The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[Rossfan]

What a pity we hadn't copied the France/Germany model from 1997 instead of the McCreevy/Harney and their US banker backer friends extreme right wing big business US model.

[Zapatista]

"That said, if we approach the brink, it may just be the only viable option left. Only the ECB can print euros to save the system."

Why do people think that this can be a solution??  I honestly don't get it, it's the same answer a kid would give.

Raises comsumer confidence and makes small short term credit flow quicker which would be great for a broadbased tax system like Irelands but wouldn't suit the Frech or Germans so much. At a time when nobody owns anything of any value cash is king.

I read somewhere that it's prevented from happening in the Maastricht Treaty.

what it raises is inflation and rapidly and erodes lender confidence.

Yes but your quote says if we approach the brink, it may just be the only viable option left.

[Zapatista]

What a pity we hadn't copied the France/Germany model from 1997 instead of the McCreevy/Harney and their US banker backer friends extreme right wing big business US model.

Spiritually we are probably a lot closer to Boston than Berlin Mary Harney

[CiKe]

If the ECB does go for the nuclear option where does that leave us? Still remain serious concerns over whether deflation is the bigger threat but nuclear option will then see them print money to try and inflate away the debt. None of the economists want a debt-deflation spiral but if they try and print their way out of this through stimulus surely this will just finance an expansion of the deficit that they are supposedly trying to reduce?

Is is possible to print the hundreds of billions necessary and implement fiscal conservatism at the same time? I know the US wasn't particularly concerned about the deficit when it started printing as they took a "we'll cross that bridge when we come to it" approach, but don't really think the ECB can do the same at this point in time

[muppet]

"That said, if we approach the brink, it may just be the only viable option left. Only the ECB can print euros to save the system."

Why do people think that this can be a solution??  I honestly don't get it, it's the same answer a kid would give.

Raises comsumer confidence and makes small short term credit flow quicker which would be great for a broadbased tax system like Irelands but wouldn't suit the Frech or Germans so much. At a time when nobody owns anything of any value cash is king.

I read somewhere that it's prevented from happening in the Maastricht Treaty.

what it raises is inflation and rapidly and erodes lender confidence.

Wouldn't that be great though? The Germans could then see what fun a property boom is. Especially the endless type of boomier no downside boom the Irish did.

[Bogball XV]

"That said, if we approach the brink, it may just be the only viable option left. Only the ECB can print euros to save the system."

Why do people think that this can be a solution??  I honestly don't get it, it's the same answer a kid would give.

Raises comsumer confidence and makes small short term credit flow quicker which would be great for a broadbased tax system like Irelands but wouldn't suit the Frech or Germans so much. At a time when nobody owns anything of any value cash is king.

I read somewhere that it's prevented from happening in the Maastricht Treaty.

what it raises is inflation and rapidly and erodes lender confidence.

Wouldn't that be great though? The Germans could then see what fun a property boom is. Especially the endless type of boomier no downside boom the Irish did.

that would be a really really boomy boom, though I seem to recall they maybe had a bit of an inflation issue in a precious incarnation of the german state.

[Ulick]

Fair play to éirígí, they seem to be the only people with the balls to express our anger at these gangsters

Seven arrested at Anglo protest

EANNA O'CAOLLAI

Seven people have been arrested during a protest outside the headquarters of Anglo Irish Bank in Dublin this afternoon.

Four people who climbed up on a ledge at the front of the building on Stephen's Green this morning and displayed flags and banners were removed and arrested by gardaí at noon.

Protestors said the four were members of the socialist republican party Éirígí. Three more arrests took place at the rear of the building after a small group of protestors clashed with gardaí.

Protestors outside the bank claimed gardaí had drawn their batons on this small group, resulting in a number of injuries.

A Garda spokesman confirmed the arrests, saying they were for public order offences.

He said no members of the force were injured during the operation but was unable to say if batons had been used.

A demonstration is planned for 2pm outside the bank today.

[Ulick]

[Zapatista]

Yeah, fair balls to them! There is a follow up protest at 2pm today if anyone is about (Dublin) town.

[Declan]

NY Times today
Irish Miracle — or Mirage?
By SIMON JOHNSON

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd.  Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro-zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank's head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely.

Prime Minister George Papandreou said this week that Greece needs to see strong investment in order for the austerity program to work.  While the government cuts fiscal spending, he said, it needs new private business to employ the dismissed workers so that they are productive, can pay taxes and do not need unemployment benefits.

The problems are strikingly reminiscent of Latin America in the 1980s. Those nations borrowed too heavily in the 1970s (also, by the way, from big international banks) and then — in the face of tougher macroeconomic conditions in the United States — lost access to capital markets. For 10 years they were stuck with debt overhangs, just like the weak euro-zone countries, which made it virtually impossible to grow.

Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.  Some Latin America countries lingered in limbo for a decade or more.

Mr. Trichet and Mr. Papandreou can look more closely at home to see what might soon be going wrong.  Ireland was one of the first nations to introduce tough fiscal austerity in this cycle — in spring 2009 the government slashed public-sector spending and raised taxes. Despite the cuts, the European Commission forecasts that Ireland will have one of the highest budget deficits in the world at 11.7 percent of gross domestic product in 2010. The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money. Further, the newly unemployed seek benefits, so Ireland's spending cuts in one category are partly offset by more spending in another. Without growth, the budget deficit still looms large.

Ireland's problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic Tiger's impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills. The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses — from computer services like Google and Yahoo, to drug companies like Forest Labs — that set up corporate bases and washed profits through Ireland to keep them out of the hands of the Internal Revenue Service.

The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product is actually "profit transfers" that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland's potential tax base. A more robust cross-country comparison would be to examine Ireland's financial condition ignoring these transfers. This is easy to do: a nation's gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are nearly identical, but in Ireland they are not.

When we adjust Ireland's figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected — by our calculation — to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

Ireland's politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008. The government has now made a fateful choice: rather than make creditors pay some part of the losses, it is taking the bank debt onto the national balance sheet, effectively ballooning its already large sovereign debt. Irish taxpayers are set to be left with the risk of very large payments to make on someone else's real estate deals gone bad.

There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a "bad bank," while moving their deposit base and profitable businesses into new, well-capitalized banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default.

Second, the Irish must take the tough fiscal steps that will be required under any circumstances. The International Monetary Fund and the European Union have made clear that funding is available to Ireland — so the government should use this to bridge the tough journey of fiscal cuts ahead.

Finally, the Irish need to consider seriously whether being in the euro zone is worth the cost. The adjustment to this awful situation would be far easier outside the euro zone — even though leaving the zone might have adverse repercussions for other nations. Once again, a comprehensive program with European Union and I.M.F. support might make this the least worse option.

Given the depths of Ireland's problems, it is no wonder the markets are looking with skepticism at the announced bailout package for the entire euro zone provided by the European Union and the International Monetary Fund. Policy makers are still not dealing with the core problems of each nation in the euro zone.  With the debt hangovers remaining, who will want to invest in Europe's periphery, and so how can Greece, let alone Ireland, grow? One thing we can be sure of: Europe's political leaders are doomed to be spending much more time at emergency meetings in Brussels over the coming months and years.

[lynchbhoy]

at first glance I think that article goes a bit OTT.
Ireland have a bit of growth again and businesses/people coming out to spend.
Also with the recent fall in the euro this should only help accelerate that growth, as Ireland trades mostly with UK and USA - unlike other euro countries who trade mostly between themselves (approx not absolutle).
With interest rates set to stay low, with increased exports hopefully and increasing growth and a feeling amongst at least some business sectors that now is the time to crack on - I personally think that the above article is having a bit of a go !
Yes we may not like the choice our idiotic politicians have made, but we are kind of stuck with it now..

[Declan]

Morgan Kelly viewpoint
http://www.irishtimes.com/newspaper/opinion/2010/0522/1224270888132.html


