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

[bcarrier]

With the effect of reduced tax take on lower wages you would probably have to lower public sector wages by about 50% ( not 30%) to get the books balanced.

Exiting the euro to devalue the currency and implement the cuts by stealth should at least be considered.

Would this not increase the debt (and repayments) even higher which is now the immediate problem.

Because we would now be paid in a new currency, lets call it the reichpunt for simplicity, the govt could do the following:
Initially 1 reichpunt = 1 euro

All govt expenditure in Ireland is in reichpunts (RP's), the govt devalues the currency (pretty much against IMF rules).  The RP is now worth 0.25Euro or 4RP = 1 euro.  We're still paying everybody the same, but the 4 billion euro we're borrowing from outside goes 4 times further.  Whilst we still have to pay back our borrowings in euro, we don't need as many of them. 
It would also work wonders with the housing market, your property worth 1.9 million at the height of the market will be worth 1.9 million again, your mortgage taken out in euro would of course be transferred to RP's at 1:1 intitially will be out of negative equity in no time etc etc etc.
Once more the bank guarantee raises its ugly head as it would negate some of the benefits of devaluation in that our state woned banks would still have to repay all their previous borrowings in euro.

The only tiny flaws in this are that nobody would lend us anything as we're small insignificant and even more peripheral than ever, there'd be no prospect of us attracting outside investment as we're shown to be politically unstable with a very unstable currency (an additional risk for would be investors), we would hardly win any friends in europe, our main markets, as we've just fcuked them over.  Whilst it's true that our exports would be cheaper, since we make nothing (bar a few computers and drugs which are normally made in truly low cost economies before being shipped to ireland and having a little value added to them to adhere to EU transfer pricing legislation) that would not be a huge benefit.  Massive inflation woud be very probable.  All in all it would be a disaster from which this republic might not recover.

Forgive any inaccuracies as to how a devaluation would work, but it's been a while since gcse economics.

Thats pretty much as I understand it too BB. I think if you are doing this the bank guarantee would have to fall away at the same time so that bit of it could be dealt with. The reputational issue is another thing altogether though and it is pretty much unknown how much punishment would be dished out by our euro partners and the markets.

There would be implications for multinationals if there was a more volatile currency and I would be worried about being excluded from european markets through tariffs etc ...access to finance after the effective default is probably less of an issue in my opinion ( if the country gets its books balanced through the process) ....markets have short memories.

Maybe a public debate would be counterproductive but I hope that behind the scenes every option is being considered....pre euro this is how we would have resolved the problem. 

A final thought ....If we were to get excluded from europe we could extract revenge by  reinventing Ireland as an offshore tax haven.

   

[seafoid]

Why do they not just accept the IMF bailout? The terms would be less stringent than the selfimposed flagilation that they seem keen  to inflict on the public for years to come.  As a northerner lookin on it just looks such a clusterfuck, i'm amazed at how the Irish public keep bending over to take more, spineless. If it  were France there'd be lynchings of politicians & bankers in the street. Fair play to the Finnish.

Because the only thing the IMF care about is reducing the deficit. They don't care how many people die or lose their homes - it is all  about the deficit. 

The 3% target by 2014 is probably not do-able without destroying the economy.

[muppet]

Why do they not just accept the IMF bailout? The terms would be less stringent than the selfimposed flagilation that they seem keen  to inflict on the public for years to come.  As a northerner lookin on it just looks such a clusterfuck, i'm amazed at how the Irish public keep bending over to take more, spineless. If it  were France there'd be lynchings of politicians & bankers in the street. Fair play to the Finnish.

Because the only thing the IMF care about is reducing the deficit. They don't care how many people die or lose their homes - it is all  about the deficit. 

The 3% target by 2014 is probably not do-able without destroying the economy.

Are they not also extremely right-wing in their ideology? Imagine putting Tyrone's Own in charge of the Health Service and Education and you might get the idea.

