Eurozone Sovereign Debt Crisis part 2 - Ireland

Discussion in 'Politics' started by Jason, Nov 11, 2010.

  1. Jason

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    This board had several chunky threads a while back on Greece. Greece has been saved from default by a massive bailout co-ordinated by the ECB and IMF. Notwithstanding for the last month the spread on Greek debt has been about 800 basis points (ie at crisis level). Investors are demanding an 8% premium for perceived risk not of Greek default, but of both Greece defaulting and the ECB/IMF not paying up on guarantees. Greece is in a shocking position - but just at the moment Greece is supported by a bailout and will not default, at least not quite yet. The ECB/IMF is also in a pretty shocking position. Investors seem to feel that a Greek default is more or less inevitable (when rather than if) but also doubt whether the bailout pledged will be forthcoming. Basically investors don't believe the ECB.

    Today the focus of the Eurozone sovereign debt crisis has switched to Ireland. Irish bonds are now at a level which is not sustainable. While Ireland has covered its bond needs until well into 2011 it is now very clear - almost as certain as anything in economics can be - that Ireland will not be able to cover its debts from mid 2011 and will need a bailout. This is almost certain, and is also a self-fulfilling prophesy. It is very hard to see what could stop this.

    The Wall Street Journal is forthright:
    With its 10-year bonds now yielding nearly 9%, it would take a Damascene conversion by investors to bring borrowing costs back to a level where Dublin could realistically return to the market. A bailout looks increasingly necessary. European Commission President Jose Manuel Barroso says the European Union is ready to help Ireland financially. But could the Irish government cut a better deal elsewhere?
    NOVEMBER 12, 2010 How Ireland Could Cut a Deal (article won't link).


    IMO a lot follows from this.
    • Ireland has done what Greece has failed to do in tackling its fiscal deficit - but we now see it has not been enough. Greece cannot possibly win. Nor can Portugal or Spain.
    • It was hard to prevent Greek contagion. This will be harder.
    • One Eurozone country needing a bailout is a problem - but two is a catastrophe. Who will believe in the Eurozone?
    • Ireland may decide to take a bailout from the IMF alone rather than the ECB/IMF - but this would be a vote of no confidence in the ECB.
    • The Irish problem is hitting the Euro already. It is also going to hit the UK as the UK has major exposure in Ireland - and sterling must surely fall. At least it can fall (and a weaker pound right now would not be such a bad thing).
    • The speculators will have their eye on Portugal and Spain. Arguably the Eurozone can bailout three small economies (Greece, Ireland, Portugal). But Spain cannot be bailed out as it is just too big. This is the place where Soros has predicted the euro will be boken.
    • My personal view is that Sarkozy, Merkel the ECB are trying to keep a lid on the crisis until into next spring - but I think this now looks more of a challenge. They may have to bring forward their plans.
    • Just a few days ago there was talk of the euro crisis having reduced. Well its back and bigger than ever. The point is IMO it cannot go away - there will be crisis after crisis until either there is a single state of the EU or the euro beaks.
    • The G20 have just criticised the German trade surplus caused by a currency too weak for Germany. Well this is further weakening the currency. The problem is increasingly that Germany cannot stay within the eurozone.
    But most of all this hits Ireland and the people of Ireland. They have probably not yet woken up to just what a 2011 bailout means to each and every one. I hope the Irish government approaches the issue with more courage than I have perceived from the Greek government.
     
    #1 Jason, Nov 11, 2010
    Last edited: Nov 11, 2010
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  2. aajjxx

    aajjxx New Member

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    American here but know lots of English and do biz there. I had a good time irritating the Brits when they'd complain about the Irish and their debt problem (as in, why should we have to pay for them?!). "Hey, if you didn't want to be responsible for them, ya should have let them have their independence!".
     
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  3. Jason

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    Ireland has been a state independent of the UK since 1922.
     
  4. B_nyvin

    B_nyvin New Member

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    The Irish need to put their banks into bankruptcy. Creditors lent the Irish banks money with no promises of bailouts; if the creditors were stupid, that is their problem, not the Irish government/taxpayers' problem.

    Close the banks and let the dumb creditors face their punishments.

    Ireland is a good case of pointing out how ignorant pre-crisis economist were back in the day....for a good 10 or 15 years you'd hear constantly about the Irish Tiger and how amazing and successful it's economy was and never even the thought that they were doing anything wrong. It's almost comical.
     
  5. dandelion

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    it is a false premise that the euro institutions have to bail out individual countries. They dont. It is a false premise that Ireland et al are solely responsible for their debt. It is a problem for whoever leant them the money. Now, that may turn out to be German banks, so the problem is back in germanys hands. But it is not because they both use the euro.
     
