Judging by the outraged reaction of Ireland’s stockbrokers – the publicity wing of the Department of Finance – Moody’s decision not to upgrade Ireland and keep us on a negative outlook was nothing short of scandalous. This indignation, in a week when we saw retail sales fall for the fourth month in a row, house prices fall for the third straight month and bank lending stall, seems a bit excessive.
Although, that said, I admit to feeling a little bit sorry for the Department of Finance because it would be nice for them if the rating agencies would acknowledge the seriousness of the government’s intent to turn the economy into a large debt-servicing agency. In this pursuit, the mandarins will not be deflected no matter what the cost to the local economy in terms of output, sales and employment.
So why, after so much pain, did the rating agencies not reward Ireland with an upgrade? After all, the promissory note deal – notwithstanding the long-term impact on the debt burden – has reduced substantially the amount of cash that will have to be taken out of the economy in the years ahead. A similar deal is also in the offing for other bailout-related government debt.
In addition, while the economy is relentlessly weak, it has not fallen off a cliff in the past few months, and surely the stabilisation, along with the fall in bond yields, could be acknowledged by the ratings agencies.
Isn’t the central policy aim of ‘exiting the bailout’ still on the cards?
Here is the rub: exiting the bailout depends on the financial markets’ appetite for risk in Europe. If the appetite for risk wanes, Ireland – which is perceived as a poor credit risk with too much debt, not enough growth and dodgy banks – will simply be too risky and money will flow into Germany.
This is already happening because the Cyprus deal – which imposes massive haircuts on large depositors – is likely to become the ‘template’ for future bank bailouts.
If you were a large depositor in Spain, what would you do? You would move your money out of the country before the capital controls imposed in Cyprus are envisaged in Spain, imprisoning your money. Delay and it will be too late. You won’t be able to move it.
Obviously, the EU is vigorously denying that this might happen, but when there is even the faintest risk, surely the best policy is safety?
The Cypriot debacle has led financial markets to have a second look at the banking systems of Malta, Estonia and Slovenia – all small in overall terms, but outsized in comparison to each individual country’s economy. And, of course, what if it doesn’t stop there?
Think about the following: the Cyprus banking sector was too big at eight times GDP, so what does that make Luxembourg, where the banking system is 24 times GDP?
Of course, unlike Cyprus, Luxembourg isn’t referred to disparagingly as a ‘tax haven’ for hot money. Could this possibly be because the big depositors who have their money parked there happen to hold German, not Russian passports?
Quite apart from the eurozone’s banking woes, there is the little problem of the recession.
Undergraduate economic students could have told you that the likely outcome of fiscal tightening and a strengthening currency when the banks are broken and money supply growth is faltering would be higher unemployment and lower output. But, then again, they don’t ask undergraduates about economics, they leave policy to people that believe in the ‘confidence fairy’ who will, like the Easter Bunny, arrive out of nowhere to sprinkle presents, yummy chocolate and the confetti of economic growth – and all will be well.
But all is not well. In France, jobless claims have risen for 22 months in a row. Not surprisingly, money flowed out of France into Germany this week as evidenced by the spread between German and French bond yields widening to 0.75 per cent up from 0.5 per cent two weeks ago.
But even in safe-haven Germany, unemployment was widely predicted to fall in March by 2,000, but it rose by 13,000.
Meanwhile, in Italy, the leader of Italy’s Democratic Party, Pier Luigi Bersani – whose left-of-centre bloc won the most votes in February’s parliamentary elections – said that he would not try to put together a government.
Bersani also said that only an “insane” person would want to run the country in the current environment. This rhetoric is hardly the stuff of the political decisiveness that might usher in a sustained period of financial market tranquility.
In short, the eurozone economy is a mess, without any growth strategy and characterised by severe mistrust between the countries of the northern core and those on the periphery. The weakening of the German economy ahead of its elections in September implies that the tolerance for any more bailouts is extremely low.
This, in turn, implies that if any of the small countries mentioned above endure a banking crisis, the ‘template’ will have to be depositor haircuts because there will simply be no other money being made available.
Without some new positive economic development, it is likely that money will move from the periphery and risky countries towards Germany. This means that bond yields in the periphery are likely to rise again.
Where does this lead the political strategy of exiting the bailout?
There are two ways of looking at this. The first is that these economic developments will make exiting the bailout more difficult. The logic of this is straightforward enough.
In contrast, a second – more political – view might also be that, given the importance to the EU of a ‘success’ in Ireland, exiting the bailout on time may be facilitated by another politics-driven debt deal. Such a move could lighten the financing burden in the immediate years ahead. This would be the only environment where you could be confident that the government’s core economics strategy might work.
