Former Chief Economist at the IMF says G7 Must save Ireland

Simon Johnson wrote:

European CDS have been relatively stable - albeit at dangerously high levels - for the past month or so. But now Ireland has moved up sharply. My point today is simple: A key warning sign just moved from orange to red. The G7 ministers of finance and central bank governors need to focus on this problem during their discussions today and tomorrow. What is the strategy for Ireland? Does the European Union come in to help? Is this a job for the IMF? Just don’t, please, tell me more about the “basic principles” of financial reform (and similar nostrums in the draft communique) unless and until you have addressed the Irish Problem. And don’t tell me, “the Irish have to sort this out for themselves.” Eventually, the world always comes to help; check your notes on Iceland. It’s much better and much cheaper to come in early and decisively - of course, the Irish will have to do some painful things, but we really can help (or, if we can’t, this will be a long dark winter for the eurozone). We need a plan of action for Ireland, and we need it now. What we don’t need is another Iceland-type situation.

Ireland is the green line on the graph:


Today's Sunday Times reports:

Quote :

The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every €100 of debt it would cost €3.50 to insure against default. A year ago it would have cost 10c to insure every €100 of Irish debt. Insuring Greek debt against default costs about 250 basis points, while Italian debt insurance costs about 170 basis points. UK debt insurance, which has also spiked considerably, costs about 150 basis points.

Debt-market experts said any potential debt default in Ireland was still considered to be a long way off, but the problem would have to be addressed at some point.

One strategy being discussed by analysts as a possible solution would see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank.

“I don’t expect Ireland to default, but it’s clear that something has to happen,” said one credit strategist at a large investment bank. Fears of sovereign default are rising around the world.

The IMF has warned that its pot of emergency funds to bail out troubled economies could run dry within months.

I will translate this financial jive talk for you.

"Look it is becoming obvious that the Paddies are getting less likely to be able to pay those fucking bonds that we bought off the bastards. We could be facing a loss of 90 billion euro because these donkeys are flat broke. Lets get the ECB to buy this junk so that we get our cash. Listen lads it has been shown often enough that the Krauts are just as stupid so we will pretend that they are buying. We will have our 90 billion and we can tell the thick micks that we bailed them out and they being gobshythes will never figure out that they bailed us out instead."

That JohnFas is why central banks were set up.

Youngdan, that is a depressing if devestatingly accurate translation you have given us. Ireland has enormous credibility problems internationally and nothing short of a wholesale clearout of thre entire domestic banking system, the imposition of a foreign-designed financial regulatory systen and radical political reform can save it.

Are the wee chicks finally coming home to roost? Have the govt been keeping the option of international financial intervention in the back of their minds as they dithered during the financial deterioration? Stay tuned.

First of all, the Irish govt's debt (i.e. tax-payer's debt) is a sovereign problem. While we do have to keep within certain defined EU fiscal guidelines, we alone as a nation are responsible for our economy and its fiscal policy. I findly it slightly amusing to think that anyone believes the German govt is going to pony up billions to solve Ireland's problems. First of all, the EU stimulus money circulated in Ireland during the early 90's(?) was with the proviso that it wouldn't happen again. Secondly, the blanket guarantee for banks issued by the Irish govt wrong footed Merkel and the German finance ministry very badly and forced their hand on several issues. We didn't make any friends and may have made some nasty enemies.

The problem for the EU is more concentrated on what happens to the Euro if Ireland were to default on its debt. Personnaly, I believe this worst case scenario to be very, very unlikely. The situation seems, however, to be sending jitters through the investing community - hence the CDS spreads.

The long term ramifications will be interesting. First of all, the ECB works along the lines of decentralised responsibility. (Just google ECB and you be presented with reams of info.) That is why we are solely responsible for the domestic regulation and oversight of our banks and those foreign operations who choose to do business here. I'm sure there are common policies which have been endorsed by the ECB board, but the day-to-day oversight is our responsibility. The question is whether sovereign govts are willing to relinquish more financial sovereignty to the ECB with regards to regulation and oversight. I'm guessing that this would be a neat little way in which the investing community could be assured that the ECB and not the Irish govt will have final say on regulation, and possibly fiscal responsibility. Of course, on the fiscal side, the ECB might want a Brussels auditing team to come in and clean up the govt's books and by extention the Irish banking fiasco to assure investors.

