Advertisement
If you have a new account but are having problems posting or verifying your account, please email us on hello@boards.ie for help. Thanks :)
Hello all! Please ensure that you are posting a new thread or question in the appropriate forum. The Feedback forum is overwhelmed with questions that are having to be moved elsewhere. If you need help to verify your account contact hello@boards.ie
Hi there,
There is an issue with role permissions that is being worked on at the moment.
If you are having trouble with access or permissions on regional forums please post here to get access: https://www.boards.ie/discussion/2058365403/you-do-not-have-permission-for-that#latest

Irish bailout "solves exactly nothing"

  • 01-12-2010 06:39PM
    #1
    Closed Accounts Posts: 4,124 ✭✭✭


    This article and its translation brought to us courtesy of the Irish Economy blog:
    The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.
    It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

    The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

    This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

    Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency. But the more successful it is at reducing wages and costs, the heavier its inherited debt load becomes. Public spending then has to be cut even deeper. Taxes have to rise even higher to service the debt of the government and of wards of the state like the banks.

    This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.

    For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.

    Irish public debt would then have topped out at maybe 100% of GDP. And the Irish program would have had a hope of working. As it is, the program will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.

    In fact, this is exactly what the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB and the German government.


    One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

    Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.

    But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

    As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, recent events make clear, leadership is in short supply.
    It's apparent at this stage that the citizens of the Republic of Ireland are being forced into paying off the gambling debts of banks and bondholders across Europe. From the ludicrous banking guarantee all the way through to this bailout, not only should we do as economists globally are urging and restructure the newly sovereign banking debts to seperate actual government debt from private debt gone wrong, we should demand restoration of every cent paid towards these institutions along with its interest.

    I have, like the author of this article, long been broadly in favour of the European Union, but the punitive terms being inflicted on a small and frankly weak country like Ireland are causing any sympathy for the struggles of the eurozone to evaporate rapidly.

    There is no moral, economic, or financial justification for the damage that is being done to this country not only by its own mandateless and staggeringly incompetent government, but by its supposed European friends.


Comments

  • Closed Accounts Posts: 8,492 ✭✭✭Sir Oxman


    Totally agree.
    I read the optimistic postings on boards and with all the will in the world I cannot believe that keeping private bank debt as sovereign debt will ever do anything but sink this country of ours into the mire for the foreseeable.
    Yes, we need the part of the funds that the markets have priced us out of but the other part including the rape of the NPRF will sink us.
    No-one needs a degree in economics to see that and that's without mentioning the absolute immorality of socialising private debt.

    What is in motion to happen is ill-conceived and hugely detrimental to our country and I feel our only hope is now outside our hands - that events will spiral totally out of control and Spain will be hit soon hopefully resulting in the crumbling of the EC/ECB & German position.


  • Registered Users, Registered Users 2 Posts: 1,206 ✭✭✭zig


    This is it, the angle on this forum has been seriously swaying to the opposite views of the above! And just because someone is good at arguing doesn't make them correct. I very much agree with whats being said here, as do alot of economists and journalists all around the world.


  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    its been 2 years since all of this started, and all thats being done (on all levels) is kicking the can down the road, no lessons have been learned and nothing has changed

    in the meantime bondholders and depositors are pulling money out as fast as they can


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    The author of that article is not entirely correct in suggesting that the bailout achieves nothing by kicking the can down the road.

    I wouldn't exactly say that we are kicking the can, however, everyone knows a restructuring is coming. What we are doing, in providing the bailout as it stands is quite clever in that it cushions the earthquake effect of the inevitable restructuring process upon the European banking sector. They are currently building up larger cushions of financial capital or offloading bonds onto other investors (perhaps those from outside the European Union).

    So derreing our restructuring is quite a clever move, in my personal opinion; it just depends on how we survive in the mean time, and in that sense, it is a gamble. However, allowing the European banks and investors to reposition themselves is a positive effect which I don't think the author of the article/ blog has truly accounted for.


