Eurozone Sovereign Debt Crisis part 2 - Ireland

[D_Gunther Snotpole]

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.

Thank you, Jason.

 

[B_nyvin]

To put things in perspective...Ireland is even SMALLER of an economy then Greece, it's about 1.3% of the EU. Even if all the banks did go bust they are by no means "too big to fail" (that phrase is so overused it's absurd)....The contagion would probably cause a bit of a usurp in Germany, UK, maybe a bit in France and Italy....it wouldn't go far.

IMO they honestly should just let the Irish banks go to default and let the creditors face the harsh realities that they made bad investments. The paranoia being fed into all this is really crazy and Ireland AND Greece are JUST TOO SMALL!!! People forget that quite easy.

Let's ask this - If say Wyoming and North Dakota were to go into default and complete bankruptcy....would the USA fall apart? Of course not. The Euro isn't as fragile as people think.

 

[Jason]

The comparison between Wyoming and the periphery nations of the EU does not work because the EU, unlike the USA, is not a sovereign state and cannot issue bonds. Rather the euro project is governed only by treaty and is dependent on responsible fiscal behaviour by all the eurozone nations, and agreement by the 16 whenever there is a problem. Most (is it all?) have broken the euro rules, some outrageously. The periphery nations - Greece, Ireland, Portugal - are worrying for two sorts of reasons:

1) They demonstrate the underlying weaknesses in the treaties which underpin the euro - basically it is being shown to be a house built on sand.

2) They are the worse offenders, but if/when they fall the next in line is Spain, with Italy and Belgium not far behind. There are also problems with nations pledged to join the euro, including Hungary, Bulgaria, Romania. Default wouldn't stop with the three periphery nations. Spain is where Soros thinks the euro will come to grief and he looks more likely to be right as the months go by.

 

[MichiganRico]

We're speaking about Ireland as though it's some type of aberration. It isn't. Ireland's boom was fueled almost exclusively by real estate assets. Banks were leveraging those holdings (just as we did here in the US) and lending money at an extraordinary pace. Then, as we all know too well, the real estate bubble burst and those assets became toxic. Again, much the same story as with most major US financial institutions.

Two things are special about Ireland, however. First, the government demonstrated exemplary leadership and has taken extraordinary steps to reduce its deficit and without all the drama witnessed in Greece, Portugal, France and the UK. Second, since Ireland is part of the Eurozone, the EU can not and will not allow Ireland to default on its debt. If that were to happen, the Euro would devalue precipitously and likely trigger the EU's complete economic collapse. Ireland will be rescued by the EU's largest economies--there is absolutely no rational alternative--and its recapitalization is probably already in process as I complete this post.

 

[dandelion]

well, why would the euro devalue precipitously? From other posts here, if it did that would be all good for ireland.

 

[MichiganRico]

well, why would the euro devalue precipitously? From other posts here, if it did that would be all good for ireland.

The EU is in completely unchartered waters. A very modest and controlled currency depreciation could be helpful to boost exports and repay debt. (That's what our own Fed is attempting to accomplish in part with its second QE.) An uncontrolled currency devaluation triggered by a Eurozone member's debt default could well result in a Euro with no substantive value. How then do you finance debt? You don't, and the entire financial infrastructure implodes.

 

[dandelion]

but given the relatively small size of the irish economy and the fact it has no responsibility for maintaining the euro itself, why will the euro suffer?

 

[MichiganRico]

but given the relatively small size of the irish economy and the fact it has no responsibility for maintaining the euro itself, why will the euro suffer?

The Euro, like the dollar, is not a gold backed currency. Its value floats relative to the health of the overall European economy and its comparative value to other world currencies, primarily the dollar and yen. It's a major world reserve currency. A Eurozone sovereign debt default would call into question the European Central Bank's ability to monetize the debt of its constituent parties. The strength of any currency is highly contingent upon the faith and trust others place in the Central Bank's ability to manage monetary policy. World financial markets are highly interdependent and very delicately balanced--as we have discovered all too painfully since the crash of 2008. A sovereign debt default could not only sink the Euro, but likely take the rest of the first tier economies right along with it. I don't think it's hyperbolic to say that with world financial systems still so fragile, we're only one major economic crisis away from a full-blown world depression. Did you watch our own equity markets' reaction to Greece's near default? It was extremely dramatic--and a bit scary. (Damn, I feel like Debbie Downer's half-brother.)