[seafoid]

This is a very good article and spells out some of the possible alternatives to the
current suicidal strategy.

http://www.irishtimes.com/newspaper/opinion/2010/1006/1224280471558.html

One point about the European bailout fund is that the boxwallahs in charge of it do not want it to be used.  Greece was just about acceptable but if Ireland goes in then Portugal and Spain will follow and after that anything could happen. 

[muppet]

This is a very good article and spells out some of the possible alternatives to the
current suicidal strategy.

http://www.irishtimes.com/newspaper/opinion/2010/1006/1224280471558.html

One point about the European bailout fund is that the boxwallahs in charge of it do not want it to be used.  Greece was just about acceptable but if Ireland goes in then Portugal and Spain will follow and after that anything could happen.

Interesting article. Kinsella, unlike most of what we see, hear and read in our media, is an unbiased commentator and was warning about the coming crisis for a long time.

Update: Fitch cuts Ireland's rating

Going, going...............

[muppet]

(This particular) Idiot's guide to what has happened:

Causes and who to blame for our crisis
* Eurozone low interest rate - ECB prioritising needs of German economy over others
* Section 23 and other tax reliefs create bubble - FF/PD mainly
* We create a Financial Regulator without clearly defining roles for it and the Central Bank - Mary Harney
* 'Light touch regulation' - McCreevy(see note below)/Harney
* A couple of banks start to recklessly lend fueling bubble - Anglo + INBS
* Excess tax revenue from Stamp Duty increases waste in public sector - FF/PD + Trade Unions
* 'Respected' banks belatedly decide to join the gravy train - AIB, BOI, BOS etc
* Some wealthy individuals allow greed and ego to completely get the better of them - Quinn, Dunne, MacNamara, Carroll etc
* Commentators who warn of over-dependency of economy on property slated as unpatriotic - FF/PD + media
* General Public believe their government and media - all of us
* International banking crisis - all of the above for leaving us totally exposed to such a shock

Government reaction to Liquidity crisis

* Blanket Bank Guarantee - to avoid any banks either failing or being nationalised, or both.

When that didn't work what did they do?

* Created NAMA predominantly to stabilise property prices and hopefully put a floor on the banks losses

When that didn't work what did they do?

Well nothing really they are severely handicapped by the decisions already made. The Government have to take huge amounts of money out of the economy (PS cuts and tax increases) just to pay for all of the above on a short term basis. By doing that they destroy the economy's ability to grow and thus to increase Government revenue which would be the only hope of paying for everything.

Think of starving Irish peasants selling all of the food they grew to pay rent to the Landlords.

For 'starving' read debt-laden, for 'food' read economic production and for Landlords read a complex conglomerate of faceless financial entities.

So what should we do?

God only knows, but we should start by taking the shovel off Lenihan, Cowen, Harney, Department of Finance and in particular the banks.


Note: For balance, while I am not a fan, it should be pointed out that if McCreevy hadn't created the National Pension Reserve we probably would have gone bankrupt last week.

I would encourage people to point out where I have got it wrong, in particularly Bogball and Seafoid who have a very good understanding of what is going on, but anyone else feel free to add to list above or change it.

[Evil Genius]

This is a very good article and spells out some of the possible alternatives to the
current suicidal strategy.

http://www.irishtimes.com/newspaper/opinion/2010/1006/1224280471558.html

One point about the European bailout fund is that the boxwallahs in charge of it do not want it to be used.  Greece was just about acceptable but if Ireland goes in then Portugal and Spain will follow and after that anything could happen.

By "very good" don't you actually mean "very agreeable"?

Even after a decade or more spent previously in The City etc, I don't claim a very in depth understanding of such matters, but as I read down that Article I thought it possibly the worst commentary I've seen since the crisis really took hold.

The question that the Government is now asking is: "How do you suggest we find the additional cuts to fund Ireland's bank-debt-swollen current deficit?"

The proper response is that this is the wrong question. The correct one is: "Since the only sustainable way that Ireland can bridge the yawning current budget gap is to grow the economy, and since even greater cuts will further decimate an already weak domestic sector [without having any real impact on the now grotesque deficit], how should we now adapt our mindset and institutions to grow the economy?"

