A recommendation concerning potential UK aid for Ireland and more fiscal pain for Greece

I would like to start today’s article by thanking those who congratulated me on my first blogging anniversary. I do appreciate it. Also there were a few new contributors that I did not have time to personally welcome so I would like to do so now. As to events yesterday and overnight we have seen a continuation of the dance between Ireland’s politicians and those of the Euro zone with a slight weakening of the Irish position and the use of the word “might” in connection with an aid package by Ireland’s Prime Minister. This was reinforced by a radio interview given by Irish Central Bank Governor Patrick Honohan who said that the final decision was up to politicians but that he expected a “very substantial loan” as part of an EU-backed bail-out and that it would amount to “tens of billions” of euros.

I would imagine that real negotiations are currently taking place as the same troika that visited Greece namely the European Union,European Central Bank and the International Monetary Fund have now arrived in Ireland. This leaves me with two initial thoughts. The first is that figures of authority are often talking about global warming and suggest teleconferencing and use of technology as a possible aid to this and yet they seem to fly all round the world and rather than one organisation we actually get three of them flying to Dublin! The other is there is the implication that the ECB,EU and IMF do not trust each other, otherwise they would not be looking over each others shoulders.

The European Financial Stabilisation Mechanism

You may not have heard this title before but it is the name for the 60 billion of loans or aid that can be provided by the European Commission. Let us take a look at it.

Under the EFSM, the EU provides support to EMU member states experiencing difficulty caused by exceptional circumstances beyond their control (Article 122 Treaty).

Also we get an answer as to who provides the funds.

Borrowings are direct and unconditional obligations of the EU and guaranteed by the 27 member states

and the speed with which it can operate.

Process expected to take about 5-6 weeks.

So there you have it the EU has set up an assistance mechanism that is even slower than that of the EFSF which is quite an achievement and it will involve the 9 nations who are in the EU but are not involved in the Euro project. I have to confesss that even I did not believe that we would see this level of incompetence and apologise for implying previously that this mechanism might be faster than the EFSF. Thanks to Barclays Capital and the FT’s Long Room for the information here.

The UK and aid for Ireland

I have written a letter to the London Evening Standard on this subject and hope that it gets published. I have copied it below.

Dear Sir/Madam

 
I have been following the development of the crisis in the countries who are in the Euro project for some time. As an economist I stayed up until gone 2 am on May 10/11th to watch and listen to the Press Conference of Euro zone ministers describing their “shock and awe” rescue vehicle for countries in the Euro who suffered in future from the problem that Greece was then suffering from. At this time they made all sorts of boasts about what their plans would achieve.
 
If we now go forwards six months to today we find the Euro zone again mired in uncertainty over the fate of Ireland and Portugal. I would like on behalf of Evening Standard readers to ask those Euro zone ministers what happened to their boasts and claims from that and subsequent days? Furthermore my contention is that their main vehicle for recovery the European Financial Stability Facility or EFSF is so flawed that they do not want to use it.
 
Now we find the possibility that the UK will be dragged into the rescue plan for Ireland via a different European Commission fund. This has two implications. Firstly the then Chancellor Alistair Darling committed us to a project at a time he was denying it and secondly that we are being dragged into support of the Euro project when we have nothing to do with it.
 
I wish to make it clear that I wish Ireland the best in difficult times but in my opinion the Euro zone should solve  its own problems. Back in 1992 when the UK was in trouble nobody helped us.
 
Further Thoughts
  
I wish to make it clear that these are not my full thoughts but simply what I thought might get published! As regards aid to Ireland then there might develop quite reasonable grounds for the UK to help out and I wish to repeat I wish Ireland well. But at the moment it looks as though we in the UK are offering the Euro a type of implicit bailout and this involves a large moral hazard. This particular moral hazard involves politicians and officials in the Euro zone who have boasted and boasted about their “shock and awe” package. Mostly this invoved the EFSF which they now seem rather reluctant to use which is strange as it is the major part of the package and is Euro based.
 