Monday, May 24, 2010

Burden of Irish debt could yet eclipse that of Greece
OPINION: What will sink us, unfortunately but inevitably, are the huge costs of the September 2008 bank bailout, writes MORGAN KELLY
IT IS no longer a question of whether Ireland will go bust, but when. Unlike Greece, our woes do not stem from government debt, but instead from the government's open-ended guarantee to cover the losses of the banking system out of its citizens' wallets.
Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt to national income than the one that is sinking Greece.
On the face of it, Ireland's debt position does not appear catastrophic. At the start of the year, Ireland's government debt was two- thirds of GDP: only half the Greek level. (The State also has financial assets equal to a quarter of GDP, but so do most governments, so we will focus on the total debt.)
Because of the economic collapse here, the Government is adding to this debt quite quickly. However, in contrast to its inept handling of the banking crisis, the Government has taken reasonable steps to bring the deficit under control. If all goes to plan we should be looking at a debt of 85 to 90 per cent of GDP by the end of 2012.
This is quite large for a small economy, but it is manageable. Just about. What will sink us, unfortunately but inevitably, are the huge costs of the bank bailout.
We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.
But when you translate from the leviathan that is America to the minnow that is Ireland, it would be equivalent to the Irish Government spending €7 billion on Nama, and eventually losing €1.5 billion in the process. Pocket change by our standards.
Instead, our Government has already committed itself to spend €70 billion (€40 billion on the National Asset Management Agency – Nama – and €30 billion on recapitalising banks), or half of the national income. That is 10 times per head of population the amount the US spent to rescue itself from its worst banking crisis since the Great Depression.
Having received such a staggering transfusion of taxpayer funds, you might expect that the Irish banks would now be as fit as fleas. Instead, they are still in intensive care, and will require even larger transfusions before they can fend for themselves again.
It is hard to think of any institution since the League of Nations that has become so irrelevant so fast as Nama. Instead of the resurrection of the Irish banking system we were promised, we now have one semi-State body (Nama) buying assets from other semi-states (Anglo) and soon-to-be semi-States (AIB and Bank of Ireland), while funnelling €60 million a year in fees to lawyers, valuers and associated parasites.
What ultimately matters for national solvency, however, is not how much the State invests in its banks, but how much it is likely to lose. It is alright to invest €70 billion, or even €100 billion, to rescue your banking system if you can reasonably expect to get back most of what you spent. So how much are the banks and, thanks to the bank guarantee, you the taxpayer, likely to lose?
Let's start with the €100 billion of property development loans. We'll be optimistic and say the loss here will be one-third. Remember, Anglo has already owned up to losing about €25 billion of its €75 billion portfolio, so we have almost reached that third without looking at AIB and Bank of Ireland. I think the final loss will be more than half, but we'll keep with the third to err on the side of optimism.
Next there are €35 billion of business loans. Over €10 billion of these loans are to hotels and pubs and will likely not be seen again this side of Judgment Day. Meanwhile, one-third of loans to small and medium enterprises are reported already to be in arrears. So, a figure of a 20 per cent loss again seems optimistic.
Finally, we have mortgages of €140 billion, and other personal lending of €20 billion. Current mortgage default figures here are meaningless because, once you agree a reduction of mortgage payments to a level you can afford, Irish banks can still pretend that your loan is performing.
Banks in the US typically get back half of what they loaned when they foreclose, but losses here could be greater because banks, fortunately, find it hard to take away your family home. So Irish banks could easily be looking at mortgage losses of 10 per cent but, to be conservative, we will say five.
So between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic (and more likely closer to €70 billion), which translates into a bill for the taxpayer of over 30 per cent of GDP. The bank guarantee may have looked like "the cheapest bailout in the world, so far" in September 2008, but it is not looking that way now.
Adding these bank losses on to the national debt means we are facing a debt by late 2012 of 115 per cent of GDP. If we are lucky.
There is more. The ability of a government to service its debts depends on its tax base. In Ireland the proper measure of tax base, at least when it comes to increasing taxes, is not GDP (including profits of multinational firms, who will walk if we raise their taxes) but GNP (which is limited to Irish people, who are mostly stuck here). While for most countries the two measures are the same, in Ireland GDP is a quarter larger than GNP. This means our optimistic debt to GDP forecast of 115 per cent translates into a debt to GNP ratio of 140 per cent, worse than where Greece is now.
And even this catastrophic number assumes that our economy does not contract further. For the last two years the Irish economy has not been shrinking, so much as vaporising. Real GNP and private sector employment have already fallen by one-sixth – the deepest and swiftest falls in a western economy since the Great Depression.
The contraction is far from over, to judge from the two economic indicators I pay most attention to. Redundancies have been steady at 6,000 per month for the last nine months. Insolvencies are 25 per cent higher than this time last year, and are rippling outwards from construction into the rest of the economy.
The Irish economy is like a patient bleeding from two gunshot wounds. The Government has moved competently to stanch the smaller, budgetary hole, while continuing to insist that the litres of blood pouring unchecked from the banking hole are "manageable".
Capital markets are unlikely to agree for much longer, triggering a borrowing crisis for Ireland. The first torpedo, most probably, will be a run on Irish banks in inter-bank markets, of the sort that sank Anglo in 2008. Already, Irish banks are struggling to find lenders to leave money on deposit for more than a week.
Ireland is setting itself up to present an early test of the shaky EU commitment to bail out its more spendthrift members. Probably we will end up with a deal where the European Central Bank buys Irish debt and provides continued emergency funding to Irish banks, in return for our agreeing a schedule of reparations of 5-6 per cent of national income over the next few decades.