"How should we adapt out mindset etc?" It's too late for that - Ireland's "credit" (actual and metaphorical) has run out. The Govt knows that, which is why it is desperately trying to answer the only question on the Examination Paper in front of them.

The answer to this is: inform the European Commission and the council that it would be counterproductive for Ireland to attempt to adhere to the 3 per cent deficit target; that it will take 10 years to rebuild the economy and that the focus of all political parties and stakeholders is to produce a strategy that is credible, one which will not further exacerbate volatile markets when – as is inevitable – Ireland fails to achieve the present target.

Ireland is in no position to "inform" the EU of anything, much less offer a naughty child's promise to Santa on Christmas Eve that "I will really, really behave like a good boy for the whole of next year, if only I can get my present for this year"

The European authorities will be riveted by the appalling vista of a departure by Ireland from the current orthodoxy, which imposes a premature and excessive adjustment on a highly vulnerable domestic and EU economy. The markets will be understandably concerned at the "moral hazard" – the possibility of backsliding on deficit reduction across the euro zone. Yet which is the more credible: pushing ahead with a programme of cuts that cannot possibly deliver on the 3 per cent target, but which will certainly set back recovery for a generation or, alternatively, the reconstruction of an economy by a nation that can now see the whites of the IMF's eyes? There are 50 billion reasons for believing the latter more credible.

Completely misses the point. The EU simply does not care if Ireland's 3% target is unachievable and so will lead to severe economic distress in Ireland when failing to meet it.

Rather, they are much more concerned with sending a message to the other bigger and more important states who think they can wander right up to the brink like Ireland, on the basis that the EU will give them a safety net. That's what "moral hazard" really means.

We can choose to adhere to a budgetary strategy that has demonstrably failed; or we can use what little time we have left, courtesy of the foresight of NTMA pre-funding sovereign borrowing into early 2011, to build a new paradigm. We have done so before.

There is no time left...

There are four options facing our country.

The first is to continue to focus, for all practical purposes, exclusively on fiscal correction. Government policy up to a week ago was set for yet another deflationary budget, taking some €3 billion out of the economy. This will now be increased to €4 billion. The aim, however, will be the same: to reduce a wholly exceptional deficit, inflated by the most recent costs of rescuing banks, to 3 per cent of GDP by 2014. This won't happen. The Government's decision to maintain the 3 per cent deficit target reflects a state of denial.

The only reason the Govt has accepted the 3% target is beccause the EU has granted them no other option. I mean, it must be so - they've been denying everything else up to now, why would they suddenly start behaving responsibly if they still had any wriggle room left?

The second option is to seek external assistance from the EU/IMF stabilisation scheme. The illusion persists that there is a difference; that such intervention need not involve the IMF. Here is what the EU council said last May in setting up the scheme, precisely to mitigate the possibility of what is now under way in Ireland: "We have decided to establish a European stabilisation mechanism . . . its activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF."

The ESM is merely the EU's attempt to retain some control if/when a Member State should default. As such, it is a bit of a "fig leaf", since everyone knows that it can never have enough money to bale out more than one or two of the lesser economies. And it must do all it can to avoid having to do even that, in case there is a rush by the next tier of defaulters to get their claim in before the fund runs out

Some may argue that the IMF will sort out problems that we have been unable to. If that is the case, it is a bleak commentary on the capacity of an ancient and cultured people to manage its affairs and act as responsible trustees for those who come after us. It takes little account of the impact of an EU/IMF "adjustment" strategy on a broken-backed economy and a society that is overstressed, demoralised and fearful.

The Greeks might also consider themselves to be "an ancient and cultured people" - for all the good that did them when the ECB etc came to call

It may also underestimate the probability of precipitating a slide into political fragmentation and destructive revolutionary nihilism. We know something about that possibility in this country – and it poses a threat to the EU, as it does to us.