  6. Joll

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    I heard the IMF were trying to keep a lid on it today, and stating their confidence in Dublin's ability to pay its debts. Hmm... :/

    Poor ol' Ireland. :( It seems a terrible shame, since they seem to have done everything possible to put the situation right - and the public seem to have gone along with it fairly stoically, too.
     
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  7. Jason

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    If a bank goes bankrupt and there is no state bailout then every individual and company who has money in that bank finds their money has vanished. However the debts they have with the bank continue, and will be charged at whatever interest rate anyone who buys the assets of a broke bank might apply.

    It is possible for a small bank to go under and for the creditors to be left in the soup - but when the bank is a major one its bankruptcy would take just about every individual and company in the country concerned with it. Ireland is in the latter position - if the banks are not bailed out there will be no Irish companies, and no Irish savings, pensions or anything else. It is a scenario that is pretty much unthinkable. The banks are too big to fail and will be bailed out. The problem is that they are so big that they are taking the country with them - so there is a bailout for the country as well.

    Yes I agree entirely with the stupidity of pre-crisis commentators - for Ireland, for Greece, for others. We seem to have given control of economies into the hands of politicians with no training whatsoever who have breached the most basic concepts of economics. Curiously it is quite easy to get a boom lasting perhaps a decade but the price is the bust. And the media have loved reporting the boom, and Irish pride has grown with the Irish tiger and the Irish housing bubble.

    I did wonder if Ireland would be the one Eurozone periphery nation to make it - after all they have taken the austerity medicine (Joll's point I think). But they haven't. The follow through is that there is no point in Greece or Portugal even trying - it won't work. I don't think there is now much room for doubt that Ireland will need a bailout and both Greece and Ireland will subsequently default (and the ECB may or may not pick up the tab). Pretty much the same Portugal - and possibly Spain and even Italy. We now have to plan for this.

    The issue is around default within the euro. The problem is that a country still has its debts and all the underlying problems and cannot make a fresh start within a single currency - in theory there is the option of "internal devaluation" but this is so impractical it is hardly worth considering. The solution for a single sovereign state is massive financial transfer, ie from Germany and France to Greece and Ireland. But we are talking almost unimaginably massive sums as a gift, not a loan. So France would need to match the UK's 66 retirement age and with no benefit to France. Similar pain for Germany - and they would need to change their constitution. Yes it could be done, and this is the logic of the EU as a single state (the mechanism would presumably be to issue EU bonds). But I cannot see any possibility of voters in France and Germany agreeing.

    Ireland has an option that Greece doesn't have. It could withdraw from the euro while seeking IMF bailout (not ECB/IMF). In theory this means it would leave the EU also, but pre-EU treaty agreements with the UK I think mean that there is complete bilateral free movement of goods and services between the UK and Ireland, so Ireland would not face the economic consequencies of withdrawal (though it might be without representation in the EU parliament and elsewhere). Ireland would need a new currency. Presumably it would look to a floating peg with sterling, ie a revived punt. I'm well aware of the political issues raised by this but economically it works and would give Ireland a pretty quick route to prosperity. The big question is whether there is political leadership in Ireland to sell the option that works to the Irish people. I think the alternatives are just too ghastly for the Irish.
     
    #7 Jason, Nov 11, 2010
    Last edited: Nov 11, 2010
  8. B_nyvin

    B_nyvin New Member

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    It's just silly to point to the Euro/Eurozone for everything...if you look around other countries aren't any better for being outside...iceland, baltic countries, hungary...there isn't any real connection between stable economy and being in the eurozone, it's all to do with the financial policies, plus there are "outer" countries in the eurozone that are doing mostly fine, Finland, malta, austria....There just isn't enough transparency to say it's the Euro's fault, it's mostly just NYC and London spewing propoganda hoping for a Euro default, which I find just outright wrong.
     
  9. Joll

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    ^Yes and no. Being in the Euro severely limits freedom of movement for Ireland, Greece etc - so they can't use normal means to manoeuvre to a more satisfactory position (by changing interest rates, or allowing their currency to devalue, or whatever - or by printing more money and devaluing that way, I guess?).
     
  10. midlifebear

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    Look for a major devaluation in the US Dollar very soon. The USA is well on its way to becoming a 2nd tier economy. If you live in Surrey and have been thinking of buying a nice 3 bedroom 3.5 bath stucco starter castle with pool in Las Vegas (just for fun) then by all means climb aboard British Airways and fly directly to the land of sin. There are thousands of properties for sale. HSBC can help you find your own desert paradise for a third of what its appraised value was just two years ago.

