Ireland asked for nothing from the EU last week – and, make no mistake, that’s just what we got
Let’s be clear. The European deal announced last Thursday night is designed to do one thing and one thing only. It is designed to persuade investors to buy Italian and Spanish government bonds. And as an exercise in how the EU works, it was quite a piece of coalition building, buying off here and there, holding hands when necessary and hoping for the best always.
But, just before you get any notions, Thursday had nothing to do with Ireland and while Greece was the proximate reason for the summit, the real action was in Italy and Spain, whose difficulties were heightened by the global background of a debt crisis simmering in the US.
If the ‘troika’ — the EU, ECB and IMF – at the core of euro policy making could persuade investors to buy Italian bonds, they could avert – for now anyway – a continued European debt crisis.
So there were a lot of balls in the air. Obviously, the first crucial aspect of the deal was to quarantine Greece under the tagline that ‘‘Greece is different’’. They needed to ring-fence Greece and declare that any U-turn on previous policy was specific to Greece and Greece alone.
The U-turn on Greece has been spectacular. Having spent the past two years beating the ‘‘default in the euro would be unthinkable’’ drum (and creating much of the crisis), the troika on Thursday sanctioned a massive €37 billion default on Greek bonds.
But this is only a haircut of about 20 per cent on all Greek debt, and Greece probably needs a haircut of 80 per cent on debt to be able to pay back the money sustainably. It is another fudge.
But for now, if you had bought Greek short-term bonds based on the troika’s promises at the time of the original Greek bailout in April 2010, you have now been shafted. All Greek short-term debt will be converted into long-term IOUs. Those who bought last year’s guff were sold this year’s pup.
Why should Thursday’s promises have any more credibility in a year or two? Fancy a wager?
In essence, what we saw on Thursday was a Brady Bond plan for one country. This column has been arguing that the Latin American debt crisis resolution in the 1980s, known as the Brady Bond plan might be the blueprint for all of Europe. I still believe that this will happen, and that Thursday’s effort to limit default to Greece is ‘finger in the dyke’ stuff.
The original Brady Plan was based on allowing countries to buy their old debts back at deep discounts with new money.
That ‘new’ money was lent to the defaulting governments but guaranteed by the US Treasury so that the countries could reduce their debt/GDP ratios buying back all their debts at a fraction of face value. Once they serviced these ‘new’ old debts, they could borrow again.
To a cynic, this constitutes just a new Ponzi scheme under a new name, but the Latin countries accepted it rather than have to run their countries with zero budget deficits indefinitely, or at least run their countries without borrowing from foreigners.
This is what the Greeks have agreed to, in return for more promises of austerity. But why should such a deal be limited to Greece and not extended to Ireland? After all, the EU sanctioned ‘‘burning the bondholders’’ – is this not the very pledge this new Irish government fought the election on?
Obviously, there is no moral reason why the Irish shouldn’t look for the same treatment as Greece, particularly if the treatment makes Greece’s debt profile more sustainable. If I were an investor, I’d be thinking to myself – ‘‘hold on, the Irish and Portuguese need this type of deal too, so why shouldn’t they get it in the future’’?
But how did the troika fob off a potential ‘me too’ bid from Ireland, given that Ireland’s debt dynamics are so diabolical? Well they banked on playing on the old Irish insecurity of always trying to be one of the goody-goodies in the EU class – the teacher’s pet of negotiators, never causing a scene.
To the extent that when the continentals thought about Ireland, they had to gamble on the assumption that the Irish authorities are so cravenly unable to stand up for their citizens’ interests that they would never cause an embarrassing scene at the summit by forcing bank bondholders to take a bath. The troika wagered that the Irish would sit there and say nothing because by saying something, it might draw attention to us, and we couldn’t have that. We’d deploy the Seamus Heaney line – ‘‘whatever you say, say nothing’’.
We’d side with the big boys, the respectable ones. The troika could buy off Ireland cheaply by conferring on Ireland the best of the worst accolade. That they did, by praising the Irish, patting us on the head.
But egregiously when you look at the detail, it seems that we committed to talks about corporate tax harmonisation. In return for what? In return for the troika stopping their present policy of loan sharking – charging us extortionate interest on the loan and dressing it up as a friendly ‘bailout’. Friends don’t involve themselves in loan sharking.
