Ireland formally asks for aid from the Euro zone and the UK and Sweden offer bilateral funds

Yesterday the Irish cabinet met to discuss the Irish financial crisis. This was ostensibly to finalise plans as to the breakdown and composition of the planned 15 billion Euros of austerity that is to take place over the next 4 years. However I would imagine that the main subject would have been the prospect of a bailout for Ireland and the fact that there was no longer any alternative. I mean it was apparent there was no longer any alternative to those who are in charge of Ireland as pretty much everyone else had already reached such a conclusion and I had recommended it in my article of the 19th of September, or put another way some two months before. One of the ironies of the situation is that after their many failings along the way perhaps the most important financial decision was taken in Ireland’s history as a sovereign nation by a group of people who if you look at their recent performance are likely to have been the least well-equipped group to have such responsibility.

The Statement by the Irish Government

The Government today agreed to request financial support from the European Union and the Euro Area Members States. The IMF will also be requested to assist in the provision of support.

In the context of a joint programme EU/IMF, the financial assistance package to the Irish state should be financed from the European financial stabilisation mechanism (EFSM) and the European financial stability facility (EFSF), possibly supplemented by bilateral loans to be negotiated by EU Member States.

EU and euro-area financial support will be provided under a strong policy programme which will be negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB.

The programme will address the budgetary challenges of the Irish economy in a decisive manner on the basis of the ambitious budgetary adjustment and comprehensive structural reforms that will be contained in the Government’s Four Year Budgetary Strategy. Given the underlying strengths of the Irish economy, decisive implementation of the programme should allow a return to a robust and sustainable growth, safeguarding the economic and social position of the people of Ireland.

A central element of the programme will also be to support further deep restructuring and the restoration of the long-term viability and financial health of the Irish banking system. It will build on the extensive measures taken by Ireland to strengthen its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to maintain financial stability of the Irish banking sector at a time the both the banking system and the Irish economy have confronted significant challenges reflecting both domestic and international factors.

The programme will address the potential future capital needs of the banking sector. By building on the measures already taken by Ireland to address stress in its banking sector, a comprehensive range of measures – including deleveraging and restructuring of the banking sector – will contribute to ensuring that the banking system performs its role in the functioning of the economy.

Some initial thoughts on this statement

Those hoping that there has been a fundamental change of heart from the Irish government may well be disturbed as I am by the use of phrase such as “underlying strengths of the Irish economy” and “robust and sustainable growth”. I am afraid that these are not the reasons why Ireland is in such a situation and the real reasons are more like exactly the reverse. Indeed to talk of the measures being taken as having maintained the stability of the Irish financial system appears to ignore the rather inconvenient truth that if events had carried on as they were the Irish financial system was in danger of collapse. Perhaps the worst example of rewriting history here is the implicit mention of the blanket bank guarantee that the Irish government provided in 2008 as something that has helped events. Let me be clear rather than helped it is likely to go down in history as the worst financial decision made by an Irish government.

What will happen next?

The detail available is still somewhat patchy. I suspect that the dithering by the Irish government meant that there was no time to come up with a formal agreement. What we have is a suggestion that the aid will be less than 100 billion Euros, however caution is needed here as the Irish government have underestimated virtually everything as her crisis has developed. Indeed they have done this so often it has felt like a deliberate policy.

The agreement between Ireland and the Troika ( this is the name used for the IMF/European Union/European Central Bank when they operate together)  will be finalised in the next few weeks, which is the time likely required for a full assessment on the state of the banks (that will involve new and more severe stress tests and seems to forget the irony that so far they have proved a failure as a concept as the last set passed Irish banks only in July) and for the European rescue funds to raise the funds/loans in the financial markets.