There are several countries, big and small, in the EU which are far more likely to have a "Red Revolution" etc than the ROI. Greece, for example...

There is no indication that our political system has comprehended that it must change. The present budgetary policy would crowd out the kind of capacity building in education, innovation and social capital which is vital to rebuilding the country. The cuts do not go with the grain of growth and necessary reforms; they are brutal and insensitive to their medium-term effects. But they foreshadow what EU/IMF intervention would entail. That and a complete loss of control over whatever residual influence the Dáil exercises on our budgetary policy and over the freedom to exercise individual and collective responsibility. The IMF/EU will not be about development. They want fiscal correction at whatever cost – rebuilding the economy is not on their agenda.

At last! He gets something right (last sentence)

The third option is an election. The Opposition are fully within their rights in demanding one. There is a visceral anger among the electorate at the manner in which policies and policy failures have wholly altered the trajectory of our economy, hollowed out our society and transmitted a malign legacy to our children. Incalculable damage has been done to Ireland's reputation. This is not, nor should it be, about political "blame". It's about survival in a sceptical world.

In the aftermath of an election, the key issue will be whether a new administration will continue to feel bound to an adjustment process that attempts to do the impossible by 2014. The indications are it will. That's the problem; there appears to be no mainstream political alternative to a failed orthodoxy.
There is no" mainstream political alternative", even for a new Govt, because,the option of leaving the EU is unthinkable and whilst Ireland is in it, the EU will give them no economic alternative.

The fourth option means a decade-long rebuilding of an economy gifted with renewable resources, a uniquely favourable demographic profile and a corporation tax regime which is under siege. It would allow Ireland to focus on, for example, leveraging the EU's technology transfer programme. It would also mean shedding our present institutional baggage in favour of trust-building, flexibility and social solidarity. It would mean a much smaller, less intrusive and costly state than that which has encouraged a culture of dependency – and failed us.

Ireland doesn't have a decade, so everything which follows his opening line is mere "wishful thinking". That is, Option 4 does't exist any more than the Pot of gold at the end of the Rainbow.

Ireland's self-inflicted difficulties are Europe's problem. The Stability and Growth Pact was, from the outset, political fudge, which the commission's most recent oversight/enforcement proposals will not resolve. The embedded contradictions within the EU, as it is constituted, leave it wide open to low probability/high-impact shocks.

Attempting to compel Ireland to adjust to an unprecedented fiscal crisis within a short timeframe is the logically absurd outcome of the pact – an instrument to achieve fiscal union between structurally different economies.

Fiscal consolidation is a necessary part of adjustment, but only in an economy being rebuilt over a period that is commensurate with the scale of the adjustment. The stasis in our political response to a crisis that requires a completely different starting point from the mindset which has brought us to the brink suggests that, even now, we still do not get it.

"Don't get it?" This entire article is like a Fifth Former's essay on "What I'd do if I won the Lottery". Face facts: you're not going to win the Lottery if you can't buy a bloody ticket, ffs!

P.S. Before anyone should assume I take some sort of pleasure in posting this, I most certainly don't, for two reasons.

First, there are a lot of very decent people in ROI who had no part in causing the crisis, but will have to bear the cost of clearing it up.

Second, the overspill on the NI economy will be considerable, at a time when we've already got quite enough on our own plate.

[seafoid]

