No opportunity missed to make things worse: Eichengreen on the 'bailout'



Squire Allworthy

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My hope, if you could even call it that, will be that the Germans finally come around to the view that there is no option other than to introduce a couple of years of QE. I think that will take the pressure off the euro, and maybe allow us a bit of breathing space. On foot of that, if we can use that opportunity to get our house in order, maybe then we can look at some debt restructuring.

Is that serious enough for you?
I am with you on that, current policy will lead to contraction and worsening outlook. Pointless as it will not work. The question now is how do you make the Germans realise the problem before it is too late. This will adversely impinge on their economy soon enough.
 

goosebump

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Defaulting is exactly what Ireland needs to do, followed by getting out of the euro. You are another one who can't seem to distinguish between a default and a currency conversion.

"we have to maintain the value of whatever currency we use as we have so much debt"

There is no more debt when you default. You are not using any currency whatsoever to service foreign debt.

Get it?
OK, so lets presume this fantasy of defaulting on all €150bn of sovereign and impaired bank debt and dropping out of the euro comes to pass.

How about the private debt?

What do banks do for liquidity?


After default, the only currency needed is to provide essential services to the Irish people. The Irish government will have to pay its domestic bills from its own domestic tax revenue.

However, considering that all domestic tax revenue will be used to provide services to the Irish people and not to pay foreign banks and foreign bond holders, that will be more than enough to maintain the current status long enough for the new currency to stabilize.
We have an €18bn deficit that has nothing to do with the banks.

Yes, the European banks will be miffed when Ireland defaults. They will grab their scissors and start cutting up the Irish government's credit cards. No more credit. No more loans.

.... which would be the one and only thing helpful they will have done in this financial crisis.
Wonderful. A entirely creditless economy. How could this possibly fail?
 

Padraigin

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OK, so lets presume this fantasy of defaulting on all €150bn of sovereign and impaired bank debt and dropping out of the euro comes to pass.

How about the private debt?

What do banks do for liquidity?



Private debt is between private parties and not something that directly involves government. However, private debt in Ireland would be converted to the new currency. New banks would be chartered with assets in the new currency. Collateral would be valued in the new currency.




We have an €18bn deficit that has nothing to do with the banks.



Wonderful. A entirely creditless economy. How could this possibly fail?

New credit cards would be issued by the newly chartered banks with credit limits set in the new currency. The new banks would need some tougher requirements about liquidity, however, which would actually mean just bringing back the old requirements that were so disastrously lifted.

If anyone wants a credit card issued by a foreign bank, who cares?

A devaluation of the punt vis-a-vis the euro would be good for business and would spur more economic growth.

Again, this is not hard.
 
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Squire Allworthy

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My German is limited and I am sorry but I cannot say if there is wider recognition in Germany, except to note that in browsing the comments on a piece in Die Welt they showed a good degree of sympathy to Ireland, contrary to what is sometimes portrayed.

Thanks

Just trying to get an impression, and see what others think. Some posters may live there.

I don't think the average German has woken up to what is headed their way.

Unemployment dropping and all looking good for them, or so they think. The unified country finally starting to move forward. They don't see the potential weakness of their position.

He can't; BE explains why:

"But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, recent events make clear, leadership is in short supply."
Good quote and agree.

Considering Banks as somehow National in this day and age seems altogether strange to me. Can't understand it.

Personally I would QE the banks into solvency, (hate the thought of it) but extract a price, accept whatever may happen to the Euro and get the economies moving. Equally I would be quite happy if part of outcome involved allowing some banks to fail, but the problem with that is it may drag down more. Utter mess.

Increasing debt is not the solution.
 

Sariel

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It leaves us in a really, really tight spot. I've never argued otherwise. We will continue to have <1% growth over the next 4-5 years, we will do well to get our deficit down to 10% within 5 years, we will continue to have 10%+ unemployment for at least 10 years.
Where is the growth going to come from? The interest on the debt is going to grow faster than the economy. Either way there is going to be a restructuring of the debt. You can do it now or wait later but it will be done.

Debt To GDP Ratio

GDP = private consumption + gross investment + government spending + (exports − imports)

How is the denominator going to grow faster than the numerator with the government cutting back spending, increasing taxation thereby reducing private consumption. So what we are left with is gross investment i.e. public and private.