If we assume a loan amount of 90 billion Euros then Ireland would receive 30 billion from the IMF and 60 billion from the EU/Euro zone if the agreement struck back on May 10/11th is adhered to. It will be interesting to see how the bilateral contributions of the UK and Sweden are incorporated in this. The Chancellor has said that we will offer around 8 billion Euros and an equivalent offer by Sweden would be around 1.5 billion Euros. If this was outside the EU deal then we would be just shy of the 100 billion Euro size established as a maximum by the Irish government. But the detail is very vague.

I have written recently about the fact that I feel that the Euro zone’s “shock and awe” rescue vehicle the EFSF  has quite a few flaws. I first wrote establishing serious flaws in it on the 25th of June and have more recently followed this up on the 17th of November and in the letter I sent to the London Evening Standard. I notice that there has been little confirmation so far that it will be used  and with the twists I have highlighted above the Euro zone may be able to get away without using it so once again the boasts of her politicians are not backed up be any semblance of reality. After all isn’t some shock and awe exactly what Ireland needs?

I wrote about the vehicle that looks as though it will be used the European Financial Stability Mechanism or EFSM  on the 18th November and it too has issues just not quite so many as the EFSF! Accordingly it will be brought into action first and everybody may yet be grateful that the IMF can respond more quickly which is one of the reasons I have recommended in the past that Ireland should go to the IMF. It is also likely that funding from the IMF will prove cheaper maybe much cheaper as the interest rate at which the Euro zone will charge remains mired in confusion ( as it does not know itself it accordingly cannot tell anyone….)

There is an interesting feature of the EFSM in that it will issue bonds which should get a AAA rating as

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

Yes that does include the 9 European Countries that are not in the Euro and I wait to see how this is explained……

What does this do for Ireland?

In the short-term this news is plainly good for Ireland as she now has access to foreign sovereign funding to help bailout her ailing banking system and to support her own national situation. However as time goes by there are dangers in this. If the same “Ship of Fools” to quote  a recent book title remain in charge then we are likely to see more mistakes as time goes by so I feel that real improvement will require a lot of reform and change of which,sadly, there is little or no sign.

In the longer or medium-term there are dangers both for Ireland and for those who will loan the money. The essential problem over this period is Ireland’s solvency which this deal helps only marginally and depending on the interest rate charged may in fact actually damage it. If the package does not lead to fundamental reform then Ireland may be taking loans that she cannot repay to put her in the same situation as Greece. Just to illustrate the difference between fantasy and reality I notice that the Greek government is talking of issuing government bonds again in 2011 just as her situation has taken further lurches downwards.

Financial Markets

These initially took the news well with equity markets rallying although I notice that some of the euphoria appears to be already wearing off. However it is early days. The Irish government bond market has improved by less than one might have expected as its yield at the ten-year maturity has only just edged below 8%.

If we remind ourselves of what happened after the “shock and awe” package was announced back in May of this year then equity markets surged and government bond yields in the peripheral Euro zone nations fell substantially. However around a  fortnight later Greek government bond yields began to rise again. As markets tend to learn from experience more quickly than politicians then Ireland is likely to get a shorter window of opportunity.

The UK’s involvement in helping Ireland

I have expressed my views on this subject in my letter to the Evening Standard which was on Sunday’s article. If we now look at the amounts the UK might be exposed too we get.

1. IMF: Our quota here is 4.94%.

2 EFSM: We are one of the 27 nations which guarantees this facility and the funds it borrows. As some of the 27 are in no state financially to be able to borrow anything our real share grows.

3. Any bilateral aid to Ireland: We will have to borrow this on financial markets and it will is used be added to our borrowings. Our government bond yields have been rising recently and the prospect of us borrowing more is likely to have been a factor.

What Ireland did in 2008: Her blanket bank guarantee weakened UK banks

This feature has turned out to have contributed to Ireland’s current position. However back in 2008 the advent of this bank guarantee was used by Ireland’s banks to poach deposits by UK banks. Let me give you an example of some advertising in the UK by Irish Nationwide Building Society as quoted by the Financial Times.