Good man Muppet. Here are my suggestions in bold

Causes and who to blame for our crisis

* Eurozone low interest rate - ECB prioritising needs of German economy over others
* Section 23 and other tax reliefs create bubble - FF/PD mainly
* We create a Financial Regulator without clearly defining roles for it and the Central Bank - Mary Harney
* 'Light touch regulation' - McCreevy(see note below)/Harney
* Absence of any effective management of the mortgage market- banks could lend anything they wanted as there were no capital implications - banks should have had to hold more capital when the market started to overheat
* Allowing of 100% mortgages and higher salary multiples for people who were priced out of the market
* A couple of banks start to recklessly lend fueling bubble - Anglo + INBS
* Excess tax revenue from Stamp Duty increases waste in public sector - FF/PD + Trade Unions
* 'Respected' banks belatedly decide to join the gravy train - AIB, BOI, BOS etc
* Some wealthy individuals allow greed and ego to completely get the better of them - Quinn, Dunne, MacNamara, Carroll etc
* Commentators who warn of over-dependency of economy on property slated as unpatriotic - FF/PD + media
* General Public believe their government and media - all of us
* Media egging on the boom as it drove huge advertising income
* Bank reliance on wholesale funding abroad of mortgage lending- deposits were insufficient so they borrowed heavily from elsewhere in the EU
* Bank dependence on one source of income for their profits- they were all monoliners with each house bet on the property market
* Bank lend long borrow cheap model - when Lehmans went suddenly they could no longer roll over their funding loans  
* International banking crisis - all of the above for leaving us totally exposed to such a shock- the crash would have happened anyway. lehman Brothers is not an excuse 
* EU panjandrums who insist on no bondholder left behind policy thus crucifying taxpayers
* Recalibration of tax system to heavy dependence on transaction taxes related to property market
* Inflation of public sector wages without corresponding improvements in productivity
* rampant price inflation which put upward pressure on salaries and led to significantly reduced competitiveness

Government reaction to Liquidity crisis


* Blanket Bank Guarantee - to avoid any banks either failing or being nationalised, or both.
* complete lack of preparedness for a crash even after Northern rock and Bearn Sterns collapsed
* total panic on night banks came in begging for help
* Lack of transparency on behalf of banks on fateful night (generous interpretation)
* Confusion of liquidity and solvency
* belief in soft landing
* Refusal to countenance nationalisation at outset 
* absence of bank resolution legislation meant bankrupt bank losses fell to taxpayer   
* Consistent inability of banking CEOs to accept gravity of situation
* Government adopts Hail Mary policy and hopes everything will be fine
* Very poor PR management - why was everyone on holidays in august when yields went over 6% ?

When that didn't work what did they do?


* Created NAMA predominantly to stabilise property prices and hopefully put a floor on the banks losses

When that didn't work what did they do?

Well nothing really they are severely handicapped by the decisions already made. The Government have to take huge amounts of money out of the economy (PS cuts and tax increases) just to pay for all of the above on a short term basis. By doing that they destroy the economy's ability to grow and thus to increase Government revenue which would be the only hope of paying for everything.

Think of starving Irish peasants selling all of the food they grew to pay rent to the Landlords.

For 'starving' read debt-laden, for 'food' read economic production and for Landlords read a complex conglomerate of faceless financial entities.

So what should we do?

God only knows, but we should start by taking the shovel off Lenihan, Cowen, Harney, Department of Finance and in particular the banks.

Note: For balance, while I am not a fan, it should be pointed out that if McCreevy hadn't created the National Pension Reserve we have have gone bankrupt last week.

I would encourage people to point out where I have got it wrong, in particularly Bogball and Seafoid who have a very good understanding of what is going, but anyone else feel free to add to list above or change it.

[theskull1]

Regarding the early stages of the greed culture which developed in Ireland.....

Have no expertise in this area but do any who do think that the profits made in the tax year as a result of the price mark ups when the punt changed to the euro created a very large greed culture as every business tried to maintian that level of profit year in year out after that? Then all that extra profit provided the right ammount of money for property speculation to become rife?

Just a thought

[muppet]

* Bank lend long borrow cheap model - when Lehmans went suddenly they could no longer roll over their funding loans 

That explains a lot and why Government keep harping on about Lehman's without ever expanding on it.

* Confusion of liquidity and solvency

Did they really confuse it or disguise it? AFAIK solvency issues were included in the emergency guarantee legislation.

[muppet]

Regarding the early stages of the greed culture which developed in Ireland.....

Have no expertise in this area but do any who do think that the profits made in the tax year as a result of the price mark ups when the punt changed to the euro created a very large greed culture as every business tried to maintian that level of profit year in year out after that? Then all that extra profit provided the right ammount of money for property speculation to become rife?