Do you think there is going to be a surge in capital formation. So, what you're relying on is exports which will also reduce income from the economy because of the repatriation of profits and the intangibles which have never been a net contributor to the economy.


I don't deny any of that. I just accept that its the best option out of a narrow choice of very bad options.

The other options are:

Dropping out of the euro, which isn't an option, as we don't have the reserves to support a currency, and we can't raise interest rates to support a currency either, and we have to maintain the value of whatever currency we use as we have so much debt
:? You don't need reserves to support a floating exchange rate system. It just leaves you exposed to a speculative attack, where the speculator will always win. Raising interest rates doesn't support a currency, it is a sign of fundamental problems and a signal to short that currency. Ask Iceland, no amount of raising interest rates could save them. There is two ways to reduce the debt, grow your way out of it or reduce it with inflation, we chose neither.

Defaulting in some way, which isn't an option, as we are entirely dependent on borrowing for both our State and our banking system.
There will be a default, you can call it a restructuring but either way it's going to happen.

My hope, if you could even call it that, will be that the Germans finally come around to the view that there is no option other than to introduce a couple of years of QE. I think that will take the pressure off the euro, and maybe allow us a bit of breathing space. On foot of that, if we can use that opportunity to get our house in order, maybe then we can look at some debt restructuring. Is that serious enough for you?
What will that solve? The ECB/NCB buying long dated bonds for reserves. This just alters the maturity profile i.e. it is just a swap of assets nothing more. QE does nothing of any importance ask Japan and soon the US and UK.

So for growth to take place, you are really relying on the private sector taking on more debt at a time they have record levels of private debt and are trying to repair their balance sheets. There is no sign of that happening as can be seen from the October Banking Statistics.
 
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He3

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Thanks Sariel.

It will happen, just a matter of when, and most importantly, how much more is squandered meantime. The people who refer to their Cabinet as being an asylum show no capacity for rational decision making, for whatever reason.
 

He3

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Krugman:

I’ve been reading Kevin O’Rourke at the Irish Economy blog, watching with astonishment and admiration as the mild-mannered economic historian becomes Isaiah, righteously denouncing what has been passing for responsible policy. Now the even more usually mild-mannered Barry Eichengreen weighs in, calling it what it is: reparations imposed on an innocent public.

Read the comments, too — especially the ones in sort-of German.

The Shrill Has Moved To Europe - NYTimes.com
 

He3

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Münchau :

Revoke the guarantee for the banking system and then convert senior and subordinate bondholders into equity holders

THE DEAL is done, but there is no joy. The agreement that was supposed to end the financial crisis gave rise to its next wave. We are now in the unique situation that financial markets are taking a longer term view than national governments.

The governments are saying: There is no liquidity crisis. Greece and Ireland are safe for the next few years. The markets are saying: There is a solvency crisis; there is no way that Greece and Ireland will be able to prevent an explosion of their national debt.

The markets, for once, are correct.

Will it work? No. What can Ireland do? Remove the bank guarantee and default
 

goosebump

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:? You don't need reserves to support a floating exchange rate system. It just leaves you exposed to a speculative attack, where the speculator will always win. Raising interest rates doesn't support a currency, it is a sign of fundamental problems and a signal to short that currency. Ask Iceland, no amount of raising interest rates could save them.
Of course interest rates have an effect on the price of a currency. Fair enough, an interest rate won't save a currency that comes under a speculative attack, but there is no way the an Irish currency could be supported with an interest rate of 1%, which is the effective rate that currently attaches to the euro.



What will that solve? The ECB/NCB buying long dated bonds for reserves. This just alters the maturity profile i.e. it is just a swap of assets nothing more. QE does nothing of any importance ask Japan and soon the US and UK.
This contradicts your other statement that inflation and growth are the only responses to debt.

QE will introduce an element of inflation into the eurozone, and reduce re-financing costs for heavily indebted nations.

QE is a stopgap rather than a panacea. At some point, the overriding sentiment will switch from fear to greed, which will makes all our lives easier, and QE could get us there without having to trigger nuclear solutions.

I'm not ruling out some sort of future debt restructuring, but there's a big difference in a euro wide restructuring programme, backed up by the ECB and the EU Council, and a unilateral total default and currency conversion in a small open economy.
 

Expatriot

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The US is in better shape because after Lehmans, it didn't let any other banks go. Lehman's nearly broke the entire Global Financial System.