The Euro zone with its combined resources has plenty of funds to help Ireland if it wants to and can agree on it. I was also working in a Treasury Department of a Merchant Bank in the days when the UK was ejected from the Exchange Rate Mechanism in 1992 which was a time that the Duke of Wellington might have called a “Damn’d hard pounding “. I remember us being left to sink or swim on our own and do not remember anyone helping us much and whilst I do not agree that we should return the compliment I do feel that we should remember that.
 
Greece’s fiscal woes continue
 
Today Greece will announce a new budget. The reason for this is that the revisions to Greek statistics produced by Eurostat that I discussed on the 16th of this month have had implications for the numbers going forwards. Higher past budget/fiscal deficits and a higher national debt affect future forecasts and figures. In essence she is starting from a worse or inferior position.
 
If the Greek government doubted that a new dose of austerity would be necessary then the threats to withhold aid that have eminated from Austria will have reminded it. Also members of the ECB Governing Council have joined in the debate pointing out that new measures will be required. The fundamental problem with this is that the Greek government and the EU have been telling everyone that things have been going so well! In truth as well as the revisions there has been a shortfall in revenue/tax collection too which has two possible causes, the first is the Greek problem with revenue collection as highlighted recently by Michael Lewis in Vanity Fair magazine and the second is that the economy is under-performing. Personally I suspect the problem is down to elements of both.
 
We will have to see how the Greeks take this latest dose of bad news that is likely to involve around 4 billion Euros of further austerity. I suppose that as already been pointed out those who support their national football team at least start today with a smile on their faces, and there is particular irony in that the opponent was Austria. I guess probably many of you are thinking that after last night the author of this blog cannot take such pleasure from his own team and you would be right. But in something which is a theme of our times the institution in charge the English Football Association pays a man £6 million a year to manage this according to press reports and recently saw fit to extend his contract.So yet again the more you get paid rather perversely the less responsible for results you seem to be which directly contradicts conventional economic theory.
Inflation
 
There have been quite a few developments on this front recently and with so much going on elsewhere I have prioritised and if not ignored them I have not written about them yet. So apologies for that but I have not missed or forgotten them, in fact quite the reverse as there have been important developments. They do deserve a full update in themselves and I will publish my thoughts either later today or early tomorrow.
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23 thoughts on “A recommendation concerning potential UK aid for Ireland and more fiscal pain for Greece

  1. I suspect that it has been explained to George Osbourne that any even partial default of an Irish bank cannot be handled by Lloyds and RBS. They would need further mega rights issues to bolster capital ratios,most of which would be paid by HMG. So signalling strong strong for Ireland is in our self interest.

    Or to be more blunt we have a gun held to our respective heads.

    • Hi Andy
      In principle I agree entirely except that we are not being told anything like that. For example in recent weeks many parts of the mainstream media have been reporting that the bailouts of the UK banks had gone so well that they could be sold-off soon. I could almost imagine the chorus of “well-dones” and applause all round which came with this. I heard a financial journalist advancing this view on the radio only on Tuesday evening.

      Yet suddenly on Thursday there is the implied view that there is danger of a collapse again….. I think that there are a lot of implications from this which is one of the reasons I wrote my letter. Over this period virtually no facts have changed.

      • Hi Shaun,

        “Over this period virtually no facts have changed.” Well, yes, but some pertinent facts have changed? For example it has been announced that rather than following the much trumpeted “CUTS” and despite increased tax revenues, government borrowing has increased again! See http://www.ft.com/cms/s/0/fb70adce-f301-11df-9514-00144feab49a.html#axzz15dcLvqm6 . If this is the Lib-con government’s idea of making “cuts” then we should shudder if they propose any further increase of government spending, such as Osbourne is now doing with the UK contribution to the Irish bailout!

