Question for Eurozone finance ministers

Today in the lower house of the Irish parliament, Minister for Finance Brian Lenihan repeated a statement that he made on Irish radio yesterday concerning European endorsement of the Irish government’s policies in relation to the banking crisis.  Specifically, he told the house

The fact is that every finance minister in Europe [Eurozone] indicated the other evening that the [blanket bank liability] guarantee was the correct policy at the time [September 2008].

The basis is this paragraph from the Eurogroup statement following their Monday meeeting

We welcome the measures taken to date by Ireland to deal with issues in its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to support the Irish banking sector at a time of great dislocation. However, market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate.

Since this statement is like all such statements written to be vague enough to encompass what all the parties want it to mean, it’s worth being more specific.  So: do the finance ministers support a policy of open-ended liability guarantees to insolvent banks regardless of their size?  Because that’s what Ireland did in 2008.  And the minister is now using the claimed endorsement of his European colleagues as a basis for being angry at the opposition for even having forced a vote on the extension of the revamped guarantee yesterday.

One from the files

With so much new reading material being generated on the evolving Ireland situation, we’d like to recommend that you go back just over 6 months to this really excellent and prescient opinion piece in the FT  from David Bowers, global strategist at Absolute Strategy Research.  We want to be nice to the FT and not cut and paste from the articles as they request, but focus in particular on the idea that we are headed for a world of increased official capital flows, with political conditions attached.  With Klaus Regling, CEO of the European Financial Stability Facility, telling us just now that he’s been shopping the EFSF fund-raising to sovereign wealth funds and central banks, we could be getting into a world of Asian/petrodollar flows, via Brussels, Washington, and Frankfurt, to the European periphery.

Ireland: The importance of the right question

It’s worth noting a major difference in the narrative regarding Ireland’s crisis that is being told inside and outside the country.  Consider for example the recent speech of the European Commissioner for Economic and Monetary Affairs, Olli Rehn, in Dublin —

In the case of Ireland in particular, we need to recall that sovereign debt has not been at the origin of the crisis. Rather, private debt has become public debt. The financial sector has misallocated resources in the economy and then stopped working. It needs reform.

Similarly, the Wall Street Journal — for whom Ireland was always a low-tax favourite, is anxious to distinguish Ireland from Greece —

Ireland, by contrast, went into the crisis with a budget surplus, a debt-to-GDP ratio of some 27% and a strong record of recent growth that has left it one of the richest countries in the world. Ireland does have a serious problem with its banks, which are the source of its current and recent woes. A property boom and bust have left Ireland’s biggest lenders with billions in bad loans on their books.

At home though, the people are being told that that budget gap between ongoing expenditures and revenues is the key to the problem.

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Ireland’s 77 year political cycle

“The British Government can rest assured that any just and lawful claims of Great Britain, or of any creditor of the Irish Free State, will be scrupulously honoured by its Government.”

That’s Eamon DeValera, writing as Irish Minister for External Affairs to the British Dominion Affairs Office in 1932.  DeValera was also leader of the recently elected Fianna Fail government, the party having completed its transition from a “slightly constitutional party” to being in power.  So let’s look at the ironies presented by the above statement in Ireland’s current context.

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Spain’s Troubling Unemployment Statistics

Spain’s statistics office continue to issue worryingly confusing press releases. The latest example is one published in connection with the quarterly labour force survey which came out last Friday.

Now the data the INE assemble in their report is very interesting, and as many observe, the complete survey gives far more reliable data about the state of the labour market than the monthly labour office signings do.

But the way they present the data isn’t interesting, in fact its downright misleading. In particular they chose not to seasonally adjust the data – which in a seasonally driven economy like the Spanish one with significant ups and downs in tourist activity doesn’t make much sense – and this omission is not only lazy, it is negligent. As I say, it is misleading, in the same way the information on VAT returns and deficit reduction progress issued by the Ministerio de Economía y Hacienda is misleading (they do not, for example, clarifying the changed VAT refunds procedure), or in the same way the notarial contracts data gives a completely topsy turvy view of movements in Spanish house prices. At best such data gives completely meaningless information, and at worst it leads reporters who cover the Spanish economy hopelessly astray. Continue reading