Aa2 from Aa1. Moody’s has changed the outlook on the ratings to stable from negative as we view the upside and downside risks as evenly balanced at the current rating level.

So, you can see that it is the outlook for the rating that has been changed from negative to stable. Having downgraded the debt, they’re saying they’re not anticipating further downgrades now. In relation to the economy, Moody’s said the following:

The Department of Finance has based its debt projections in the SPU on the expectation of growth rates exceeding 4% in the period 2012 to 2014. For the reasons mentioned above, we believe these forecasts to be optimistic and instead expect real growth to range from 2% to 3% from 2011 onwards.

So, for what it’s worth, Moody’s are more pessimistic on growth in the Irish economy than the government.

Moody’s Downgrades Irish Sovereign Debt

Moody’s have downgraded Irish sovereign debt again, this time to Aa2 “blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio.”

The FT’s Alphaville people are inclined to blame it on Dan Boyle for his comments to the Sunday Tribune (reported internationally with an interesting headline by Reuters.) I think the FT people are pulling our legs a little attributing such importance to Dan. However, the comments did seem a little strange.

The bond market reaction has been fairly muted, with the ten year sovereign yield ticking up only a few points. However, yields at 5.5 percent are hardly satisfactory. If sustained over a long period, interest rates of this type would make it very difficult to stabilise the fiscal debt.

Merkel Proposing Orderly Default Framework

Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”.  In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows: 

“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”

It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.