Just a thought

The first thing that strikes me is that you have a point, however lots of other countries joined the euro that time (and since) and haven't had the same problem. Maybe their Governments managed it better.

[bcarrier]

I have been reading this time its different...there is a good summary here. 

http://earlywarn.blogspot.com/2010/04/debts-and-defaults-in-history.html






One of the things that struck me in the book was their observation that it is not the level of debt ( compared to GDP) but the willingness of a countries citizens to carry it ( their debt tolerance) that influences likelihood of default.  Why stop with the anglo subordinated bond holders ?

[muppet]

http://www.youtube.com/watch?v=11CCxv2ueiQ

Morgan Kelly the day after the Bank Guarantee. He was right on the money and I wonder how the smirking Brendan Keenan feels now. Keenan (Indo man defending the Government's action, surprise surprise) actually says
that .....'if it is (the same as) a Swedish banking crisis then it (Guarantee) wont work and they'll have made a horrible mistake.." see 8:20.

It is uncanny how right Kelly was, with the one criticism that he underestimated how bad it would be. If he had said €50 Billion Keenan and O'Callaghan would have laughed him out of it.

[Declan]

Gene Kerrigan: Listen to the experts? I'm not so sure
Sunday October 03 2010
OKAY, then, shut your stupid mouth. You have no right to an opinion on these matters. Unless that opinion concurs with that of the Minister for Finance. Should a dissenting opinion sneak into your subversive mind, you must not express it publicly. Leave it to the experts.

That's what Brian Lenihan said (or words to that effect), in a notorious recent speech. "Some of our [newspaper] columnists", the minister warned, "might question the value they can add to the debate". This rap on the knuckles, of course, also applies to all citizens who aspire to partake in the national debate of which newspaper columns are a part.

Heed the experts. "There are after all, very many accomplished specialist columnists in the area of business and economics."

And the media seems to be weighing in. Time to shut the hell up. Close down discussion, take your opinions from The People Who Know About These Things. (Never mind the fact that the experts have been wrong again, and again and again -- on the bubble, on the bank guarantee, on the effects of deflating the economy.)

Now, this column has never been shy about stressing its ignorance of the technicalities of economics. In fact, in just a moment, I will produce irrefutable evidence of my ignorance -- nay, my sheer thickness -- when it comes to matters of deficits, banking debacles and blanket guarantees.

But first -- if we're going to isolate or snuff out dissenting voices -- we need to be clear about who will be allowed express opinions on economics. Mr Peter Sutherland, the banker, has recently been widely and prominently welcomed to the debate, urging austerity on us. Is this the same expert who in April 2008 told us we could "confidently look forward to continuing growth above the EU average for the next five years and beyond"? Yup, 'tis him.

(And what was Soapbox saying that April? It was a whole year since the column had warned that the US economy was in trouble because of subprime mortgages, and now it lamented that the experts urged us "to continue borrowing with wild abandon". There's ignorance for you.)

Jim O'Leary is an expert. Mr Lenihan has just appointed him "senior economic advisor" at the Department of Finance. Is Mr Lenihan now about to take advice from an economist who was a director of AIB between 2002 and 2008, when the bank effectively blew itself up (and has now handed us the bill for the consequences)? Yup, he is.

And this chap Mike Soden, who Mr Lenihan has appointed to the Central Bank Commission -- he wouldn't be the Mike Soden who was head of the Bank of Ireland, would he? Yup.

Now, you pay attention to these good folk, they're The People Who Know About These Things.

We've isolated dissenting voices in the recent past. When Morgan Kelly shouted a warning he was dismissed as a grumpy "contrarian", at odds with all those nice, ungrumpy economists who worked for the banks. David McWilliams -- with his lovely hair and his cutesy way with words -- was easily dismissed as an ego driven know-nothing. When Richard Curran presented a razor-sharp analysis of the danger of a collapse, he -- along with RTE -- was fiercely condemned as an unpatriotic Chicken Little.

