Financial Times news article–
“Real estate development could become a catalyst for emerging from the crisis,” said Yiannis Stournaras, director of IOBE, an Athens think-tank.
That’s the Greek crisis that we’re talking about. And although suggesting real estate as a path out of crisis sounds like a hair of the dog cure, since real estate didn’t have much to do with Greece getting into crisis, the point has validity.
It’s a sign of where things have gotten to in Ireland that the country has a number of options for producing a constitutional crisis. In no particular order there are –
After a strange 3 days of deliberations within the ruling Fianna Fail party, political events in Dublin are moving quickly this evening.
The developments are too rapid to have much considered to say but it seems clear that there are new features to this uprising. The role of Wikileaks in showing that the US diplomats didn’t view the political economy of the place much differently than the people in the street. Nor is this a “colour revolution” of the type from the mid 2000s — it’s not that organized or branded. And for the first time in a long time, a decision for European and Arab governments about government legitimacy in their own backyard — and how to handle graceful retirement for the former incumbent. At least two imponderables: the reaction of overseas Tunisians, who would have been forgiven for wondering if things would ever change, and the spillover to Egypt, where some of the political features are similar and succession is already, obliquely, in the air.
Remarks prepared by European Commission President José Manuel Barroso for his potentially awkward news conference with Hungarian Prime Minister Viktor Orbán –
Earlier this year, I made clear that it is not only the so-called “federalists” who want to see more economic governance and economic co-ordination in Europe; it is the markets. The markets are demanding more coordination at European level. The markets are sending every day a very clear message that Europe has to work in a more coordinated manner when it comes to economic and financial issues, so it is not a question of utopia or idealism to ask for stronger economic governance and coordination. It is a matter of realism, sound, solid common sense.
Does Mr Barroso really mean to argue that European Union citizens should be willing to surrender more economic autonomy to EU institutions because “the markets” demand it? You could fry that argument in a referendum, if you had a referendum.
It’s worth noting a flurry of Greece-related chatter coming into a quiet news cycle on New Year’s Eve. The context: Greece has a 3 year stand-by arrangement from the IMF and a parallel arrangement with the EU, meaning that it gets the money over those 3 years, but has to repay fairly soon afterwards. It’s easy to lapse into the Greek mythology to find a metaphor for the looming repayment schedule from 2014 onwards but suffice it to say that no one likes the look of it. So for over a month, reports have circulated that a loan extension was close to a done deal — up to 11 years according to one report.
USA Financial Crisis Inquiry Commission, “primer” issued by the Republican party defectors from the project –
If the bank uses deposits to fund poorly performing projects, depositors can become concerned that eventually their bank is going to fail and they will not get their deposits back. If a bank lends too much of its deposits to finance long-term projects, depositors might begin to worry that they will not be able to withdraw their money according to their needs. Therefore, banks hold enough cash on hand, or “liquidity,” to be able to honor withdrawal requests and offer confidence to depositors that their money will be there when they want it. If depositors lose confidence in their bank, the only rational thing to do is to withdraw their money and move it to a safer place. With each depositor withdrawal, the bank becomes more leveraged, the mismatch between its assets and liabilities becomes more pronounced, and liquidity on hand is further diminished.
With the credentials that one assumes qualified them to be on the commission in the first place, you’d hope to do better than what you’d get from putting “bank run” into The Google. But do you?
Ireland’s department of finance has released the draft loan program agreement with the European Union and IMF. It is still preliminary and subject to various approvals, but the government was under pressure to show the basics of what had been agreed prior to the budget vote on 7 December. A quick perusal of the document reveals the following:
The EFSF apparently asked the government to post collateral for the EFSF loan. This rumour had circulated during the negotiations but a reference in the letter confirms it. But the government found “legal and economic constraints” to do it … those acquired-helpnessness Irish lawyers strike again. Anyway, the apparent disagreement over collateral provides indications both of the risk EFSF may see in the package, and so the interest rate that has drawn so much attention.
In the better-late-than-never department, the opening letter includes the statement “The Irish owned banks were much larger than the size of the economy.” The government may be groping towards an understanding of the difference between “Irish banking system” and “Irish banks.”
The government is leaving open the option of more wage or number cuts in the public sector (p13) … it will consider “an appropriate adjustment, including to the overall public sector wage bill, to compensate for potential shortfalls in projected savings arising from administrative efficiencies and public service numbers reductions.” Note that under the Croke Park Agreement, those savings are supposedly pledged to reversing previous wage cuts, in reverse order of wage level. But now it appears that those savings are part of the fiscal targets and wages/numbers may be on the table to meeting them. Note: that’s a 2011 decision, left to a future government as the current one feathers its personal nests.
Bank resolution legislation is coming (various described as end December or February); under it, the Central Bank can appoint a special manager, transfer assets and liabilities of distressed institutions, and establish bridge banks. It is unclear whether this is the same as or separate from legislation that will impose burden sharing on subordinated bondholders in banks.
Finally, it looks like the deficit targes are being set in currency terms and not in percentage of GDP, which may indicate some thinking that the ratios have been misleading or added statistical doubt to the numbers. And, in the final sign of how there’s a new sheriff in town, there will be a lot of new monitoring and reporting to overseas agencies under the agreement.
In assessing the effectiveness of the EU/IMF emergency lending package to Ireland, it’s important to distinguish the financial market impact from the political impact. In terms of market impact, the package is surely a success. All talk of restructuring, for sovereign debt let alone senior debt in banks, is off the table. Through IMF and bilateral involvement, the call on EU lending has been kept in the low range: note the heavy use of the EU-budget backed stability mechanism relative to the use of the financial stability fund — the EFSF’s powder has been kept dry in case it’s needed elsewhere. Furthermore, the lender of last resort checklist is looking good: if not quite lending freely at high rates against good collateral, all the EU money comes in at a large headline amount, with a fairly high rate (above IMF and Greece program), and the collateral coming from conditions to which the Irish government had already agreed. This money will get paid back.
In terms of domestic politics — and therefore with broader implications for the EU as political project — the package is much more problematic.
The government of Ireland released its 4 year plan for fiscal consolidation and structural reform earlier today. Finance Minister Brian Lenihan gives the optimistic version in the Financial Times. Speaking of optimism, here’s an interesting bit of the underlying economic analysis (page 28) –
This combination of current account surpluses and substantial (though declining) budget deficits implies the continuation of a large private sector financial surplus throughout the period of the Plan. Much of this accumulation of financial surplus by the private sector will take the form of increased deposits with and reduced borrowing from domestic banks. The result will be a very substantial fall in the loan-to-deposit ratio of the domestic banking system and a corresponding reduction in the domestic banks’ reliance on external sources of funding.
So the expenditure compression coming from continued austerity will form part of a slow-motion solution to Ireland’s banking crisis, because deposits will go up and loans go down. With Bank of Ireland and Allied Irish Banks currently on loan-to-deposit ratios of about 160 percent, this effect certainly goes in the right direction. But it takes a long time to work relative to the speed with which wholesale funding can disappear. And it’s a very fine balancing act. In the section on risks, the same 4 year plan says –
… domestic risks are tilted towards the downside. The most significant of these risks is that households maintain savings rates at current very high levels which would represent a continued constraint on personal consumption.
So the same saving that might help the banks could undermine expenditure growth in the economy. But most of all, the optimistic scenario regarding banks’ funding needs assumes that these Irish household savings flow into Irish banks. Whether the traditional home bias of Irish savers — as is true for savers in most EU countries — can be assumed to continue is an open question. Without confidence in domestic banks, the assumptions in the four year plan look heroic.