  • Closed Accounts Posts: 4,124 ✭✭✭Amhran Nua


    later10 wrote: »
    What we are doing, in providing the bailout as it stands is quite clever in that it cushions the earthquake effect of the inevitable restructuring process upon the European banking sector.
    They would do well to find another cushion besides the backs of the Irish citizenry. Not one cent will be paid that should not rightfully be paid.
    later10 wrote: »
    However, allowing the European banks and investors to reposition themselves is a positive effect which I don't think the author of the article/ blog has truly accounted for.
    Over and over again we hear the same tired old mantra, give the banks and investors time. They had all the time in the world when they were pouring money into bad investments, and they were bad investments, the level of foreign purchases of Irish property were essentially nothing. The cats and dogs in the street knew what was going on here.

    Barry Eichengreen is exactly right, there is no justification for the actions taken by our European "partners", and if they expect some sort of loyalty after hanging us out to dry they have another think coming.


  • Advertisement
  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    later10 wrote: »
    However, allowing the European banks and investors to reposition themselves is a positive effect

    positive for whom? the banks and investors are trying to get out of here asap


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Amhran Nua wrote: »
    They would do well to find another cushion besides the backs of the Irish citizenry. Not one cent will be paid that should not rightfully be paid.
    The Irish 'citizenry'? Before you go reciting Yeats' September 1916 I would just like to point out that they would have no intention of doing so. They are likely to sell the bonds on the global market. The fact that there is nothing in the bailout abour restructuring is quite profitable for the Irish economy, restructuring debt at a level that is anticipated so prematurely would only hurt us and would save little or no money.
    Over and over again we hear the same tired old mantra, give the banks and investors time. They had all the time in the world when they were pouring money into bad investments, and they were bad investments, the level of foreign purchases of Irish property were essentially nothing. The cats and dogs in the street knew what was going on here.
    Really this, actually, is only mantra. Giving them time relates to their ability to build up capital and offload what may be dodgy bonds, as well as to shed such liability over time.

    This all has precedent by the way. Have you ever heard of The Brady Bond?


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    ei.sdraob wrote: »
    positive for whom? the banks and investors are trying to get out of here asap
    I have already addressed this in the above post. It is in our best interests not to cause a sudden bloodletting of investors. The Latin American debt crisis of the 1980s proved this.


  • Registered Users, Registered Users 2 Posts: 7,338 ✭✭✭Pete_Cavan


    The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent.

    The bailout was not about reducing our national debt, not for the IMF/EU anyway. It is about getting us back to a situation where we can continue to borrow at a decent rate. I dont think there was ever a chance of the interest rate on the bailout being any lower than it is. The IMF just want to stabilise the country and restore confidence so that we can go back to the bond markets and borrow there at a lower interest rate than on the bailout.

    The IMF/EU are hoping that we will borrow on the bond markets and pay them off. It is not "kicking the can down the road" because the IMF/EU will have achieved what they wanted, stabilising the country. The bailout does not tackle the causes of the problems that have led to us needing a bailout, deficiencies in our political and banking systems, but these are matters we must sort out for ourselves. If the IMF/EU tried to sort these out the author of the article would then be bitching about handing for power to the IMF/EU. The author misses the point of the bailout imo, which is to send us back to the bond markets but getting lower interest rates there, it is up to us to get our house in order and reduce our reliance on debt to fund the country.


  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    later10 wrote: »
    I have already addressed this in the above post. It is in our best interests not to cause a sudden bloodletting of investors. The Latin American debt crisis of the 1980s proved this.

    dozens of billions in deposits have left Irish banks especially the last 2 months, and most bondholders have been paid of apparently.

    these banks are "bleeding" depositors


  • Advertisement
  • Closed Accounts Posts: 4,124 ✭✭✭Amhran Nua


    later10 wrote: »
    The Irish 'citizenry'? Before you go reciting Yeats' September 1916 I would just like to point out that they would have no intention of doing so. They are likely to sell the bonds on the global market.
    Yes, the Irish citizenry, the citizens of Ireland, those people who are expected to carry the can for the mistakes of European banks. The word "citizen" doesn't mean much to some, but what can you do, some people believe in creationism.