 

[D_Gunther Snotpole]

^^^^^^^^^^
My gosh, Rico ... I thought you were all about eyeballs, and not brain pans.:tongue:

 

[dandelion]

we are in uncharted waters because the euro is independant of any one country. A number of people suggested the best solution for Greece would be to default, and establish the principle that the euro is separate from any one country. There is no reason German debt should be affected by a Greek default. Except for the issue of confidence, and creeping risk if countries defaulting one by one. The danger is not a collapse of the euro but still a collapse of the international banking system. Maybe those in charge would rather argue risk to the euro as a spur to international action than admit the real risk.

 

[798686]

^^^^^^^^^^
My gosh, Rico ... I thought you were all about eyeballs, and not brain pans.:tongue:

Biggest surprise of the year. Wow!

Can't wait till he starts posting hot pics of different denomination euro coins. Especially the lovely, hard, bronzed ones. :biggrin1:

 

[B_nyvin]

An uncontrolled currency devaluation triggered by a Eurozone member's debt default could well result in a Euro with no substantive value.

That's extremely speculative....I highly doubt it would ever go that far.

 

[MercyfulFate]

The world is collapsing, and it will only get worse.

 

[Jason]

... since Ireland is part of the Eurozone, the EU can not and will not allow Ireland to default on its debt. If that were to happen, the Euro would devalue precipitously and likely trigger the EU's complete economic collapse.

Full agreement that an Irish default is unthinkably horrible. Yet yesterday analysts at LloydsTSB using an objective formula calculated on the basis of the additional basis points charged on the periphery nations' bonds the risk of default that the bond buyers are factoring in. (The figures are published, for example in today's Guardian). The chance of default is calculated as follows:

Ireland - 80%
Portugal - 65%
Spain - 30%

Greece is not included because the bailout in place changes the nature of what is being considered. That said it appears that there is a substantial risk being factored in that both Greece will default and additionally the ECB will renege on guarantees.

Sentiment has changed since yesterday. Irish default risk is likely to have increased from 80%. The Eurozone meeting on Tuesday may (or may not) calm nerves. But I think we are now in a position where a bailout of Ireland is very likely indeed, almost a certainty - the question is around when. And with Ireland gone the guns will turn on Portugal - indeed the smart answer would probably be to bail out both of them at once. The sums needed by Greece (and already granted) and presumably by Ireland and Portugal are enormous and will be needed every year for many years. Don't forget the needed every year bit.

There are enormous political and constitutional objections to such bailouts. They are pretty certainly a breach of the German constitution and of the Lisbon Treaty (though at the moment they are defined as loans rather than gifts - the legal issue is triggered when the loans are not repaid and become gifts). Hence the need to re-open Lisbon. There are very real doubts about whether the political framework can be put in place. At the moment we are looking at a substantial possibility of the eurozone reneging on the Greek bailout and refusing to bailout Ireland and Portugal - and the consequencies IMO are every bit as bad as MichiganRico suggests.

But lets assume necessity forces the politicians of the eurozone 16 to force through the necessary changes. Then we have the problem of Spain. With the three small periphery nations propped up by bailouts (and doubtless a sense that this is as far as the eurozone can go) who in their right mind is going to buy Spanish bonds which have a high risk? Spain cannot print money to get out of a hole, so it won't be Spain - and nor can the EU print money because it is not a fiscal union. Spain is trapped. No QI, no devaluation. The notional bailout fund does seem to envisage supporing even Spain, but it is beyond belief. The eurozone nations are so up to their necks in debt that they could not raise E700bn - the sort of level of the total bailout fund pledged. They don't have it in a long stocking and they just couldn't raise it. Remeber this is not a one off payment - we could be looking at E7 trillion over a decade.