        Modern politicians do not seem to understand algebraic summation. To balance a budget, when you are already overspent, it is necessary to make real CUTS in expenditure, not to continue to increase overall spending! Unless you can master that principle then there is no hope. So I feel that here we do have significant facts which have changed, affecting the overall UK position?

        • Hi Drf
          I was trying to make the point that suddenly we appear to have gone from being told how well our banking system had recovered in the UK to be implicitly threatened that it could come under real pressure again. So those that were making such contentions about the UK banking system, and there were quite a few, need to explain themselves I feel. This is because it was known that the Irish banking system was in trouble and that parts of the UK banking system were heavily exposed to and in Ireland.That is the point I was trying to make that the fundamental trends were there previously rather than saying that nothing at all had changed.

          It had come to my attention because I had heard a so-called expert assert that very point only on Tuesday evening and I thought that we are back to 2008. By that I mean attention suddenly switching from declared profits to worries about banks balance sheet which provoked the immediate question, what was learnt from the events of 2008? And then will the bank profits of 2010 disappear too?

    • Andy -“Or to be more blunt we have a gun held to our respective heads.”

      Gun or no gun we have no choice in the matter. Once again Im told we are to bail out banks via my taxes. It disgusts me! All the more so because this time the UK Govt sees fit to use UK taxes to bail out Irish banks (after all its not the Irish Govt that needs the cash) in order to once again save the TBTF UK banking system.

      It IS NOT in the UKs interests to signal strong support for Ireland. It is purely in the UK banking sector that those interests lay. Pain today or pain tomorrow.. like it or not that pain is coming and no amount of bailouts or support mechanisms can keep it at bay forever. The bailouts merely transfer that pain from the banks to the taxpayer in the short to medium term. Like Shaun, I wish the Irish no harm but my fear is that in assisting in the bailout of Ireland’s banks the UK govt is setting a dangerous precedent when it comes to dealing with the rest of the EUs problems.

      The UK stayed out of the Eurozone in what may be thought of as the “good times”. Now it seems we are to take the punishment during the “bad times” whether we like it or not. How I wish we still had Maggie Thatcher as PM. I know what she would have said to the idea of the UK bailing out Europe! Funny thing is I didnt agree with anything the woman ever said when she was in power =)

      Cheers for the blog!
      Zak.

  2. As far as I am aware macroeconomics does not have an “Efficient Bailouts Theory” though the way things are going I suppose such a field might arise in the next few years. In the meantime I wonder if we can throw one together from the existing concepts and perhaps try for a bit of insight into how one should or should proceed with a bailout. Even if a bailout is “wrong”, if it’s going to happen anyway then surely there are “less bad” ways of accomplishing the desired goals.

    For the sake of argument let’s suppose that it is necessary and desirable for Britain to protect her deposit taking banks (or the ECB hers) from being destroyed as a result of their holdings of Irish/Greek/Portugese/etc sovereign debt or bank debt. If this is what is really at stake and not the rescue of the troubled sovereigns/banks per se, perhaps bailing out the Irish government or banks is not necessarily the best way of accomplishing this goal. Could it be better (more efficient, less risky, etc) to instead allow the Irish government or banks to default or restructure as needed and then more directly apply bailout efforts to those entities deemed necessary to protect (e.g. retail UK banks, to live up to the government’s deposit protection obligations)? Perhaps it would be mutually advantageous to provide assistance to make the default/restructure process an orderly one and not panicked, but that is qualitatively different from offering assistance to attempt to prevent the default/restructuring.

    If there is to be an Efficient Bailouts Theory “EBT” might it produce idealized conclusions in a manner similar to the Efficient Markets Theory “EMT”? Just as the latter produces an idealized conclusion that risk weighted returns become equalized as a result of arbitrage in large liquid markets, perhaps (if I had to guess) an “EBT” might produce conclusions such as:

    – emergency loans can fix liquidity problems
    – emergency loans have (at best?) a neutral effect on solvency problems in the short term, medium term and long term.
    – bailouts narrowly delivered directly to rescue targets are cheaper, less risky, and less distorting to the economy at large than bailouts directed “upstream” of the target

    If we’re not willing to go the “no bailout” route, could we at least please try to make the bailouts that we do make be as cheap, effective and non-distortionary as possible?