    Now, lets get to the point - in your opinion, they have no intention of doing so. Have you got anything to support your opinion, a whisker of evidence, anything at all? Have you got anything on paper or otherwise, some insight into the negotations conducted behind closed doors, some shady contact in the halls of power who indicated that we aren't "likely" to be liable for the full bailout? I and hundreds of economists around the world would be fascinated to hear about it.

    I mean for example, I could pull out out of my hat a concoction of suppositions and imagination that showed the punitive terms are in fact to the benefit of Ireland any time I wanted, but it wouldn't be anything more than hot air.
    later10 wrote: »
    Really this, actually, is only mantra. Giving them time relates to their ability to build up capital and offload what may be dodgy bonds, as well as to shed such liability over time.
    It's like deja vu all over again. Was that not what the government guarantee was meant to achieve? That same guarantee that is currently dragging the country to the bottom?

    The almost laughable part about the whole mess is these same characters had the unmitigated gall to start harping on about our corporate tax rate as if they were doing us a favour.
    Pete_Cavan wrote:
    The bailout does not tackle the causes of the problems that have led to us needing a bailout, deficiencies in our political and banking systems, but these are matters we must sort out for ourselves.
    It certainly does, the bailout comes with conditions which have been agreed and will be adopted at the next meetings of eurozone and EU finance ministers on the 6th and 7th of December.
    Pete_Cavan wrote:
    The author misses the point of the bailout imo, which is to send us back to the bond markets but getting lower interest rates there, it is up to us to get our house in order and reduce our reliance on debt to fund the country.
    The point of the bailout is to get us to pay for the shambles that European banks have dropped themselves into. And hold on, you just got finished saying that the bailout doesn't tackle the causes of the problems while in the same sentence saying that the point is to get lower borrowing rates as a result of sorting our house out.


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    ei.sdraob wrote: »
    dozens of billions in deposits have left Irish banks especially the last 2 months, and most bondholders have been paid of apparently.
    these banks are "bleeding" depositors
    Why, exactly, are you drawing a link between bank depositors and bondholder renumeration? If bondholders were confident of being paid in the first place, we would never be in this mess. In an ideal world, nobody would need bondholders, but that just isnt realistic right now.

    If you would like to address the particular issue of bondholder renumeration continuing as normal for now, with a progressive write down of their debentures over the coming years without any ostensible immediate repudiations occuring and enough time to build up 'cushion capital', then do so.
    Because many people here seem to think that you can take money away from these bondholders overnight, and they'll be back investing in us by Tuesday. Come on.
    Amhran Nua wrote: »
    Yes, the Irish citizenry, the citizens of Ireland, those people who are expected to carry the can for the mistakes of European banks. The word "citizen" doesn't mean much to some
    Blah blah blah. Hot air. If you want to talk about economics or debt write down, do so, but enough of this faux patriotic nonsense.
    Now, lets get to the point - in your opinion, they have no intention of doing so. Have you got anything to support your opinion, a whisker of evidence, anything at all? Have you got anything on paper or otherwise, some insight into the negotations conducted behind closed doors, some shady contact in the halls of power who indicated that we aren't "likely" to be liable for the full bailout? I and hundreds of economists around the world would be fascinated to hear about it.
    Read my post. The bond holders have no interest in using us as a cushion, nor are they they ones devising a method of renumeration through progressive write down. In fact, straight off the bat, they probably hate the idea. These are just simple facts Amhran Nua.
    I have no idea whether the scheme I am talking about, involving progressive write down of debentures as characterised by The Brady Bond system, is the one envisaged by the ECB, the EFSF, the Commission nor the Irish Government. However, I think it is extremely likely, and if so, I think it is a highly valuable instrument.
    It's like deja vu all over again. Was that not what the government guarantee was meant to achieve?
    In short? Eh, no.