In September 2008, RTE's Liveline was shut up. Callers had expressed unease about their life savings. Brian Lenihan rang RTE and asked them to take the microphones away from the common, foolish, panicky, ignorant callers. And RTE did.

Simon Carswell, in an excellent background piece on the events of that period, quoted a "well-placed insider" who noted that the government was upset by Joe Duffy's programme -- angry that discussion was fuelled by "taxi driver and hairdresser conversations". Ordinary people were expressing opinions on the economy. My God, the nerve.

Behind the scenes, there had been weeks of panic. The well-placed insiders had moved their money to safer hidey-holes. Some hugely indebted players had transferred their assets to their wives -- while their expert cheerleaders (and Mr Lenihan) assured us the banks were securely capitalised. Who needs the opinions of taxi drivers and hairdressers when you've got experts?

Without that Liveline discussion, the Government would not have increased the guarantee on ordinary deposits, from €20,000 to €100,000 -- a stabilising move. Liveline made a positive contribution. Those who repeatedly gave false reassurance damaged this country.

Now, here's that admission of utter ignorance on my part. Last week, while looking for something else, I came across a 2002 publication of the World Bank. It was about managing the effects of a banking crisis. This bit caught my eye, summarising one of the publication's articles: "The authors find that governments that provided open-ended liquidity support and blanket deposit guarantees incurred much higher costs in resolving financial crises."

Oh dear, I thought. Looks like these experts think that throwing billions at banks, and giving a blanket guarantee is exactly the wrong thing to do.

So, I read the article. It was hard going. Full of jargon. On blanket guarantees, however, it was clear: ". . . we find that if the countries in our sample had not pursued any such policies, fiscal costs would have averaged about 1 percent of GDP -- little more than one-tenth of what was actually spent."

The expert authors had studied 40 banking crises. "The policy message from these results seems clear: open-ended liquidity support, regulatory forbearance, and a blanket guarantee for depositors and creditors all significantly contribute to the fiscal cost of banking crises".

However, says I to myself, these people could be wrong. It's a judgment call. Two opposing points of view -- one is that of Brian Lenihan and the other is that of -- who wrote that paper? It had two authors, one of them Patrick Honohan.

Not the Patrick Honohan who's now head of the Central Bank? Not the Patrick Honohan whose name gets sprinkled like fairy dust whenever a government minister wants to trump an opponent? Yup.

So, you see my problem. An ignorant newspaper columnist might conclude that Professor Honohan -- a truly independent economist -- thinks the Government made a boo-boo by giving a blanket guarantee to the money markets (AKA Roman Abramovich). And that can't be right, because ministers are never done telling us that Prof Honohan is the expert's expert and that he agrees with every jot and tittle of government policy.

Obviously thick, I can't make sense of it.

As Shakespeare put it: "The fault, dear Soapbox, is not in our stars, but in ourselves." The stars (Mr Lenihan and his boss, Mr Nasal Congestion -- and the "very many accomplished specialist columnists in the area of business and economics") always get things right. The fault, clearly, is the ignorance of gobdaws like me, the taxi drivers, the hairdressers and others who don't matter.

One might well think that Mr Lenihan, his boss and all their cheerleaders, were wrong on the credit bubble; that they were wrong on the bank guarantee; that they were wrong on deflating the economy, via austerity measures -- thereby killing any prospects for the growth they need if the economy is to recover.

You might well feel repulsed by the desire of Mr Lenihan, his boss and all their cheerleaders to financially attack the aged, the schoolkids, the homeless and the terminally ill (who, incredibly, insanely, are being told they must "share the pain"). You might feel that an establishment that rages against dissenting opinion is creating conditions for a dangerous explosion of anger.

One might well think that -- but it's best to keep quiet. That way, we'll ensure that the money markets continue to hold Mr Lenihan in high respect.