So now we have no deal on the banks, no debt forgiveness, ‘normal’ official interest rates for an official loan and a threat to our corporate tax rate. This is now being dressed up as a victory for Ireland.
Having bought the Irish off cheaply as an afterthought, the troika had to deal with another more pressing constituency – the investment banks that held Greek bonds.
If they were to prevent a complete collapse of Greek asset prices, the leaders had to come up with more money from somewhere else to make sure that the share prices of the bank that owned the Greek crud, didn’t tank further. So they turned to who? How do I put this nicely. . .you.
The summit decided to expand the slush fund known as the ESFS with taxpayers’ money that can be used to prop up the assets of countries like Greece to make sure the private banks don’t take a bath. Is it any wonder bank shares rallied on the news?
All this is hoped to encourage investors to buy Italian bonds. Let’s see what happens – but I wouldn’t be too confident.
It is easy to see why the Triumvirate behaved as they did. They have so many conflicting constituencies to hold together. They need to keep the Germans on-side and also the Finns, who want no part of taxpayer bailouts.
The French need to protect their overexposed banks that are up to their necks in Greek debt and thus need a taxpayer bailout. The Italians and Spanish need to stop a run on their bond markets, so they need a deal that quarantines Greece. The ECB need a deal which makes its previous promises credible and prevents everyone jumping on the emerging European Brady Bond bandwagon. So they drew a line at Ireland.
And we did what? We opened up negotiations on our corporate tax rate in return for a commitment from our so-called friends to desist from loan sharking.
In the end, we have just experienced a shift in language that would make Orwell’s Big Brother blush. Think about it, we have ended up with an explicit selective default in the euro.
This is now being signalled as a triumph. Yet up until last Thursday the official line was that such a default in the euro would constitute a calamitous defeat. Crisis over? I wouldn’t bank on it because the stated universal agreement for everyone to cut spending now and go for zero or close to zero deficits will cause growth to falter, generating the expectations for the next bailout.
Fudge Party & Co welcome all of You to another Noonanesque Burlesque Show ‘ La Noonan Rouge ‘ .
The troika needs to take one step at a time. I agree that their priority was to dampen speculation about Spain and Italy but Thursday’s measures made some inroads on the greece problem and provided some crumbs of comfort to Ireland and Portugal. Significantly that was followed almost instantly by a comparable reduction in the interest rates due for UK loans to Ireland. Enda Kenny entered the MacGill Summer School last night to a standing ovation– the first ever for a visiting speaker. He was at pains to emphasize his friendly links with Britain, whose ambassador opened the event with… Read more »
David,
If the solution employed rebalances the power back toward the non rigged markets then the corpocracy / insiders will surely be reticent to use it.
Hence in my opinion why the brady bonds, for the moment, is on ice for ireland.
This morning, the markets are letting the Troika know what they think of the last weeks events. There is blood all over the place. Italy has a bond auction this Thursday and already commentators are getting nervous. Coupled with the US debt standoff, it looks like a repeat of August 2007, general meltdown! David has finally returned to his best idea, Brady-type bond repo’s as the most efficient mode of getting Ireland debt to manageable levels. However, he is still leaving out the public spending reform which is essential to execute this strategy. Unless the Irish state returns to at… Read more »
Teacher’s Pet Mentality in Ireland As we all know, Ireland was and is a crony republic. To succeed and indeed survive here, Irish Middle Class Mammies have told their darling boys and girls to study hard at school and behave well for the teacher, otherwise a life of hard labour and poor conditions would be their future. They were sent to Irish College in Gaeltachts, given private one to one supplementary tuition, to get the points to get the university place to make Mammy proud. So, learning for the love of learning does not exist here, its more like learning… Read more »
Probably the best article on last events that can be seen anywhere. Definitely better than the rest of the Irish media coverage. Well done David – perfect 10 score.
The EU is fudging (as John Allen is implying) and they are basically pulling off a masterstroke – for which they have no money to back it up. This is reminiscent of the time in the build up to the EMU crisis in the early 1990s – except now everybody is in a worse position.