As Irish Nationwide qualifies under this scheme we now represent the safest place to deposit money in Europe with a AAA guarantee from a country with the lowest national debt to GDP ratio of any AAA country…………Money in these accounts are guaranteed regardless of the size of deposit and represent the best value in the UK market.

Back in October 2008 the FT suggested this.

British bankers said there were already signs that some Irish lenders were approaching corporate and private banking customers in the UK and encouraging them to move their money.

So there you have another objection to our Irish assistance they have not always been the friend that we are now being to them. Back in 2008 they strengthened themselves at the expense of UK banks. These are the same banks the UK taxpayer had to bail out. I repeat again I wish the Irish people no ill but their government has acted to weaken UK banks in its failed efforts to save itself and we should be reminding them of that in my view.

Conclusion

In the short-term this is likely to help Ireland with her problems. Unfortunately as time goes by Greece has not proved to be a good omen because as developments have emerged the aid to her now looks permanent and that is the danger for Ireland that she ends up with ever more obligations that she cannot settle.

There is much to emerge in terms of detail as time progresses but many of the principles established already look worrying to me.

Advertisements

22 thoughts on “Ireland formally asks for aid from the Euro zone and the UK and Sweden offer bilateral funds

  1. Two options: fiscal unification (fat chance!) or break up of Eurozone to EURO categories. Probably three. Category one Germany and its sattelites, curency German Euro, category two France and its sattelites currency French Euro, category three PIIGS, currency Euro (it is a Greek word after all!! at least they keep the name as full!).

  2. This is a disaster its like watching a slow motion train crash how long before Portugal and Spain go (six weeks I reckon). These will break the Eurozone and probably take us with it

  3. Once you start underwriting people’s losses where do you end? Should the Irish have let most of their banking system collapse? Should the UK have let RBS fall?

    Will all these problems be solved by regulation, banks holding on to greater capital and action on bonuses as my MP seems to think?

    • Hi Sean
      The Irish problem essentially results from the decision to give a blanket bank guarantee back in 2008. In itself it may not have proved to have been as disruptive as things have turned out but I think it also led the Irish goverment into a protect the banking sector mentality at virtually any cost which did lead us to where we are now. In terms of the UK I feel that we should have let Northern Rock fail but bailed out retail depositors but of course we did not and are now on another course…

      To your last question I suspect not. We will also have to deal with moral hazard issues and find a way of having a remuneration system which does not reward failure as handsomely as it does now and does have some allowance for risk.

    • Hi Mr.K
      I can give an answer to your past question about how the Irish people are taking this and it would appear that they are taking it much less well than before. This has led I think to the Green party asking for a January 2011 election to which the Taoiseach has just agreed. Let us hope that things stay contained and controlled as seeing a Sein Fein demonstration in Dublin reminded me of some its past handiwork in London, to which I was a witness.

  4. HI Shaun,

    “As markets ten(d) to learn from experience more quickly than politicians then Ireland is likely to get a shorter window of opportunity.” Well I agree that markets used to react to real facts, but it seems to me that they no longer do entirely and have not essentially done so for the last decade or so. This is mainly I feel because financial markets are now so manipulated (as exposed by Max Keiser amongst others); they are manipulated by the financial institutions and by governments, so as to avoid the natural rewards of recklessness and irresponsibility.

    You have in fact made a number of remarks in your blog over the last few months, partially implying these digressions; but I know what you mean of course by your remark today, relative to Ireland’s window of opportunity. Just thought it worth making this point to qualify the inevitable doubt.

  5. The legal premise of the EU loan arrangements is that these peripheral countries are victims of circumstances beyong their control. Nothing to do with their own ineptidude. Does anyone really believe the legal premise? Obviously Mr Osborne does. Not sure the Germans do.