    • “…….allow the Irish government or banks to default or restructure as needed and then more directly apply bailout efforts to those entities deemed necessary to protect (e.g. retail UK banks, to live up to the government’s deposit protection obligations)?”

      This does seem far more sensible but of course will never happen due to politicians having to then sell it as a bailout of UK banks. Better to blame it on those foolish Irish politicians and tell everyone our banks are solid as a Rock!

    • A longtime lurker finally speaks –

      Something like the Icelandic approach, in fact?

      The pros and cons would be well worth debating – what do people here think?

  3. DanielC: In my amateur opinion, the amounts of capital needed for such a plan would be enormous considering that Greek and Irish Foreign Debt amount to about $1 trillion {much of this to extremely overleveraged banks}, nevermind the $300 billion in CDS’s on just Greek debts. Then we come to banks outside the EU which are involved. If your plan is to have the ECB simply print the amount, you run the risk of seriously debasing the currency, which in turn could seriously effect interest rates, which in turn could send other states over the edge. It’s a very delicate rope they’re tip toe-ing on.

    • I am yet to see a sensible argument as to why CDSs exist in the sovereign and banking debt areas when it seems impossible to let them do what they are meant to do (rather than acting purely as a money making trading exercise in their own right)?

      Are there any good explanations out there (that the amateur can understand)?

  4. Shaun,
    I remember you claiming not in the very distant past that the honesty of Irish paid off and the Greek cooking of the books has not. I am now reading many comments about the corruption and chronism of the Irish system. I had claimed from the very beginning of this (having lived in four countries including the UK and Greece) and I continue to claim that all countries all over the world have cooked the books (including Germany) and their system is far from being honest. I have seen corruption everywhere. The worse cases were not in Greece but in the UK. It is just the unfortunate ones that fail one way or the other (I do not deny the calpability of the Greek politicians to do such excessive borrowing) that they are scrutinised and exposed. The system involves corruption, chronism etc. because it is only human. In my opinion, there have been bad decisions, but to say that the corruption and dishonesty is in the heart of this crisis is plainly wrong. The best player might be the most corrupt of all.

    • Hi Basil
      I completely agree that there was a period where I was misled by some of Ireland’s behaviour and I apologise accordingly. The only defence I have is that this is the way it appeared at that time and as soon as I realised that the situation was different I have written regularly about the way that cronyism has affected Ireland.
      Is there a country which is clean in this regard?Well if there is I do not know it! It is not a good state of affairs at all.
      You have provided an interesting thought about why someone might appear the best player right now. I will mull that one over as actually I need to start with who is the best player?!
      I do still hold to the view,however, that corruption and dishonesty have been driving forces in the world’s problems and that part of a solution to our problems is to set about ending them. I do not pretend that it is an easy task.

    • I totally agree with this Basil. Personally I am on country 6 and so far none has been worse than the UK (though some are more creative!). In particular, the example of our MP’s and their devious wealth creation schemes, long suspected but only recently confirmed, will recalibrate the scale for widespread abuse of power and cronyism. Not that we are the only ones at it, but we are one of the few who pretend we don’t do it.

  5. The ECB is totally split after this, the French and meds wanting to print money and bail out until inflation bails out the debtors whilst the Germans want hard money policies. The Germans hold all the cash so how long before they pull the plug? Is it when Spain goes cap in hand or when Italy does.

  6. Hi,

    Returning to HIGNFY: Hislop had to shoe horn the Irish debt into the programme, kudos for him for that. How a satire programme was able to miss it out is amazing. They even had a shot of the Mansion House speech but didn’t mention that speech either.

    Keep us informed about any reply to your letter.

    Regards
    Fletch

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