Within two months this article will appear prescient and of remarkable relevance.
Fudge, Baby, Fudge.
http://www.voxeu.org/index.php?q=node/6778
This letter form the editors of VOX Eu sums up exactly what David is saying.
Just look at the list of Itlain academics who signed it along with Richard Baldwin who wrote the main Uni textbook on European Integration and founder of voxeu.
The letter is paniky and the gist of it is – please help Italy.
The deal was all about Italy. It just goes to show that Irleand is marginalised and a pawn ready to be sacrificed. Italy is a Rook and will not be sacrificed so easily.
By the way please note the deal ended up quite similar to what was called for in this letter.
I think the figures for the reduction in Greek debt for 2012 is from 150% of GDP to 130% of GDP. Go figure.
Very begrudging DMcW , the EU gave us a hand and David clobbers them. Basically what happened is that the EU gave us a lower interest rate and a longer payback period , that is it , thats all that happened. The reason for all this financial trouble is that governments throughout Europe are over spending and the only thing to combat this is …..AUSTERITY. We must cut spending and get back to 3% borrowing of GDP as quick as possible. This year according to Gurdgiev we will spend the same as last year so after a buget of 6… Read more »
subscribe.
David, every economist worth his salt knows that there is tremendous momentum in the US for a return to the Glass-Steagall Act. Marcy Kaptur’s bill, HR1489, Return to Prodent Banking Act, calls for a return to Franklin Roosevelt’s Glass Steagall, which has an evergrowing list of 30 cosponsors, will, when passed, protect the commercial banks and hand the toxic investment junk back to Wall Street and tell them to sort out their own gambling debts with no bailouts. Even the British, after all their fancy ring fencing clap trap are now calling for a Glass-Steagall model of total seperation of… Read more »
What is happeneing here is not a European Problem. It is the breakdown of the current form of capitalism we now have. The balance has swung way too much from the citizens of the world to the markets and funds etc. The speed information now flows gives the players an even bigger advantage now than owning the money did alone in the past. They now have the buying power and the control of info and the ability to move faster than governments. But the current model always needed the ordinary consumer to be active at the bottom of the food… Read more »
DmcW is certainly on the ball and in top form here:) Enda The Titanic is no Icelandic Geir Haarde or Swedish Bo Lundgren. At the moment, he’s playing seagull with the troika and hoping to be thrown fish overboard as he follows faithfully along in his trawler:-) Its rather embarrassing and sad to hear Gilmore implore us to don the green jersey and step up to austerity. He’s closer to the Greens than he realises having dumped the green jersey in favour of wearing a crisp banker’s suit for quite some time now. The embarrassment doesn’t end there with Gilmore… Read more »
A large fraction of our debt has effectively been written off. A lengthened term and a reduced interest rate is for all intents and purposes the same thing as a debt write-off. The amount effectively written off is in the same order as the bank debt we have assumed. You yourself advocated the idea of a bad bank where bad debt would be segregated. What you said we needed is exactly what we now have – the Resolution Bank and AIB. If the bad banks now don’t pay back their senior debt, they will spread contagion to the whole of… Read more »
Let’s be clear. The European deal announced last Thursday night is designed to do one thing and one thing only. It is designed to persuade investors to buy Italian and Spanish government bonds David your assessment is absolutely correct … I would go one cynical step more and call it the “Beach time Deal”. In September when Europe returns from its holidays the euro turmoil will casting its Ebenezer Scrooge shadow on the little taxpayers of Europe once again. Really enjoy these phrases calling them eejita and fools is actually praising them… ‘a good economy, hijacked by eejits and financed… Read more »
Lets get the short term party started before the long term pain will be suffered by our kids and younger kin. This is the start of the biggest can kicking excersise since the bailout of AIB in the 1980s.
There should be looking at the markets around Ireland a short term cash bubble around September. Pints on me. I am not joking.