  6. Slightly off topic, Shaun, but did you see Alan Johnson’s article in the Times. It blames the Irish problem on the cuts imposed by the Irish Government. This man is possibly our next chancellor…

    • He doesn’t seem like an idiot, so he cannot possibly believe that. So presumably he’s just telling his voting constituency (being net recipients of state spending) what they want to hear, which is “cuts are bad”.

      One of the saddest aspects of the credit crisis is the exceptionally poor reporting of it and clarity of explanation of events. Thus the general lack of understanding of what has happened and is happening has been further perpetuated.

      This has allowed politicians and others in high office to take actions which are expedient to them in the short term, rather then imposing effective solutions for the longer term.

      The net results will be that the crisis will eventually cost a great deal more, cause much greater hardship, and for that hardship to be distributed much more inequitably than would otherwise have been the case.

      It’s our misfortune to be living through it, rather than reading about it in history books, incredulous at how those people in the past could be so foolish.

  7. This makes me wonder (in earnest) about the longer-term prospects of the Eurozone. I distinctly remember Shaun (and others!) praising the “bravery” and “resolve” of Ireland regarding the budgetary policy they followed, and yet, even though it was largely expected for Portugal to follow Greece, in fact Ireland caught up and used the EFSF first.

    Long-term speaking, myself as a citizen of Greece (and I imagine my stance would be similar if I lived in Ireland, since their political class is sub-standard as well) would favor some sort of integration where our own political class would not decide about fiscal policy… I’d prefer us to be a federal state of Europe in a way, as Germany governs itself with its Bundes-* structure.

    However, admittedly, if I were a French or British or whatever individual, I wouldn’t like offering money and protection to these “weaker links”.

    The possible two outcomes seem to be some sort of further integration (?), or a structured, pre-determined break-up of the Eurozone to .

    I don’t know. It’s a rather unprecedented situation, and I’m not sure what would be best for each individual country. All I know is that it’s been proven quite ambitious to keep a single currency for so radically different economies (and I’m not speaking about Greece per se, Italy, Spain, Portugal, Ireland, and others are not of the exact same formation or standards).

    If I were the EU, and keeping in mind that my next “expansion” wave appears to be in the Balkans (not exactly shining examples of fiscal management, all the countries in the area), I would probably split the Euro in two distinct zones somehow, since I can’t realistically see Albania, Romania, Montenegro, Serbia, etc, attempt to keep up with Germany. It’s already extremely hard, or next to impossible actually, for Greece / Portugal / etc, and they are “a notch above” certain of these countries.

    Anyway. Thoughts, anyone?

    PS: I have decided to remain in Greece for the time being, since the company I work in decided to transfer me to a slightly better position compared to the one I was in…Although I’ll know more when I find out if this move is to my better interest, financially speaking, or not. However, although you’re not supposed to care about this, I will be around a little longer and give you feedback re: developments in Greece / Athens, as I do on a fairly regular basis.

    • Ioannis,

      It’s not often that I reply on this excellent blog and to your useful insights into Greek life and it’s current “Greek Tragedy”, but I feel compelled to reply that I have no wish to see the Euro introduced into the UK, and I see no benefit whatsoever to the Euro, full stop (oh, apart from it’s easier to compare prices when you go on a European holiday. Gee, shame people can’t divide or multiply to convert the prices).

      Why is it people feel compelled to try and fix the Euro problem by suggesting that there’s a two or three tier Euro. The idea is madness. The rest of the World will just laugh, and continue to laugh, at the sheer incompetence of the European Union. How will the Greek or Irish citizen feel when they visit a country and try and change their Euros, only to sneered at by the receiving country, that their currency is the inferior kind, and to be offered an inferior rate, when the German behind them will be given a preferential rate?

      The European Union is a bloated whale, slowly beaching itself. I like Europe, I like being part of the European continent, but I am not in favour of this continuous integration. Please, let’s get back to basics and something similar to the 1972 Treaty of Rome. Ah, they were the days!