    Amhran Nua, do yourself a favour, google 'The Brady Bond'.


  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    because depositors are savers while bondholders are investors

    there is a difference, hence why the bondholders get higher interest rates


    acting as if they are the same and wowing to protect bondholders at all costs is silly, since bondholders are aware (should be) of higher risks and get a higher interest in return
    as for burning depositors most of the depositors in some irish banks are not even from ireland, people from UK decided to invest in likes of Anglo (70% apparently), its not the Irish taxpayers job to bail them out for their foolishness


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    ei.sdraob wrote: »
    because depositors are savers while bondholders are investors

    there is a difference, hence why the bondholders get higher interest rates
    This post makes no sense. I asked you why you draw a link between bank depositors and bondholder renumeration?

    It just reads like the same old Daily Mail article that probably inspired it.

    My points are in relation to a controlled depreciation of senior bondholder debentures as was done during the Latin American debt crisis of the 80s, if you want to go off on a tangent about something else, that's really fine but it's not relevant to my points so why quote me?


  • Closed Accounts Posts: 13,992 ✭✭✭✭recedite


    later10 wrote: »
    allowing the European banks and investors to reposition themselves is a positive effect which I don't think the author of the article/ blog has truly accounted for.
    Interesting theory, but I don't think they are that clever.
    Pete_Cavan wrote: »
    The bailout was not about reducing our national debt, not for the IMF/EU anyway. It is about getting us back to a situation where we can continue to borrow at a decent rate.
    It is about getting us back to a situation where we can continue to borrow at a decent rate, so that we won't default on the bondholder debt.

    But they would do well to remember, that for every foolish borrower, there is an equally foolish lender.


  • Closed Accounts Posts: 4,124 ✭✭✭Amhran Nua


    later10 wrote: »
    Blah blah blah. Hot air. If you want to talk about economics or debt write down, do so, but enough of this faux patriotic nonsense.
    Sorry, the citizenry isn't an inconvenience of government, its the point. Governments of any colour forget that at their peril.
    later10 wrote: »
    I have no idea whether the scheme I am talking about, involving progressive write down of debentures as characterised by The Brady Bond system, is the one envisaged by the ECB, the EFSF, the Commission nor the Irish Government.
    That's correct, you have no idea. You're guessing wildly, without any support or evidence. In the extremely unlikely event that you are correct, well done and I'll buy you a pint. But they'll still have to repay us whatever interest and capital was paid out. Lets not fool ourselves however, a debt restructuring is not going to be accepted willingly no matter what happens. If they think they can get away with it, they'll try to.
    later10 wrote: »
    In short? Eh, no.
    So the guarantee wasn't an exercise to buy time for Irish banks to sort themselves out? Enough with the mushroom treatment and lets have it: do you think there is any justification for burdening Irish taxpayers with the debts of bondholders and European banks? Do you think even in your imaginary scenario that we won't be forced to pay at least part of the debt that should never have been ours?


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Amhran Nua wrote: »
    Originally Posted by later10 viewpost.gif
    I have no idea whether the scheme I am talking about, involving progressive write down of debentures as characterised by The Brady Bond system, is the one envisaged by the ECB, the EFSF, the Commission nor the Irish Government.
    That's correct, you have no idea. You're guessing wildly, without any support or evidence.
    Huh? i said that this was a positive side effect that the writer of the original article or blog failed to account for when he complained about 'kicking the can down the road'. I never said it was official government policy, in fact it is largely irrelevant whether it is an accidental benefit or a deliberate one.

    However, just so you know the FT have been writing about this a lot over the past ten days, if you don't take my word for it I suggest you go out and buy yourself a copy. It is a pretty well established belief that this is what the Europeans intend on doing in designing our bailout, especially in light of the Franco-German agreement that was also announced on Sunday between Sarkozy and Merkel which allows for restructuring, or certainly facilitates it with common clause procedure and increased regulatory authority.
    But they'll still have to repay us whatever interest and capital was paid out. Lets not fool ourselves however, a debt restructuring is not going to be accepted willingly no matter what happens. If they think they can get away with it, they'll try to.
    Who will still have to pay us? We are the ones who will be doing the restructuring and the progressive write down as per the Brady bond scenario... we are the ones who owe the money. I'm not sure you know what you're talking about to be honest...