    And while you're in town, be sure to stop in at the Bellagio and have a cup of tea.
     
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  11. dandelion

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    But there is an entirely acceptable alternative to take state control of such an institution thereby punishing the shareholders who ran it into the ground, but preserving the lives of its ordinary creditors and debtors.

    Except that this was not politicians running the show, it was bankers. Who for good free market reasons made themselves rich and didnt really care who eventually paid.


    mmmm. A lesson for britain here perhaps?

    You know perfectly well this isnt a euro issue. Its a world economy issue with one country after another collapsing until it gets germany too. How is china situated when it ceases to be able to export anything?
     
  12. Jason

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    For Iceland and Hungary there is a way forward. They will bounce within a very few years. It is through a three-pronged solution:
    1) Give your debts a haircut (ie restructure payments, default in whole or part).
    2) Accept IMF loans to keep your services going and prevent too much misery to people.
    3) devalue - or allow a free-floating currency to devalue.

    1+3 are essential. No one has yet got back without doing both of these - and if a country does nothing they happen anyway. The optional bit is 2 - you can get away without IMF loans if you don't care about the misery inflicted on your own people.

    For Greece and Ireland there is no possible way forward without devaluation as they are locked into an impossible currency. For all the clever EU talk of "internal devaluation" this doesn't work - devaluation has to be through a falling currency. Greece needs a fall of ball park 60%. Less for Ireland. Germany needs a substantial upwards revaluation, maybe 20% or more. The euro as a whole cannot change to fit everyone.

    While economies remain around the average of the euro area's performance they do fine - so Finland and Austria are doing okay right now. But if one day they get out of step there is no way of solving the problems.

    What we have right now for Greece and Ireland within the euro is no possible solution. We are asking them to take a generation of poverty with all the social misery, organised crime and civil strife that means. For the good of their citzens they must default. But we need an EU scheme in place to manage this default. Portugal isn't in the news yet but the position is similar. And the next domino is Spain, the big one.

    The fault is the euro. There are zero examples of a currency union enduring without a fiscal union and it is economics 101 that this is the case. The misery presently in Greece and coming in Ireland and elsewhere is caused by political hubris around the euro project. Without the euro they would have devalued moderately every year, experienced moderate inflation, and would have been doing a lot better than they are now.
     
  13. Jason

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    Dandelion - the majority shareholders of the banks are pension funds and small investors through unit trusts. The idea of shareholders taking the pain seems fine until this is rephrased as pensioners and small savers taking the brunt.

    Yes it was politicians running the show, creating the whole euro project as a device for creating an EU sovereign state. The banking crisis is a different issue - the euro has been tried by it and found wanting. Compare the dollar which is devaluing - or sterling which has devalued and is now doing quite well.

    Ireland's austerity hasn't worked because it was too little too late and because the currency cannot move as it needs to. The UK is not in a comparable position - though another few weeks of Labour would have taken us over the brink.

    The problems of countries within the eurozone are exacerbated by the euro. It is an additional problem for economies which cannot respond as they need to. Portugal, Spain, Italy are eurozone casualties and would be better off had they never joined.
     
  14. dandelion

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    Jason, devaluing the currency and running up inflation will hit the pensioners every bit as much as removing the shares from the pension funds. We are back to this issue of whether there is ant risk to shareholders so that they might try to exercise control over the companies they supposedly own. Your solution is every bit as bad. The reason countries devalue their currency in this sort of crisis is because they do not have an option about it. Traditionally the value of a currency is inextricably linked to the probity of the issuing authority (and thats true now too) but the issuong authority isnt ireland. So ireland has the option of reneging on its debts entirely , keeping a fully functional currency and continuing on a current account basis. If it can do without borrowing if it doesnt pay any debts back or any interest on debts, then its back in business. Problem solved. Let Germany decide what it will do now its banks have suddenly inherited the Irish defaults.
     
  15. Jason

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    Greece, Ireland and Portugal could in theory default and remain within the euro. But at present this would guarantee that the sovereign debt crisis would hit Spain, Italy, Belgium, perhaps others in the eurozone, and the eurozone would be overwhelmed. The process would probably take hours rather than days. While I'm sure the financial brains are working very hard to see if they can find a mechanism which would permit peripheral default without contagion, I suspect it isn't there to be found.