[muppet]

=2915&tx_ttnews[backPid]=901&cHash=5fc6365df5]http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2915&tx_ttnews[backPid]=901&cHash=5fc6365df5

WHY THE EU'S BANK RESCUE STRATEGY IS TURNING INTO A POLITICAL AND ECONOMIC CATASTROPHE
By: Wolfgang Münchau

The anniversary of the collapse of Lehman Brothers was without a doubt the single most symbolic moment of the financial crisis. But, at least for Europe, it was not the quintessential turning point. That came on Tuesday, 30 September 2008, when Brian Cowen, the Irish prime minister, gave a blanket guarantee for the entire banking sector. His decision bounded the other eurozone leaders into following suit. The rest is history.
I would go as far as to classify the decision as one of the most catastrophic political decision taken in post-war Europe. This not so much because of the decision itself – it was necessary to stop the rot at the time – but because of a lack of action to embed the decision into a strategy to solve the problems of the banking sector – lack of capitalisation, abundance of toxic assets, poor management, and of course, excessive size. The consequences of that strategy will only become apparent in the years to come. We saw a small glimpse last week when Ireland's recognised the black hole inside the banking sector, which will cost the country a cool 32 per cent of GDP this year alone. I myself recently estimated that the cost of Irish bank rescue would ultimately run up to about 30 per cent of GDP, which seemed a shockingly large number to some of observers. As it turns out, I was unrealistically optimistic - as I so often am. The Germans, too, are notorious optimistic about the underlying states of its banking sector, large parts of it are not properly capitalised.
The fundamental error committed by Europeans governments at the beginning of the crisis was the failure to shrink the banking system, and to force the bondholders to share the cost of the rescue operations. Last week, the Irish government took only the minimalist step to participate the holders of subordinated debt. My explanation is that the banks must have succeeded in scaring the politicians into believing that forced bond-to-equity conversions would signify the end of civilisation as we know it.
Why not just default? History has shown that countries recover from default relatively quickly. But in Europe, default is considered such a gigantic blemish, that Europeans go to extremes to avoid it. Latvia marched through one of the most brutal economic depressions in modern history.  A currency devaluation would have eased the pain, but it went against official dogma. Ireland and Greece, too, preferred to cripple their economies for generations to come in order to avoid the political blemish of a default, or even an agreed rescheduling of the sovereign debt. Both countries are fundamentally insolvent – if you assume, as I do, that there will be zero growth for five, or even ten years, with further steep declines in asset prices.
Even the Greeks, with a debt-to-GDP ratio approaching 150 per cent, want to get through this without default. This week's Greek budget law is very optimistic for 2011, but this is going to be a long haul. The question about solvency is whether Greece can achieve sustainable growth to pay off its debts in the long run.
It would be much easier to accompany this process with at least a partial default. But Europeans detest the whole idea. The eurozone was built on the trinity of No Default, No Exit, No Bailout, a logically incoherent combination, but one that nevertheless has deep roots. Of the three, the EU reluctantly agreed to drop the latter, while defending the first two to the death.
The single most absurd spectacle of it all, almost comic in fact, is the debate that is raging in Brussels. The big issue there is whether sanctions against deficit sinners should be automatic, or subject to a political vote. It is an almost exact re-run of a debate that took place before the euro even started. Twelve years later, during which the EU failed to impose sanctions on a single occasion, not even to Greece, this is still the main issue of debate.
So while Ireland and Greece are burning, the EU has taken the eyes off the ball, and reverted to the more familiar ideological debates. The fact that Ireland was, until very recently, never a deficit sinner, does not seem to impress anyone. Ireland, but also Spain, went from virtuous to almost bankrupt over night. All the proposals I have yet heard discussed in Brussels have in common, that, if applied retroactively, they would not have made a single bit of difference to the present situation.
The big issue in the eurozone is not narrow fiscal discipline but national solvency, which is much broader concept. Because of the blanket guarantees, it is no longer possible to separate private and public debt. There is just plain and simple debt. We are now in the paradoxical situation where the survival of the banks is more assured that the survival of those who saved it.
The author is President of Eurointelligence ASBL, and an associate editor and columnist of the Financial Times.