  • Registered Users, Registered Users 2 Posts: 1,206 ✭✭✭zig


    Amhran Nua, id be interested to know what kind of options you would be looking at as an alternative to this bailout.
    Thanks


  • Registered Users, Registered Users 2 Posts: 4,633 ✭✭✭maninasia


    later10 wrote: »
    The author of that article is not entirely correct in suggesting that the bailout achieves nothing by kicking the can down the road.

    I wouldn't exactly say that we are kicking the can, however, everyone knows a restructuring is coming. What we are doing, in providing the bailout as it stands is quite clever in that it cushions the earthquake effect of the inevitable restructuring process upon the European banking sector. They are currently building up larger cushions of financial capital or offloading bonds onto other investors (perhaps those from outside the European Union).

    So derreing our restructuring is quite a clever move, in my personal opinion; it just depends on how we survive in the mean time, and in that sense, it is a gamble. However, allowing the European banks and investors to reposition themselves is a positive effect which I don't think the author of the article/ blog has truly accounted for.

    Ireland is not that important, we just screwed ourselves, Greece, Portugal and Spain will impact the European banks sooner or later, we got a bad deal by not negotiating with bank bondholders, then allowing senior bondholders off scot free.


  • Closed Accounts Posts: 67 ✭✭X files


    Somebody will be making money out of the bail out apart from the lenders anyone know who else ?


  • Advertisement
  • Registered Users, Registered Users 2 Posts: 3,612 ✭✭✭swampgas


    maninasia wrote: »
    Ireland is not that important, we just screwed ourselves, Greece, Portugal and Spain will impact the European banks sooner or later, we got a bad deal by not negotiating with bank bondholders, then allowing senior bondholders off scot free.

    Maybe Ireland simply doesn't have the leverage to get a better deal than we did? You can only push the "we will bring you all down with us" argument so far, and burning the bondholders may have repercussions way beyond what people here realise.


  • Registered Users, Registered Users 2 Posts: 1,558 ✭✭✭kaiser sauze


    I'm not sure why this is even news, maybe it's the fact that we lost the only Euro supporter over that side of the Atlantic?


  • Closed Accounts Posts: 4,124 ✭✭✭Amhran Nua


    later10 wrote: »
    Huh? i said that this was a positive side effect that the writer of the original article or blog failed to account for when he complained about 'kicking the can down the road'.
    As has already been asked of you, a positive side effect for whom? I don't really care if it helps Germany or France, to be blunt. Its not them who are being forced into a default; in fact they are forcing us into a default to better their own position.

    Now answer the other question as put to you previously: do you think there is any justification for burdening Irish taxpayers with the debts of bondholders and European banks? You're spending a lot of handwaving effort dancing around that one, can you respond to it.
    later10 wrote: »
    I never said it was official government policy, in fact it is largely irrelevant whether it is an accidental benefit or a deliberate one.
    Assuming what you are imagining is true.
    later10 wrote: »
    However, just so you know the FT have been writing about this a lot over the past ten days, if you don't take my word for it I suggest you go out and buy yourself a copy.
    Eh the only article about Brady Bonds I could find on the FT site has this to say:
    Euro-officialdom hasn’t wanted to hear about the Brady precedent, as Mr Van Rompuy said last week.
    Which is pretty much the exact opposite of what you're saying. So perhaps you could direct us toward whichever articles you have been reading?
    later10 wrote: »
    I'm not sure you know what you're talking about to be honest...
    The relevant issue is whether or not I can support what I am saying, and it appears I can.
    zig wrote: »
    Amhran Nua, id be interested to know what kind of options you would be looking at as an alternative to this bailout.
    Thanks
    Pretty much as every independent economist has put forward, seperate the properly sovereign debt and the private debt gone horribly wrong, offer a debt for equity swap on whatever reamins of the Irish banks to private debtors, and pay off what should be paid off. Similar arguments are put forward in the article in the OP, all credit to Professor Kevin O'Rourke for translating that by the way.