To repay these reparations will take swingeing cuts in spending and social welfare, and unprecedented tax rises. A central part of our "rescue" package is certain to be the requirement that we raise our corporate taxes to European levels, sabotaging any prospect of recovery as multinationals are driven out.
The issue of national sovereignty has for so long been the monopoly of republican headbangers that it is hard to know whether ordinary, sane Irish people still care about it. Either way, we will not be having it around much longer.
We have long since left the realm of easy alternatives, and will soon face a choice between national bankruptcy and admitting the bank guarantee was a mistake. Either we cut the banks loose, or we sink ourselves.
While most countries facing bankruptcy sit passively in denial until they sink – just as we are doing – there is one shining exception: Uruguay. When markets panicked after Argentina defaulted in 2002, Uruguay knew it could no longer service its large external debt. Instead of waiting for a borrowing crisis, the Uruguayans approached their creditors and pointed out they faced a choice.
Either they could play tough and force Uruguay into bankruptcy, in which case they would get almost nothing back, or they could agree to reduce Uruguay's debt to a manageable level, and get back most of what they lent. Realising Uruguay's problems were largely not of its own making, and that it had never stiffed its creditors in the past, the lenders agreed to a debt restructuring, and Uruguay was able to return to debt markets within a few months.
In one way, our position is a lot easier than Uruguay's, because our problem is bank debt rather than government debt. Our crisis stems entirely from the Government's gratuitous decision on September 29th, 2008, to transform the IOUs of Seán FitzPatrick, Dermot Gleeson and their peers into quasi-sovereign instruments of the Irish state.
Our borrowing crisis could be solved before it even happens by passing the same sort of Special Resolution legislation that the Bank of England enacted after the Northern Rock crisis. The more than €65 billion in bonds that will be outstanding by the end of September when the guarantee expires could then be turned into shares in the banks: a debt for equity swap.
We need to explain that the Irish State has always honoured its debts in the past, and will continue to do so. However, the State is a distinct entity from its banks and, having learned the extent of the banks' recklessness, we now have no choice but to allow the bank guarantee to lapse and to share the banks' losses with their bondholders. It must be remembered that when these bonds were issued they had no government guarantee, and the institutions that bought them did so in full knowledge that they could default, and charged an appropriate rate of interest to compensate themselves for this risk.
Freed of the impossible bank debt, the Irish State could concentrate on the other daunting problems left by its decade-long credit binge: unemployment, lack of competitiveness and indebted households. The banks would be soundly capitalised and able to manage themselves free of political interference.
There are two common objections to sharing the banks' losses with their bondholders, both of them specious. The first is that nobody would lend to Irish banks afterwards. However, given that soon nobody will be lending to Irish banks anyway, this is not an issue. Either way, the Irish State and banks are facing a period of relying on emergency funding. After a debt-for-equity swap, Irish banks, which were highly profitable before they fell into the clutches of their current "management", will be carrying little debt, making them attractive credit risks.
The second objection is that Ireland would be sued in every court in Europe. Again wrong. Under the EU's winding-up directive, the government that issues a bank's licence has full power to resolve the bank under its own laws.
Of course, expecting politicians to sort out the Irish banks is pure fantasy. Like their British and American counterparts, Irish politicians have spent too long believing that banks were the root of national prosperity to understand that their interests are frequently inimical to those of the rest of the economy.
The architect of Uruguay's salvation was not one of its politicians, but a technocrat called Carlos Steneri. The one positive development in Ireland in recent months is that control of the banking system has passed from the Government to similar technocrats.
This transfer did not take place without a struggle – one that was entirely missed by the media. When Anglo announced they wanted to take over Quinn Insurance despite the objections of the Financial Regulator, journalists seemed to view this as just another case of Anglo being Anglo. They should have remembered that Anglo cannot now turn on a radiator unless the Department of Finance says so, and what was going on instead was a direct power struggle between the Financial Regulator and the Minister for Finance.
Having been forced to appoint a credible Financial Regulator and Central Bank governor – first-rate ones, in fact – the Government must do what they say. Were either Elderfield or Honohan to resign, Irish bonds would straight away turn to junk.
Now you understand the extraordinary shift in power that lay behind the seeming non-headline in this newspaper last month: "Lenihan expresses confidence in regulator".
The great macroeconomist Rudiger Dornbusch observed that crises always take a lot longer to happen than you expect but, once started, they move with frightening rapidity. Or, as Hemingway put it, bankruptcy happens "Slowly. Then all at once." We can only hope that the Central Bank is using whatever time remains to us as an independent State to devise an intelligent Plan B – or is it Plan C?
________________________________________
Morgan Kelly is professor of economics at University College Dublin

[Hedley Lamarr]

God bless the Credit Union and all who sail in her!!

[Billys Boots]

Gulp.

[Declan]

Nothing to worry about at all - Sorry if I alarmed anyone  

Ryan rejects economist's claims on bank guarantee
Monday, May 24, 2010 - 12:03 PM

Communications Minister Eamon Ryan is rejecting claims from an economist that Ireland still faces an economic doomsday because of the bank guarantee.

At the weekend, UCD Professor Morgan Kelly insisted it was a case of when and not if Ireland would go bust.

Professor Kelly - who predicted the property-fuelled economic crisis - said our debt ratio here is actually worse than Greece at the moment.

But Minister Ryan disagrees and insists we will be able to cope with the tough economic challenges that still face us,

He said that Ireland's debt legacy was still a problem but insisted that the country would be able to manage its way through it.


Read more: http://www.examiner.ie/breakingnews/ireland/ryan-rejects-economists-claims-on-bank-guarantee-458908.html#ixzz0oqucgkQv