There's only one fly in the ointment. The entire world banking structure is under scrutiny and regulatory features may change radically, and the investing community knows this. Part of the problem is that the Investing community wants to continue to do business in the "normal" way but with enhanced gaurantees, and at the same time with no regulatory hinderance on how business is conducted. As the saying goes, they wants their cake and they wants to eat it when they choose - enhanced gaurantess with high interest returns. Happy days. Maybe Ireland will become a test case. Any solution will come with strings (ropes, chains, shackles?) attached.

I think what Dan is alluding to is that no one is going to come in and take our debt over and we get to walk away scot free - such suckers are rare on the ground these days. The big boyos, that is the ones who lend money, are only worried about getting their money back with interest. They want better gaurantees, full stop. I can't forsee anyone writing a big blank cheque for Ireland. Too many people have made mega-fortunes in Ireland and the country is actually awash with cash. No, the Irish people, I would surmise, will be paying for this fiscal hangover for decades to come. There wasn't a free lunch (for most) during the boom and there won't one (for most) during the hangover. I'm just wondering if the present govt isn't too fond of the "hair of the dog that bit yee" cure for the old hangover.

Some related links and interesting points here at the Sunday Times

http://business.timesonline.co.uk/tol/business/economics/article5733723.ece

Quote :

Pledges made by Ireland to support its banking sector amount to 220% of the country’s annual economic output. The total loans held in Irish banks are more than 11 times the size of the economy.

Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve.

With Ireland set to borrow an additional €15 billion (£13.4 billion) this year, the national debt pile will hit €70 billion.

The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every £100 of debt it would cost £3.50 to insure against default. A year ago it would have cost 10p to insure every £100 of Irish debt.

The idea that the Germans will want to pay up when they are in recession seems mischievous. If Ireland defaults, Greece, Spain and Italy might be lining up behind us.
Also, an Irish default would be a bomb going off in banks across the europe and would be a body blow to the Euro.

Difficult to see how it can be avoided though and the IMF deflationary solution would make it harder, not easier, to repay national debts.

Ireland does not have a problem. The people with the problem are those owed the 90 billion. They are to be bailed out not the Irish people. Why is this so difficult to grasp.

youngdan wrote:

Ireland does not have a problem. The people with the problem are those owed the 90 billion. They are to be bailed out not the Irish people. Why is this so difficult to grasp.

Indeed, it shows that people are basically herd creatures and don't like to create problems or question. We can be glad we are top of the evolutionary tree because if we were not we could be selectively bred and within a few generations would be as docile as sheep.

youngdan wrote:

Ireland does not have a problem. The people with the problem are those owed the 90 billion. They are to be bailed out not the Irish people. Why is this so difficult to grasp.

When Iceland looked like walking away from its debts and liabilities, the U.K. used anti-terror legislation to freeze Icelandic assets in the UK. This turned crisis into disaster for Iceland and led to total financial collapse.

http://news.bbc.co.uk/1/hi/uk_politics/7688560.stm

When Henry VIII defaulted on loans owned to the Lombardi bankers, he had the backing of a good navy and army, and plenty of wealth taken from the Church.

If you want to default, you need to be armed to the teeth. The best chance would be to default, nationalise the lot (industry, land, natural resources) and call on the populations of other indebted states to do the same in solidarity.

youngdan wrote:

Ireland does not have a problem. The people with the problem are those owed the 90 billion. They are to be bailed out not the Irish people. Why is this so difficult to grasp.