  • Closed Accounts Posts: 4,124 ✭✭✭Amhran Nua


    Here's an article from today's Times:
    THE DEAL is done, but there is no joy. The agreement that was supposed to end the financial crisis gave rise to its next wave. We are now in the unique situation that financial markets are taking a longer term view than national governments.

    The governments are saying: There is no liquidity crisis. Greece and Ireland are safe for the next few years.

    The markets are saying: There is a solvency crisis; there is no way that Greece and Ireland will be able to prevent an explosion of their national debt.

    The markets, for once, are correct. At an interest rate of 5.8 per cent, the loan from the European Financial Stability Facility will at best plug a temporary funding gap. It will not improve – and quite possibly worsen – Ireland’s underlying solvency position. The interest rate is very likely to be higher than Ireland’s nominal annual growth during the period of the loan. And that means that the real value of the debt will increase.

    Solvency is not a legal concept. No court will ever declare you insolvent. Solvency is an analytical framework. You are insolvent if you are not able to service your debt in a sustainable way. Solvency depends on the absolute level of debt, of course, but also on your expected future level of income.

    Reasonable people might disagree on what that might be. But it is unreasonable to assume that we will simply return to the pre-crisis game, as though this financial crisis was no more than an unwelcome disturbance of the party. The combination of rising market interest rates, rising money market rates, extreme fiscal austerity, a slowdown in the global economy, financial contagion to other parts of the euro zone and contagion to other parts of the financial markets, including the market for corporate bonds, all make it hard to see where a solvency-maintaining growth rate is coming from.

    Yes, Ireland is a flexible economy that is extremely open. Unit labour costs in the export sector are falling. So in contrast to Greece, Spain and Portugal, Ireland is improving its competitive position. But we would be kidding ourselves if we believed that anybody, even the world’s most flexible small open economy, can pull itself out of this mess in the current economic climate.

    The Nordic countries managed to extricate themselves out of a milder financial disaster in the 1990s. But they devalued their exchange rate. And it all happened in a much more benign global environment. If you ignored all the toxic interactions that are currently taking place, you could make a reasonable assumption of continued solvency: A return to modest rates of growth, no further decline in house prices, a further but contained decline in commercial property prices, a government funding rate now capped at below 6 per cent. You impute this into your macroeconomic model, and it tells you that you are solvent.
    There's a good bit more in the article, written by Wolfgang Münchau, who is an associate editor and columnist of the Financial Times, and president of Eurointelligence ASBL.

    It has indeed been interesting to observe O'Rourke and Eichengreen transform from mild commentators to Angry Men over the last few months, and not just them but Martin Wolf, Buiter, and many other respected commentators. The markets are making it clear that they have no faith in this solution. I appreciate that anger is not a policy, as do these economists, but it can be helpful in spurring on policy decisions.

    Brian Lucey has this to say:
    A key element of the plan, in general, is growth. And what is the EU growth forecast?

    Another is the banks : who now knows how much more money they will eat - i dont , my worst nightmare losses were lowballing it, but in an environment where mortgage rates are rising, trackers are common and SME financing is constrained would anyone hazard a guess. I now hear that we wont hear the results of the next, no really this time its definitive, stress tests. I wonder why.

    As for the endgame : what odds that it will be “going forward” not retrospective? That is, spanish/belgian/wherever senior bond finances in banks will be haircut/absorbed by ECB/sorted in some other way but….we will be left with ours as is? As I say, some game theorists needed here and some good monte carlo similations.
    Pretty damning analysis there. The we have the ECB which is living in its own world, placing senior debt higher than sovereign, and trying to pay member states off against one another. This also lends itself to the idea that there doesn't seem to be any real leadership or insight even at the European level, as astonishing as that sounds.