      • Robert,

        Having stayed in the UK for 4 years whilst studying there (and I must say that, while the British culture is markedly different compared to South European countries, I do tend to admire it in many regards, and definitely not sneer at it), I have seen first-hand the love of the people for the £, and their rightful claims regarding the (non) necessity of the Euro.

        However – When viewing things from a “weak currency” viewpoint, as most of South Europe does, things start getting a little weird.

        I will admit, openly, that back in the Drachma era, a 10,000 note (roughly equivalent to 30 EUR) was more than enough to have a night out, that included for instance, food at a restaurant, cinema, drinks, transportation…

        …Today (although we’re talking several years later, but still), the equivalent of 30 EUR isn’t nearly enough to do all that, at least in Athens.

        On the other hand – Buying a TV or other imported equipment in the Dr. era was quite a feat, while today the prices are quite lower than they used to be.

        The same goes for other costs linked to the international economy, of course.

        Now, if you ask me “Would you like to be able to spend your money more efficiently in day-to-day life, and be *forced* to save up to buy imported / tariff-laden goods?”, I would probably answer yes, because I don’t buy a new TV or cellphone every year, while I have to eat 365 days a year.

        Still, unfortunately, the Euro doesn’t appear to be something you can easily get out of. Weakening it, makes Germany (mostly) look weak, although it’d be a bliss for the European south.

        Printing money (QE) with it, means to weaken it, look above for the reason this cannot happen.

        Dissolving it, seems unprobable at least under the current German administration, who views the currency as the “DM MK. II”.

        Screwing the weaker countries for a “core” to profit? Yes, this seems the general idea so far.

        I don’t know. Again, I do believe many things have been done the wrong way in Greece and other countries, but it’s not like everybody else is doing fine at the moment. The situation has many shades of gray – From black-ish (southern countries & Ireland), to plain gray (large part of EU), to almost white (northern countries).

        I don’t see an easy way out of this, disregarding the political issues present as well.*

        *Which reminds me – Whenever Shaun tends to ask “Why doesn’t X country ask for help from the IMF, and stall things?” the obvious answer is “They’re not allowed to. It’s either EFSF or doom. Europe cannot be underhanded”.

        We’ll see. I value your opinions very much, and hopefully mine do tend to make you think about a couple of things.

        Have a nice afternoon!

    • Hi Ioannis
      I just wanted to say thank you for your previous offer and that I did not miss it. I am aware that I could organise this blog in a better way and will be in touch although in the short-term I am not sure when it will next be quiet. As I wrote today I expected Ireland to get much less of a honeymoon than Greece from the bailout but not necessarily quite this quick!

    • I want to add that I also find your comments about Greece really insightful.

      As for the two tier EU, I could see that happening. By excepting all the countries recently it has lost its high standard. So for example extradition treaties should not be EU wide as some courts may be corrupt. You could join together a subset of the EU and in this case have stronger extradition powers.

  8. Robert,
    It might be surprising for you but for Greece, EU and Eurozone and whatever further integration has never been about money and economy, reform or whatever it has always been a matter of security and survival since our neighborhood is rough and Greece turbulent history ascertains and this has not changed a bit. On the contrary, the challenges still remain and Greece neighbours are becoming more threatening. The are dog-fights between Greek and Turkish F16s every day. There is a clear and official threat of war by a NATO member (so NATO does not cover us). Turkey wants to share 50-50 something that does not belong to her more than ~10% (Aegean sea). Turkey still occupies a big part of another country. The 1972 Treaty of Rome has to do with trade. This does not cover Greece’s territtorial anxieties at the slightest. If EU fails, strategic partners of Greece will be dictated by security issues and it cannot be anyone else than Russia. This is perceived a threat for US interests in the region and will try its best to keep Greece within Europe financially, politically etc. The main three problems of Greece have always been (the last several thousands of years at least) location, location, location. There are problems of economy but one should not forget (although at the background currently) geopolitical factors.