If the first view prevails and there isn’t the risk appetite in the markets and bailout fatigue dominates in Germany, it will provide a mighty headache for the coalition, which has put its entire credibility on exiting the bailout. If it doesn’t succeed because of adverse events, what is the price for the coalition staying together? If there is no market/sovereign reward for all this austerity, people will rightly ask, what’s the point?
Taking the events of the week in totality, you would be advised to be healthily sceptical when our spindoctors tell you that the Cyprus deal has no impact on Ireland. The channels through which policy in one country affect another in the euro are many, varied and not always obvious.
On a lighter note, I’ve just noticed that the first name of the new Cypriot Central Bank governor, the man charged with bringing financial tranquility to the island and who promised that this week’s capital controls would be ‘temporary’ is, wait for it, Panicos. How about that for getting lost in translation.
Morning David
May I be bold enough to point out a slight mistake..? very good article but you inadvertently typed “publicity wing of Department of Finance”…instead of “Propaganda wing of the Department of Finance”..
Very happy to point this out and always glad to be of any assistance during these great historic times & witness the fledgling rise of the Fourth Reich.
Hope you had a very happy Easter and had plenty of chocolate.
Barry
Oops My bad..!
Morning Adam………….Subscribe..!
May I also take this opportunity to wish our Dear Friends in North Korea a very happy Easter and to assure they have nothing to fear from America as North Korea HAVE weapons of mass destruction so their will be no fear of any military action. Also like to congratulate Dear Kim on his score of 42 shots and 4 hole in ones during yesterdays pan-Korean Golf classic. So,rest assured N Korea you are fine,I know your dear leader has seen “Team America” many times but to assure him that this was only a school education video available to those… Read more »
http://www.independent.ie/business/irish/cyprus-effect-on-deposits-is-negligible-aibs-duffy-29165087.html
Well with the day that’s in it you would be forgiven in thinking that this was some kind of ill-humoured April Fool joke, but no: Overpaid AIB CEO says ‘Cyprus effect on deposits is negligible’ Not funny lads.
There is a bank run out of Europe into Asian banks not Germany. BRICS are dumping the Euro. Serious money cannot have faith in ECB anymore. I would suspect that we are a short period away from capital controls across EU. The debt that can’t be paid won’t be paid quickly meets the interest on the debt can’t be paid. There is no growth there will be no growth. Make up our minds if you wish to remain trapped in stasis waiting for the equivalent of the Easter Bunny. I read a short story over the weekend on the descent… Read more »
This “thing” is not over. Even Murish McFuchlacain Chief Officer in the Department of Finance ( 310,000 pa, A+ in hounors Irish 1976 , speciality Peig Sayers , owner of 10-20 rentals ) can’t change what is going to happen. Herbert Stein ( quote from Wiki says it all ). Stein was the formulator of “Herbert Stein’s Law,” which he expressed as “If something cannot go on forever, it will stop,” by which he meant that if a trend (balance of payments deficits in his example) cannot go on forever, there is no need for action or a program to… Read more »
Ah yes, Panicos. We don’t have any Panicos figures in the DoF. We have smooth talking, extremely suave, totally confident, all knowing geniuses who provide calm and reassurance, just as the whole thing falls apart.
A few years ago an Irish author wrote a book about how the EU was going to be a success because it had so many laws. And these would be administered on everybody. I smelled not only a rat, but an awful lot of nonsense. It was all about the glorious unbeatability of the Big All embracing Theory approach to life. Just have one collection of bureacrats in charge, drawing up a law for every eventuality for the serfs. It does not work. Nobody asked the obvious question. What if this approach means that you have one policy that is… Read more »
Moody Swings – The Euro Is In Its “Flowers”. Meaningless Over Rated – Rating Agencies. The people have lost out to greed and the fundamentally flaws in constant growth capitalism. Ah! Money and the Moody Swings, it just goes to prove it’s not real. (Money) If all the IOUs leave the E-Zone who cares they are not ‘creditable’ IOUs if I wrote an IOU for a couple of trillion it would be as credit worthy as any banks might be, at least you may get some work out of me. David, I hear the Irish Times is looking for a… Read more »
People might say what’s the point.
What is the point, the point is when something is clearly not working for years stay at it and make people suffer as much as possible.
Cost of living is up .
Income is down.
Crime is up.
Health is down.
Government life style is protected and up.
David: What would you have Germany do? Water down the Euro some more? Make no mistake, inflating a currency, as you constantly suggest, is like watering down soup in a famine. You talk as if the British and American economies are doing fine. They are not. The Sterling and the Dollar are so watered down that the oil producing nations are getting nervous – they are being paid in watered down soup. I wish you would look at the broader global problem of disappearing currencies and the debilitating effects of zero interest rates instead of this constant Euro bashing. Writing… Read more »
I think it is meant to distinguish between those economists who search for answers to economic problems and suggest choices to policy makers rather than those economists who do what celebrities generally do, play to the crowd, look for attention and self-promote. Which are you?