    The we get to the political on-the-ground backlash, which these commentators are not qualified to speak on, and not just in Ireland. Our supporters in the UK are talking about a serious rise in the level of British nationalism feeding into the BNP and similar groups, because of the fact that the UK is part of the bailout package for Ireland while people are being let go from their own public sector in huge swathes. This is starting to look more and more like the greedy leading the clueless down the garden path to a tune being played by the blind.


  • Registered Users, Registered Users 2 Posts: 1,206 ✭✭✭zig


    Alot of common sense in that article. Whichever decision you take its going to be a gamble, but debt for equity swap is a gamble that could leave us in much better shape in the near future than the situation we're about to face.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    The banks are being pared down to a size we can actually manage, the ECB is keeping them on life-support while we do so, we're recapitalising the banks using primarily our own funds - the NPRF and the Treasury buffer - and the majority of the bailout facility (€50bn) is for the state deficit we expected to have to run up over the next 4 years, with a bit of extra because the EU and the IMF don't believe the government's growth figures of 2.75% per year.

    The bailout facility is not a single loan, as the author of the article seems to either believe or prefer to claim, but a sort of private bond market that caps our exposure to a rise in market rates. The cap is high, but that's because it's a cap, and the hope is that bond market rates will fall below that cap. Because it's a facility, not a loan, the moment bond market rates do drop below the effective 5.83% average of the facility, we re-enter the bond markets and don't have to further touch the bailout facility. If the bond market rates do not drop below the cap, then the rate at which we could borrow the money we need to pay social welfare/pensions/salaries would be more 'punitive' than the bailout facility's rates.

    On top of that, the programme of cuts is going ahead, supervised by the EU/IMF rather than just being in the hands of the Irish government, who will be tempted to fudge the cuts for political gain. The reduction of the banks' balance sheets to a manageable size is also going ahead, and a fair bit of that has already happened since the initial size of the guarantee was estimated at €467bn.

    This isn't "kicking the can down the road". It's capping our exposure to market bond rates at a high but not unsustainable rate - and it only covers debt we were expecting to run up anyway. Let me repeat that - this facility covers debts we were expecting to run up anyway with the 4-year programme in place. It's not a loan we're taking on in addition to the debt the state would have taken on over the next four years - it's an alternative mechanism for funding that expected debt that means we don't have to go to the bond markets if their rates rise above the rates provided by the facility. Part of the deal is that we stick to the 4 year plan (over 5 years, because the EU/IMF think the government's growth predictions are too optimistic).

    The article paints a completely false picture - that we're taking out a large loan right now in order to prop up our deficit rather than making cuts. That's complete rubbish. On the contrary, we're getting a capped source of funding for the debts we're already committed to running up during the period where we restructure the banks and make budget cuts. Without that facility, we will be unable to borrow the money to fund the country, or will be in a much worse position if we do, because the market rates are higher than that offered by the bailout facility.

    It's extraordinary that anyone can give credibility to any article that essentially represents what's happening as us borrowing an extra €85bn as one large loan. We're being given, first and foremost, the ability to borrow the government deficit we were going to have anyway, and which at current bond market rates we simply cannot afford to borrow. The only other option is full default - but default means we have to cut the government deficit to nothing by spring.

    regards,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Amhran Nua wrote: »
    As has already been asked of you, a positive side effect for whom? I don't really care if it helps Germany or France, to be blunt. Its not them who are being forced into a default; in fact they are forcing us into a default to better their own position.
    Forced into a default? Amhran Nua, the reason France and Germany are not defaulting is because they do not need to. We have caused the necessity to "restructure" our debt - call that a partial default if you will. France and Germany have not inflicted this on us, we have done it to ourtselves. So can you account for the term "being forced into a default" - how are they forcing us - according to you?

    The partial restructuring of our debts by progressive and managed write down of current debentures is to our benefit, not Germany's, since many of these debts are owed to investors and banks within Germany. Do you not get that?