And who the feck do you think is paying the cost of stabalising the Irish banking sector so the 90 billion can be paid? We, the Irish people, just forked over 7 billion and that ain't the end. Read some of the clauses in the 7 billion give away - forebearance of payment, roll overs. etc. The investors are worried that we're just putting the problem on the long finger in the hope that everything we turn around quickly and we'll start selling houses to each other again. We, the Irish people, have inceased borrowing costs due to the blanket gaurantees given on our behalf. Our falling tax intake due to the absurd over reliance on housing speculation is adding 10's of billions more in borrowing. If the Irish people, for the near term anyway, aren't in a jam, I don't know who is.

Why is this so difficult to grasp?

The people who are owed the vast majority of the 90 are rightly worried and want enhanced gaurantees, and the want their high interest rates also. They have the Irish people just where they want them. Ireland's involvement in the Eurozone is tantamount to a gaurantee of payment on the 90 billion. The ECB will have to intervene if things really do go arse over tip. The Irish people will have to work longer and harder just to maintain their current lifestyles, let alone try and advance as they pay for yesteryear's follies far into the future.

Tbh, as I didn't indulge in the housing frenzy and lead a frugal lifestyle, I really don't give two fucks about the 90 billion and those who are owed.

However, as I live and pay taxes in Ireland, I really don't have much say. The integrity of Ireland's financial structure, including the insurance business, has been questionable for some time. While the tax intake was healthy, we could afford the normal chinchancery that has plagued internal Irish buiness dealings for decades. The investors owed 90 billion will get their pound of flesh in knowledge that Ireland's dodgy financial past will more than amply reward them in terms of interest return than they could hope to make on many other investments.

[quote.

I think what Dan is alluding to is that no one is going to come in and take our debt over and we get to walk away scot free - such suckers are rare on the ground these days. The big boyos, that is the ones who lend money, are only worried about getting their money back with interest. .[/quote]

No sucker will buy the debt and nobody is talking about leting the Irish walk free. They are not being bailed out.

rockyracoon wrote:

youngdan wrote:

Ireland does not have a problem. The people with the problem are those owed the 90 billion. They are to be bailed out not the Irish people. Why is this so difficult to grasp.

And who the feck do you think is paying the cost of stabalising the Irish banking sector so the 90 billion can be paid? We, the Irish people, just forked over 7 billion and that ain't the end. Read some of the clauses in the 7 billion give away - forebearance of payment, roll overs. etc. The investors are worried that we're just putting the problem on the long finger in the hope that everything we turn around quickly and we'll start selling houses to each other again. We, the Irish people, have inceased borrowing costs due to the blanket gaurantees given on our behalf. Our falling tax intake due to the absurd over reliance on housing speculation is adding 10's of billions more in borrowing. If the Irish people, for the near term anyway, aren't in a jam, I don't know who is.

Why is this so difficult to grasp?

The people who are owed the vast majority of the 90 are rightly worried and want enhanced gaurantees, and the want their high interest rates also. They have the Irish people just where they want them. Ireland's involvement in the Eurozone is tantamount to a gaurantee of payment on the 90 billion. The ECB will have to intervene if things really do go arse over tip. The Irish people will have to work longer and harder just to maintain their current lifestyles, let alone try and advance as they pay for yesteryear's follies far into the future.

Tbh, as I didn't indulge in the housing frenzy and lead a frugal lifestyle, I really don't give two fucks about the 90 billion and those who are owed.

However, as I live and pay taxes in Ireland, I really don't have much say. The integrity of Ireland's financial structure, including the insurance business, has been questionable for some time. While the tax intake was healthy, we could afford the normal chinchancery that has plagued internal Irish buiness dealings for decades. The investors owed 90 billion will get their pound of flesh in knowledge that Ireland's dodgy financial past will more than amply reward them in terms of interest return than they could hope to make on many other investments.

Exactly. I am the one advocating that the correct course of action is default. But instead ye are going to accept the massive shafting

Slim Buddha wrote:

Youngdan, that is a depressing if devestatingly accurate translation you have given us. Ireland has enormous credibility problems internationally and nothing short of a wholesale clearout of thre entire domestic banking system, the imposition of a foreign-designed financial regulatory systen and radical political reform can save it.

We might disagree on what to do later but firstly the bond holders and banksters must get the shaft, not have them bleed the country dry