We are peering over the abyss. Back to Merkel's "If the euro fails, Europe fails". What we need - and I think we are getting - is a way of managing the major changes we have to have. The first prerequisite is time - changes are enormous and cannot happen tomorrow. The whispers - and there are zero official announcements, at least as far as I know - is that the way to manage the crisis is for the strongest economies to revalue out of the euro. IMO this is why France and Germany are going flat out for fiscal union as this (post euro catastrophe) will be seen as essential for stability. With France, Germany and others out, the rump euro will devalue enough to stabilise Spain and Italy. Quite what is done about Greece, Ireland and Portugal I don't know (maybe three different solutions).

It is the stuff of nightmares, and yes it could still trigger a great depression - but managed correctly there is a way forward. I suspect Sarkozy and Merkel are doing just this and by being very careful not to make public statements they deny the media a news story. My thought is it will get as far as a mega-crisis summit, then the noro will be wheeled out with all the details sorted as the miracle solution.

 

[dandelion]

Bankers love a crisis: if crises didnt exist for them to make money from, why, they would have to make some.

The world is collapsing, and it will only get worse.

No, it could get better.

I am curious to knowwhere all this money ultimately derives? Is this a huge plot to pinch back all that chinese and arab money they have been amassing for ages?

The news seems to think theyre going to get 50 billion somethings.

 

[MichiganRico]

we are in uncharted waters because the euro is independant of any one country. A number of people suggested the best solution for Greece would be to default, and establish the principle that the euro is separate from any one country. There is no reason German debt should be affected by a Greek default. Except for the issue of confidence, and creeping risk if countries defaulting one by one. The danger is not a collapse of the euro but still a collapse of the international banking system. Maybe those in charge would rather argue risk to the euro as a spur to international action than admit the real risk.

I take exception to your view of Euro devaluation (because that would be the triggering event), but your major premise of a collapse of the international banking system and global apprehension over the integrity of the Euro for less than pure reasons is absolutely spot on. These are uncharted waters indeed, the EU's "experiment" with a single currency tied to so many desperate economies and politically sovereign nation-states is without precedent in the modern era. There certainly is no question, however, that the EU has significantly raised standards of living in many of the less prosperous nations--primarily the ones who are now in trouble. If there is a saving grace to the entire sovereign debt issue, it will be Germany's leadership to find, and largely fund, solutions in consort with the ECB, IMF and the more economically stable EU partners. As pointed out by an earlier poster, those solutions may be unique to each debtor nation.

 

[B_nyvin]

Ireland and Portugal are being re-examined mainly because of the new policy of making private investers more responsible for bailouts rather then just taxpayers. This caused corporate deposits to outflow from the country (mainly Ireland) and made their bonds look scary (because of a fear of a bailout). It's more about paranoia then anything. But a few days ago the Irish bond market jumped up apparently....so things aren't as bad as some are saying.
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[Jason]

Been out, just seen the news - BBC is reporting that Ireland is in preliminary talks (Sat eve) with the EU for bailout and "it is now no longer a matter of whether but when". The sum needed is E60-80bn.

So Ireland is in trouble and this is going to really hurt the people of Ireland. The sum is double the E40bn talked about a few days ago. Merkel suggested a few days ago that any new bailout should be accompanied with control of budgets and spending going to the ECB (ie economic colonisation where all financial decisions are taken away from the nation state) and Merkel has also suggested that irresponsible nations should be punished by having their voting rights taken away. Presumably these issues will be part of what Ireland is talking about. Maybe more moderate views will prevail. IMO Ireland would be better taking funds from the IMF than the ECB.

By the way E60bn is about E10,000 for everyone in Republic of Ireland.

 

[798686]

Merkel suggested a few days ago that any new bailout should be accompanied with control of budgets and spending going to the ECB (ie economic colonisation where all financial decisions are taken away from the nation state)...

Eek!

 

[Jason]

Irish Economy | Eurozone Crisis | Ireland Bailout

Forthright article.