    The Deauville declaration and last Sundays Franco-German agreement copperfasten the future availability of, and the intention to impose sovereign and corporate debt write down.
    Now answer the other question as put to you previously: do you think there is any justification for burdening Irish taxpayers with the debts of bondholders and European banks? You're spending a lot of handwaving effort dancing around that one, can you respond to it.
    Of course not, I pay taxes like anyone else, I don't want to see it going into the black hole of bank debt any more than any other tax payer. However, I do understand why we now have to, having taken on the banks, and I also understand the implications of an immediate default on this debt, so it isn't all black and white.
    Originally Posted by later10 viewpost.gif
    I never said it was official government policy, in fact it is largely irrelevant whether it is an accidental benefit or a deliberate one.
    Assuming what you are imagining is true.
    What are you talking about 'assuming it is true'. Capital building and the offloading of corporate banking bonds are bound to happen and bound to improve the position of European investors - what exactly do you dispute about that:confused:
    Eh the only article about Brady Bonds I could find on the FT site has this to say:
    I asked you to google brady bonds to improve your own personal knowledge. I said that the FT have been covering the issue of delaying restructuring quite consistently over the past ten days. Searching for evidence of that by doing a search for "Brady bonds" is like doing a search for "property sector" by googling "Nama" - anyway...
    So perhaps you could direct us toward whichever articles you have been reading?
    Sigh. The FT have been covering it consistently. Yesterdays paper alone covered the issue twice, I have today's copy at my feet and I haven't read it yet, if you want to know if there any relevant articles from todays edition, buy it yourself. Anyway because we happen to have yesterdays edition in the office, I'll give them to you now.

    FT Main Paper - Page 16
    The central banks and regulators recognised that while many banks would have been insolvent if they had to take an immediate loss, equally most had sufficient earning power to be able to afford a gradual writedown in the value of their loans over a number of years. The evntual result was the Brady Bond restructuring.... The net effect was that over the following years the debts were written down to levels which were manageable for both debtors and creditors...

    FT Main paper - Page 8
    "Prof Prasad said the function of the Greek and Irish programs may simply be to cushion the blow of restructuring on the European banks that hold their debt, allowing them to build up capital or offload the bonds gradually by deferring restructuring by a year or two."
    (By the way, the Professor being referrd to there is a former senior IMF official now an economist at Cornell University)
    Originally Posted by later10 viewpost.gif
    I'm not sure you know what you're talking about to be honest...
    The relevant issue is whether or not I can support what I am saying, and it appears I can.
    No you cannot. You clearly don't know anything about debenture write down and I actually think you struggle to understand what restructuring is. Once again - can you please explain this statement.
    But they'll still have to repay us whatever interest and capital was paid out. Lets not fool ourselves however, a debt restructuring is not going to be accepted willingly no matter what happens. If they think they can get away with it, they'll try to.
    Who do you think is going to be 'repaying' us interest and capital? Do you actually know the meaning of the word restructuring, and do you know that it is us who owe all of this money????


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Amhran Nua wrote: »
    Here's an article from today's Times:
    There's a good bit more in the article, written by Wolfgang Münchau, who is an associate editor and columnist of the Financial Times, and president of Eurointelligence ASBL.
    I should add, ironically, in light of your post - that Wolfgang Munchau, who is probably my favourite economist commentating on the Eurozone crisis, strongly advocates debt restructuring and has written about its inevitability on many, many occasion for the FT. If you want further proof of what I have been saying on progressive write downs to manageable rates, just look back over Muchau's articles in the FT over the past fortnight or so.


  • Registered Users, Registered Users 2 Posts: 83 ✭✭politicsdude


    well apparently greece may be needing a second bailout ... if they are an example of whats in store for us then yup the bailout solves nothing


  • Advertisement
  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    well apparently greece may be needing a second bailout ... if they are an example of whats in store for us then yup the bailout solves nothing

    Source? You're sure you're not thinking of the next instalment of the existing Greek bailout, which has recently been cleared for payment?

    cordially,
    Scofflaw


Advertisement