Let's remember, the value of Lehmans Balance sheet as a percentage of US GDP was smaller than that of Anglo vis a vis Irish GDP.

Lehman collapse: the drama of a mad 48 hours that will never fade - Telegraph

"Lehman's collapse almost took the entire financial system with it. In the craziest 48 hours ever seen in financial markets, with shares plummeting across the world's exchanges, Bank of America was enticed to come to the rescue of Merrill Lynch. Then, having resisted Lehman's clarion call, Paulson found himself with no option but to save the world's biggest insurer AIG with an $85bn (£50bn) bailout – later increased to an eye-watering $170bn.

By the Thursday of that week, with Lehman infecting markets across the globe, the British Government had strong-armed Lloyds TSB into rescuing HBOS. Eleven days later, Bradford & Bingley was nationalised.

The following month, the government bail-outs began. The cost has been staggering. Saving the capitalist economic model has topped $9 trillion, according to the International Monetary Fund – a figure split between cash injections, lending guarantees and funding lines. It all started with Lehman."



Try having to pay out on a Deposit Guarantee after BOI and AIB go to the wall.
Anglo should not be regarded as a % of the Irish economy but as a % of the EU one. Take Lehmans at the % of a State in the USA and you are comparing like with like. The central bank is in Frankfurt not Dublin.

Many many banks have failed in the USA, they let them go all the time.
Its normal.

Nobody serious ever advocated a disorganised failure of Anglo and the Leniganophiles always come out with that old chessnut. It should and could have been wound down, the deposits transferred elsewhere and the bonderholders given debt for equity.

Could not have happened you say? That is exacly what is going to happen in Jan 3 years and 200 billion euro too late. A controlled wind down of Anglo and other "banks".


Just too late.
 

goosebump

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Nobody serious ever advocated a disorganised failure of Anglo and the Leniganophiles always come out with that old chessnut.
Another old chestnut is that we should have an 'orderly' wind down of Anglo. This is gnerally stated by people who have no idea how these things work.

Banks cannot be wound down in an orderly fashion, because the banks owners have no control of the flow of deposits out of the bank.

The only way to close a bank is to shut it down, put it into liquidation and fasten your seat belt.

That was the lesson of Lehmans.
 

rhonda15

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So you reckon we might invade Poland some time in the next 20 years?
that's it you're on my ignore list

your posts make me nauseous

what the hell is the matter with you!?

this is not funny anymore
 

vanla sighs

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We no longer have European "partners", the EU is no longer a family, it is a forced cohabitation. Ireland is like like the abused wife who is afraid to leave because she doesn't know where to go. Perhaps at some stage, like the abused and ignored wife, we'll turn around with a knife and drive it into the heart of our abuser. Had we European partners we would have been offered interest repayments at ECB standard rates of 1.5%, not close to 6%. As was mentioned somewhere else this is akin to our own Treaty of Versailles. Had we true European partners we would have been told yes, burn the senior bondholders. There is no solidarity in the EU there is only the illusion of solidarity.
 

Sariel

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Of course interest rates have an effect on the price of a currency. Fair enough, an interest rate won't save a currency that comes under a speculative attack, but there is no way the an Irish currency could be supported with an interest rate of 1%, which is the effective rate that currently attaches to the euro.
You don't support a floating exchange rate currency, that is why it floats relative to other currencies. You can try to support a fixed exchange rate system but you will fail. Japan 0% for years and QE and they have one of the strongest currencies in the world.

This contradicts your other statement that inflation and growth are the only responses to debt.
:? Read what I wrote:

Originally Posted by Sariel
What will that solve? The ECB/NCB buying long dated bonds for reserves. This just alters the maturity profile i.e. it is just a swap of assets nothing more. QE does nothing of any importance ask Japan and soon the US and UK.
QE is the ECB/NCB buying debt in the secondary market and in return the sellers of the debt get reserves in the banking system. It is the same thing as if the governments never issued the debt in the first place. It is not printing money it is just a swap of financial assets.

QE will introduce an element of inflation into the eurozone, and reduce re-financing costs for heavily indebted nations.QE is a stopgap rather than a panacea. At some point, the overriding sentiment will switch from fear to greed, which will makes all our lives easier, and QE could get us there without having to trigger nuclear solutions.
No, it won't. QE is primarily deflationary because by holding down the interest rate you are depriving the private sector of interest on their savings. There won't be this magical switch until the private sector has repaired their balance sheets. QE is not what it is made out to be that is why Ben Bernanke is asking for more fiscal stimulus in the US.