So that I might avoid doing to David what I am accusing him of doing to the Irish Government, sniping from the long grass, may I suggest two elements for our debate? 1. What would any of us do if we were a large pension fund manager trying to manage our risk? 2. What would we do if we were a political leader worried about losing support? The markets are dominated by (1) and (2) is political reality. The battle therefore is sound money vs. political suicide – pensioners require sound money while their children require jobs. It is in… Read more »
David, Great analysis but as you know I am very pedantic about all things to do with the monetary system. In writing ‘the ‘template’ will have to be depositor haircuts because there will simply be no other money being made available.’ I get the impression you feel that some institution will have the money ‘confiscated’ from depositors. In actual fact the money that was in people’s accounts won’t exist once the levy is applied. As Martin Wolf recently noted, ”Most euros are, in fact, the liabilities of banks.” and when the banks reduce their liabilities the money supply drops by… Read more »
Hi everyone, You know what really terrifies the bejaysus out of me in all of this is the thought that in order for representative democracy to work you must have the rule of law. The case in Cyprus has proved that rule of law (property rights) has gone out the window. What Pandora’s Box is being opened up now? I am asking a very serious question as McGurk has an excellent article adjacent to David’s in the SBP and it is showing us a truly frightening spectre. Ultra right wing fascists’ and ultra nationalist groups popping up in Europe. As… Read more »
Old age pensioners and the long term unemployed have their spending habits and their bank accounts scrutinised by government bodies for the last two decades in European states with high sophisticated social welfare systems. The implementation of the Big brother culture has been there for some time. It started off with something innocent but it is now your very own neighbours who are telling tales. The same way we have now an anti or prevent insurance fraud campaign. Examples: Single old age pensioners are not given the chance to share a meal to cut the costs. Old age pensioners who… Read more »
David’s articles are becoming more critical by the day as Europe grinds to a halt. But then, the world is grinding to a halt as well. The recession is everywhere. Ireland will be in recession with or without the Euro simply because the slowdown is global – mind you our size is so small that any business sent our way (from a global perspective) will always have a disproportionate benefit. Standing back, I’d say what we are looking at is a large systems global collapse – kind of like the Ulster Bank problem last year. But let’s not be technological… Read more »
I am continually surprised by commentators and bloggers insisting that “their way” is the right way to deal with a financial crisis that no-one has ever experienced before and the complicated ways they go to explain their view is right. The only way I see or saw it is perhaps too late but still stands for the next Country facing financial catastrophe. Banks who are bust should go Bankrupt..just like every other business in the world. The first loss is the hardest… Enshrine water tight regulation on the “New”Banks and the subsequent financial system. Shareholders lose…Bondholders lose… depositors get their… Read more »
Hey Molly
don’t despair,The rich always become soft while the poor become more resilient.
That serenity prayer keeps a lot of people going.. whether they are religious or not..it is a excellent mantra…I only found it when I was in the gutter…kept it with me ever since , and that was 12 years ago.
Protecting your Family is all that counts..once you realize that..you can reach out to those who ASK OR SEEK help…..Trust me , I know what I am talking about
Every day is a good day…just some days are better than others..!
Have a great day
Barry
It Frankfurt’s way or Labour’s w,…wait,,,,,,,………..
http://www.youtube.com/watch?v=Kpr2zaXvb4M..
‘House Prices falling for the third month in a row’……. did anyone contact Pravda RTE or The Paper of Record to shatter their wet dreams?
http://news.goldseek.com/GoldenJackass/1364601600.php Read the above and cast your eyes to a wider horizon. See the Euro-Asian alliance through the collaberation of China and Russia with the BRIC, Pulling in Germany (who now looks East and abandons the Euro) Look for mega pipelines for energy and mega infrastructure projects for trade and commerce, Look for a new monetary system to put aside the US dollar reserve. Look for such monetary system to be backed by gold used as the final settlement of debt. Look for US treasuries to be spent on the above as US reserves are unloaded igniting high inflation in… Read more »
I could not find a way to link this so had to copy and paste. Follows my view point that money is private property that has been commandeered and abused by bank and state. A freeman has a free currency, all else is slavery. Credit and usuary must be banned. A reversion to real capitalism is required. ———————————————————————- Expropriate the Banks, Abolish all Fiat Money, Outlaw Credit and Interest Hans Schicht Since 1998 I have published about 40 essays on various Internet sites containing opinions and comments on world finance, politics and precious metals. Nearly all of them can be… Read more »
We are going to be asked to vote on same sex marriage and we could not be asked to vote on bailing out banks is the country bonkers or what.