    • Basil,

      Are you saying that Greece joined the European Union (EU) just so they could be protected from Turkey? If you are, then what happens when, and if, Turkey joins the EU? Then my prediction would be that the EU will have to try and arbitrate between the two, with, God help us, the possibility of another war. And with both countries being part of Nato, they too, would probably be asked to arbitrate, too.

      So, getting back to economics, all I really want to see is every EU country being independent and for the EU to act as a trade body, no more, no less.

  9. What I am saying is not a secret in Greece. Number one issue is to protect the territorial integrity in a very volatile neighbourhood. What I am also saying is that joining the EU might mean different things for different countries. For UK might be trade, for Greece this is not so important. It is far more important to be within unions that Turkey does not belong so that it can use them (to put it blantly) to protect her from aggression. I am not saying something new, the Greek official position for Turkey’s EU membership is very positive provided that it respects the borders of other already members and withdraw the threat of war and become a good neighbour. It is not sinister, it is trying to get some geopolitical advatages. If Greece goes out of the EU, or EU is desolved, this will be the real problem for Greece, the geopolitical disadvantage that it will entail, not the money. This is the real reason that it will put up with all sort of demands and austerity to remain in the heart of Europe, i.e. in Eurozone even if financially it is not in her benefit. How would you feel if you lived next to a country 10 times stronger than yours with an official casus belli, with almost daily overflights over Greek islands, of disputing openly the status over thousands of islets in the Aegean? Imagine if you lived in the Aegean sea with this threat over your head all the time and you know that you are minutes away from a possible invasion. Trade is not the priority, survival is the priority.

  10. Wow Basil.. most interesting perspective. We in America hear none of these war games. But most here are aware of the historical enmity between your two nations. FWIW, when I was in the Navy, I became aware that us and the Russians played these war games routinely, and so it might not be as threatening as you imagine.

    • My Sentiments Exactly. It took me time to get over the longest blue helmet mission being inside the EU.(Cyprus)

      Has/when did Russia stop its war games? I guess you mean it continued after topgun era.

  11. In my article entitled Stocks Slip On Fears Euro Crisis Will Spread, On China Bank Tightening And On Basel III Accords, I write …Ireland and its banks receive seigniorage bailout from The EU, IMF, and the UK establishing a region of global governance that now includes the United Kingdom … Jean Claude Trichet, Dominique Strauss-Khan and David Cameron are now Ireland’s sovereigns and seigniors. Their supranational budget rules impose regional global governance, specifically economic governance, upon Ireland. The bailout clearly constitutes fiscal federalism, and unifies not only Ireland, but the UK into a European region of global government. This is simply part of the vision of the Club of Rome in 1974, when it called for the creation of ten regions of global governance. Ireland’s budget is now directed by others from outside and means more internal devaluation, that is more austerity.

    International Monetary Fund chief Strauss-Kahn, in a speech at the European Banking Congress in Frankfurt, Germany, spoke of sovereign crisis. The crisis is now held in abeyance, it has not been abated,

    The issue is that people participate in a currency union where there are different interest rates, cultures, trade account balances, and labor rates, as well as known and unrevealed debts; history shows that currency unions usually fail.

    In as much as Mr Strauss-Kahn says there is a sovereign crisis, I believe a sovereign will arise to address the crisis. And I also believe this leader will be complemented by a seignior, an Old English term meaning top dog banker who takes a cut, and that he will provide seigniorage for all the people, and pave the way for a global currency system, to replace all current currencies as they expire in the current bout of global debt deflation that commenced that November 5, 2010, when the currency traders sold most of the world’s currencies, as the bond vigilantes sustained the Interest Rate on the US 30 Year Government Bond above 4%, causing the US Dollar, to rise to 76.59; it closed even higher today at 78.64

    Evidence abounds and is clear, cogent and convincing that fiscal seigniorage is failing. As the end of credit approaches, then the Government, will be the sole credit seignior: it will be the first, last and only provider of credit.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s