Yes i agree with you David i also agree with what Piombo says about our bankruptcy laws god knows why the Goverment has not acted on it yet.I also agree with what you say on homeowers, investors, and developers they all got trapped in debt some through greed,but they did create employment,they did pay a lot of tax to the goverment who job acting through the Regulator was to regulate the banks and there lending.It was not the homeower or the investor or the developers job.The problem here is the old irish begrudgery a “well it is good enough of… Read more »
Avoiding the fundamental issue is historically par for the course, David. Though kleptocrats have been warned and provided with the only workable solution before revolutions, they preferred to lose their lives than to employ it. That’s some commitment to the status quo! See “The Plutocrats’ Suckers” at http://thedepression.org.au/?p=6848
Italy’s 10 year bonds are heading for 6%. Now there are a lot of things you could say about that but maybe it’s better if I cut straight to the chase…. If them bonds, go to 6% then my advice (returning to my favourite aeronautical analogies) is to …..
1. Move your seats to an upright position
2. Brace for impact.
In the meantime let me tell you that I love you, kiss me goodnight……..take it away Louis prima………
http://www.youtube.com/watch?v=wZZeTACFb5Y&feature=related
So ye reckon Kenny speaks English, Irish and French.I think he should take a crash course in Italiano,have a few words with his Euro pal Angela Merkel, or should we call her Angelina….
http://www.youtube.com/watch?v=PIJzpdJIdmI&feature=related
We have seen the lives and families in Norway decimated by an imbicile and now he is jailed .
We have also seen the lives and families in Ireland decimated by dangerous people and no politician , banker or regulator jailed .
The State is in no ‘state’ to remain a sovereign entity anymore and we must dissolve it immediately.
Give us just one LEADER .
Not sure if I am missing something here but my calculations show that borrowing at 5.8% over 7.5 years is much cheaper than borrowing at 4% over 15 years….I haven’t heard anybody say this so I’m not sure whether I have missed something but my calculations show the new deal will cost us 29% MORE than the old deal!! How is that a good deal for us?
EOC, I was wondering the same thing. I would like to be wrong, but I have a nasty suspicion you are right.
Red or Blue Bonds anyone? Politicians who back measures such as common bonds “will prove to be the euro’s gravediggers,” Otmar Issing, the European Central Bank’s former chief economist, said in a July 19 interview in the Frankfurter Allgemeine Zeitung newspaper. “The consequences of this policy will strangle Germany.” A compromise proposed by the Brussels-based research group Bruegel would see countries fold debts up to 60 percent of gross domestic product into a joint “blue” bond. That would likely enjoy relative lower interest rates than even low-deficit governments now pay, in part because of the more liquid market. Any excess… Read more »
Here is an interesting slideshow in the context of the article, the bailout, Ireland, and Irish media coverage of the event.
http://www.businessinsider.com/20-big-banks-that-are-most-exposed-to-the-piigs-2011-7#
One bank gets absolutely no media coverage in Ireland concerning how it is doing. But it still buys advertising. It buys silence.
And the government is trying to sell the other one before the skeletons pop out and land on the floor.
Diagnosis is very important. Take for example this notion doing the rounds that Ireland is in a downward spiral or tailspin if you will. Now an old friend of mine who passed away some time ago flew planes during the Second World War and he once told me that when you are in a dogfight, you sometimes found yourself in a tailspin and heading for the ground or deck as he called it. What you need to do he said was the opposite to what you think you should do and that was to push down hard on the controls,… Read more »
Folks, look-ye here: http://businessetc.thejournal.ie/bailed-out-ireland-could-stump-up-e11-1bn-to-pay-for-new-bailout-fund-187551-Jul2011/?utm_source=shortlink
On top of the estimated extra €7bn the term-extension will cost IRL, the new ESM is to cost IRL a further €11.1bn.
Good deal negotiated?
One business party running the country. Just look at poverty statistics, look at illiteracy levels, look at unemployment, look at the drop in consumption, gap between rich and poor, remuneration for bankers v teachers, nurses and police, look at hike in insurance premiums, mortgage interest rates, utilities rise and wages decline. Government has access to banking information, has convinced itself people are saving huge sums, so it is going after that via stealth taxes, water charges and property tax, the elite are once again getting the people to bail them out.