I'm not ruling out some sort of future debt restructuring, but there's a big difference in a euro wide restructuring programme, backed up by the ECB and the EU Council, and a unilateral total default and currency conversion in a small open economy.
The above institutions can't solve this probelm, which has been there since the formation of the euro which is a lack of a fiscal authority to complement the ECB.
 

Expatriot

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Another old chestnut is that we should have an 'orderly' wind down of Anglo. This is gnerally stated by people who have no idea how these things work.

Banks cannot be wound down in an orderly fashion, because the banks owners have no control of the flow of deposits out of the bank.

The only way to close a bank is to shut it down, put it into liquidation and fasten your seat belt.

That was the lesson of Lehmans.

You literally have not a clue what you are talking about.

Well tell that to the ECB, the Irish Central Bank and Alan Dukes. Because from what I understand we are about to start an orderly wind down of Anglo.

Professor Patrick Honohan said officials were working to complete an orderly wind-down as quickly as they could, with a deadline for the plan set for the end of January.

“I think we’re talking weeks. I think a deadline has been established which is early in 2011,” the Governor said.


Read more: Honohan: Anglo wind-down likely in early 2011 | BreakingNews.ie




Almost everything you have said here for the last couple of years about NAMA and the bank bailout has been wrong. It is total nonsense to say a banks cannot be wound down, hundreds if not thousands of banks have been wound down.

There will be no ram raids of ATMS, no chaos and no panic. It will wind down and the deposits will be perfectly safe somewhere else. We could have done this years ago to several of the banks.

You are literally in a situation now where you are calling black white. Within weeks what you say have have said was impossible will have happened. Then what will you say? Will you then attack the bank policy because you are in opposition then?
 

Expatriot

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that's it you're on my ignore list

your posts make me nauseous

what the hell is the matter with you!?

this is not funny anymore
I only ignore people that get personal with the abuse, but I like you am tempted I have to say. This level of rage cannot be good for me.
 

GDPR

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Almost everything you have said here for the last couple of years about NAMA and the bank bailout has been wrong. It is total nonsense to say a banks cannot be wound down, hundreds if not thousands of banks have been wound down.

There will be no ram raids of ATMS, no chaos and no panic. It will wind down and the deposits will be perfectly safe somewhere else. We could have done this years ago to several of the banks.

You are literally in a situation now where you are calling black white. Within weeks what you say have have said was impossible will have happened. Then what will you say? Will you then attack the bank policy because you are in opposition then?
The wind down of the loan book of Anglo will take years and Anglo will continue to exist until that wind down is completed, not as a visible deposit bank, but it will continue to wind down the loan book nonetheless.
 

Expatriot

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The wind down of the loan book of Anglo will take years and Anglo will continue to exist until that wind down is completed, not as a visible deposit bank, but it will continue to wind down the loan book nonetheless.
Are you saying the central bank is wrong?

Anglo will not exist, it is going to close with in weeks. A loan book is not a bank. Spin away, but this is exactly what we called for two years ago. We were told it was impossible to do. Now it is possible.

We were told you cannot transfer loan and depsoit banks etc. Wells its happening. There are still loans from Barings bank on the go, does it stil exist?

There are entities from B&I, maybe I still have an outstanding phone bill from Telecom Eireann. Does it exist?

You sell off or give the loans to some other company and close the bank and revoke its license. Its not free, but its better than pretending all is well.

Bank of Scotland Ireland pulled the plug here a few months ago. I will still be repaying them a mortgage for years. Do they exist as an Irish bank?

No, they wound up their operations.

And Anglo will not be the only one wound up. All things being equal we really only need one Irish State Bank. Park all the other crap in NAMA of the like.

Once something is no longer a bank, we are off the hook for all sorts of regulations. Keeping a bank going is a very expensive operation, running down a loan book is easy.

You have been shown to be uttely wrong throughout this crisis, at least have the honestly to now admit the facts in front of you. Anglo is closing within weeks. What could not happen, what would cost 70 billion is happening. It makes little difference now, but 2 years ago it would have. We still controlled our affairs then.
 

He3

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Are we the first country to make reparations without waging war?

Eichengreen:

The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid.

Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know.
 


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