    The point is that we are heating a kettle with a cork bunged in the spout. Something has to give. In the case of Iceland and Hungary with no cork it is their currency, and in a few years time (five?) they will be doing okay, and in the meantime the IMF prevents anything too terrible for their people. But for Greece, Ireland and Portugal we have no safety valve. If they stay in the euro they are looking at a minimum of a generation (30 years) of recession making them the very poor fringe of the eurozone - and inevitably the hot spot for crime and social deprivation. De facto ECB/Germany/centre will rule as a form of economic colonisation (think of Merkel's ida to take away representation from nations which are not fiscally responsible). Without devaluation there is no possible way out for these countries. What they desperately need is not default but devaluation - indeed if they could devalue they may not even need to default. The euro is killing these countries.

    I'm sure Merkel and Sarkozy are working for a solution, but the Irish problems are earlier than anticipated. Ireland has (mostly) covered its debts until next April, which is when the crisis should have come. But it is heating now and there is concern about some small financial requirements in January. At best we are looking at an April crisis; at worst it could be January (even December).
     
  16. D_Gunther Snotpole

    D_Gunther Snotpole Account Disabled

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    Jason, this confuses me. What could they have in mind? Controls of prices and wages? Please be simple, to match my comprehension of economics.
     
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  17. Joll

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    I was surprised to see the amount of Belgium's debt as %GDP recently - seems it's further up the problem list than the UK, after the PIIGS (and Japan's is bloody astonishing...something like 225% of GDP?).
     
  18. B_nyvin

    B_nyvin New Member

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    ALL countries are desiring to devalue their currency right now. It's something that's being averted by central governments. It's not a matter of there being nothing else to do, it's a matter of the EU nations deciding if they truly are in this together or not.
     
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  19. dandelion

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    might be a good time to print some euros and lend them to Ireland? Yes, I know were going round in circles here. Devaluing a currency might be more difficult than some imagine, if your trying to devalue it compared to something, er, stronger.
     
  20. Jason

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    Internal devaluation is the (theoretical) process of artificially reducing all prices within an economy, ie all wages and all costs. No one has ever made it work as a policy and there are social, legal and economic arguments that suggest it indeed cannot work. Yet notwithstanding the impracticalities internal devaluation is actually required of Greece by the ECB. (They are asking for something they know cannot work as a fig leaf for their actions so that their financial gifts to Greece can be recorded as loans.) It stands in contrast to an external devaluation where a currency falls. All prices in that economy are lower relative to other world currencies but the actual prices are unchanged.

    Printing euros is of course not presently possible because the eurozone is not a fiscal union and cannot issue sovereign debt. I know there is an argument that this is a "beneficial crisis" that will push a fiscal union in order to create EU sovereign debt (at which stage the EU is de jure a sovereign state). Leaving aside the arguments for and against there is an enormous issue around practicality. This would need another treaty or constitution and many nations would oppose it.

    Having the euro as a whole devalue is interesting as a concept. Because the eurozone is not a fiscal union the ability of the ECB to influence the level of the euro is limited - I'm not at all sure it could be managed. However it could not go down low enough to suit Greece (say to 40% of its present value) nor to suit the big cuts in value needed by Portugal and Ireland and Spain. By contrast Germany needs a much stronger euro. Indeed the spirit of the G20 meeting is to avoid the race to the bottom and if anything the euro is too weak right now - without the distortion of the present crisis it would be trading much higher.

    Also possible is wealth distribution within the EU. What is needed by the poorer nations right now is something in the general ballpark of the following:
    Greece E70bn
    Ireland E40bn
    Portugal E40bn
    And they will need similar sums every year for the forseeable future. The immediate need is E150bn. If the richest 150m citizens in Eurozone pay this (German, France, few others) this is E1000 per person per year. However the domino effect means that Spain and Italy will need help also, and the grand total looks more like E700bn (the sort of guarantees that are in place). This is close on E5000 per person per year in the richer Eurozone countries (or E10000 per worker). For everyone in work this is something like E200 per week to find. It won't happen. Suddenly we are back to the Eurozone issuing this sum as sovereign debt simply because there is no alternative. Then we are into issues about the Eurozone's ability to pay, because this is debt additionally to all the national debts. The question no one dare ask is, if push came to shove and the EU indeed found a way of issuing the sovereign debt needed would the whole Eurozone default? There must be a significant risk of a yes. And the IMF does not have the capacity to bailout the Eurozone. IMO it is unthinkable that the eurozone would test this dangerous option, so I don't think they will even try for EU-issued bonds.

    IMO the challenge we are now facing is how to unpick the euro. IMO this is what is being discussed behind the scenes, but I think it needs more time. So IMO we are trying to keep the euro show on the road for a while longer.
     
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