The indo says different so it must be true David. Sorry me old friend but perhaps you are just out of touch and / or out of time? Second-hand home prices soar by 10pc – property price survey Not only are they rising David. They are actually ‘soaring’ in the white heat of Celtic Tiger 3. Are you fucking blind man ??? God the resiliance of these Irish people takes your breath away. Mighty. It’s almost like they are super human and their never say die attitude should be an inspiration to troubled life forms everywhere Even cockroaches could not… Read more »
Evening All
Thought some of you may like the following from NYTimes the other day. http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html?pagewanted=all&_r=1&
Best
D
Hi David and all,
Apropos you comments on possible haircuts on depositors, the old saying is instructive; “He who panics first, panics best!”
As for what to invest in? Surely the answer is obvious? Why precious metals of course; tin(s) and lead, with the brass jacket.
New Zealand Bank’s Computers Already Programmed to ‘Freeze’ Percentage of Deposits for Bail-in April 2, 2013 (EIRNS)–The Mont Pelerin Society purgatory New Zealand is so advanced on planning to steal deposits to prop up failed banks, that the computer systems of all NZ banks are already programmed to freeze a portion of deposits in a crisis. New Zealand’s so-called Open Bank Resolution system is explained in an article in the September 2011 issue of the Reserve Bank of New Zealand’s Bulletin, entitled “A primer on Open Bank Resolution”, by Kevin Hoskin and Ian Woolford. It reveals that OBR is not… Read more »
Cypriot Finance Minister Resigns April 2, 2013 (EIRNS)–No sooner had he finished selling Cyprus out to the European financial oligarchy, than Cypriot Finance Minister Michalis Sarris handed in his resignation, today. The reason he gave, was that he was one of the targets of the investigating commission tasked with looking into the island’s economic debacle. Prior to becoming Finance Minister, Sarris was chairman of Laiki bank (Cyprus People’s Bank), which was closed down at the expense of the depositors. He is to be replaced by Labor Minister Harris Georgiades. President Nicos Anastasiades accepted Sarris’s resignation. The President himself is accused… Read more »
According to financial expert Reggie Middleton AIB is in deep sheizer and could be the next Laki Bank.
http://www.zerohedge.com/contributed/2013-04-03/dear-ireland-aib-havent-we-all-learned-problem-insolvency-not-liquidity-
Can somebody explain how Germany has such a low unemployment rate compared to the rest of Europe ??
Domino effect? BoE and FeD are now switching on plans laid months ago even as far back as Jun 2012.
Bank of England Assumes Dictatorial Powers
The game is to assert monetary diktat as they dismiss the old financial system. If we do not split the banks they will proceed. The consequences are unimaginable for most.
Expect up to 80 percent in losses from future bail-ins
3 Apr.(EIRNS) Bail-in legislation is underway for all of the EU, with member states’ approval planned by the end of 2013, and going into effect in early 2015 implementation. But bail-ins could occur long before, as the case of Cyprus shows.
http://bullionbullscanada.com/intl-commentary/26104-bail-ins-are-fraudulent
Ditto for Ireland–Leave the Euro and implement a sound monetary system “Unfortunately, (Cyprus) is the predictable result of a fiat paper money system combined with fractional reserve banking. When governments and banks collude to monopolize the system so that they can create money out of thin air, the result is a business cycle that wreaks havoc on the economy. Pyramiding more and more loans on a tiny base of money will create an economic house of cards just waiting to collapse. The situation in Cyprus should be both a lesson and a warning to America. We need to end the… Read more »
Just reminded by Pat Flannery’s comment – a very interesting speech given by Elizabeth Warren some years ago, on, essentially, the cost of living in the US:
http://www.youtube.com/watch?v=akVL7QY0S8A
The economy has affected people’s health and caused some to commit suicide others are permanently ill while some claim disability yet the banks are been paid and no one is threatening to cut off their disability benefit . During the meanwhile the ghost estates remain empty while the state pays landlords rent allowances yet some are now advocating that these estates be knocked. When these estates are knocked down we will pay for the demolition and we will still pay rent allowances to landlords while continuing to dole out disability to the banks “money” which they magiced up to build… Read more »
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/bail-in-debt-practical-implications.pdf
Bail-in liabilities:
Replacing public
subsidy with
private insurance
July 2012
Review by KPMG–cutting through complexity
This is a proposal touting the bail-in system. It suggests that the depositor may require a higher return on the money deposited if they are liable to have funds seized to use as bank assets.
No Kidding. Personally, I am convinced to never leave a penny in a bank if I can avoid it!!