Colin, I replied to Eddie on twitter that 910k at 30kpa pension would fund my retirement til I am 95 yrs old. His figures are incorrect and I am not the one who “sheepishly walked away”; indeed I have continued to call on him to retract his lie of last Friday on Newstalk that “No public servant has lost their job involuntarily”. Paddy, we’ve had no real austerity yet? Check again. The figures are available at trueeconomics.com by Constantin. Argue with his maths if you like, but you will be wrong. Try paying/coping with loss of job or pay cuts/extra… Read more »
The destruction of the Irish economy is being hidden and masked by the multinationals: Look at the following report: http://www.rte.ie/news/2011/0727/export-business.html “Figures released by the Irish Exporters’ Association show that multi-national companies account for more than 75% of Irish exports. Launching a report on the top 250 exporting companies in Ireland, the association said the top 20 firms accounted for 44% of total exports. Johnson & Johnson is Ireland’s number one exporter, according to today’s report, with the firm’s most recent figures showing exports worth €8.5 billion. It is closely followed by Microsoft, whose exports hit €8 billion last year. Next… Read more »
Paddythepig, as usual, it seems you still do not read posts that people write here, even in direct reply to you. “Sacrificing my benefits”? I have explained that the EXTRA monies taken from me every month for the last 3 years amounts to more than my monthly mortgage was when the austerity measures began. Has your employer taken the EXTRA equivalent of a second mortgage from you every month for the last three – four years? If so, my sympathies to you; if not, I suggest you refrain from asking me, or any other equal fellow-citizens of yours, to make… Read more »
Afternoon,
Thanks for the comments on this piece, the quality of the info in the posts is truly excellent. Thanks for all the detailed stuff on the EFSF and how the revolving credit system works.
That said, as you know I never censor any one on this site nor close down discussions when the tone becomes critical of me – criticism is part of the game and I make mistakes every day, but let’s not get too abusive to each other either.
All the best,
David
Malcolm McClure Thanks for posting the MacGill link, but I’ve been watching it already.
RTE have announced that any action taken in relation to the Anglo Irish case won’t happen until next year at the earliest.
It would be laughable if it wasn’t so serious.
Inside Job, so good worth posting again.
Inside Job – Part 1
http://www.youtube.com/watch?v=iFfTcAcGjcU&feature=player_embedded
Colin, paddythepig, I am not going to waste any more of my time replying to your questions, since you don’t bother to read the answers, preferring instead to attack/criticise/disbelieve a post you imagine I have written.
Take care.
Colin, what a bizarre list of assumptions you make, yet again, about me and the “priviledges” you assume I have. There is nothing “guaranteed” about my income, Colin, as the last four years prove. “The persona of a victim”? That was not my intention and I don’t know where you think you saw me write that. I attempt to present myself as an honest person who defends the rights of working people to be properly remunerated for that work. On a scale of 1-10 of “devastation” of my income? You didn’t specify which of the two ends of your arbitrary… Read more »
How utterly bizarre. Poor old Ireland really is screwed. The masters have the majority eating out of their hands. No wonder FG/LAB got elected despite supporting the last FF/GP four-year-plan and budget.
I almost despair.
Colin, “If you’re gonna be better off on welfare, that begs the question why you haven’t gone on welfare”.
Facinating.
Why do you think a person is “better-off” if they earn more MONEY on social welfare?
Colin, I sense that you are a good guy, despite your efforts to the contrary. You claim to know me on twitter. Please contact me, at any time.
Colin, don’t leave yourself in the position of coming-across as a COMPLETE dick, eh?
That honour is for paddythepig.
Meh.
Tim, in my absense, Colin has exposed your patronising, nauseating self-pity for what it is.
You do hardship a dis-service, if you think your own relatively minute lifestyle adjustment qualifies as hardship.
Better to take that spotlight off yourself for a while, and open your eyes, and your mind.
Colin, paddythepig, both still not reading posts. I never said dole was “overgenerous”, nor did I mention “hardship”. You are making-up things to argue about. Colin, even if I wanted to, you think a person can quit a job and simply go on the dole? Also, if a teacher leaves their job while this moratorium is in place, no-one new will be hired. Cbweb explained that above also. Why don’t you read the information people write here, instead of carping at words you imagine I have written? “Disingenuous”; “patronising”? You really couldn’t be more wrong about that, but the irony… Read more »