Only solution is for Ireland to leave the euro

kaymin · 14-02-2010 3:14pm #1

Leaving the euro is the only way we will emerge from recession for the following related reasons IMO:

a) there is too much opposition from the unions to sufficiently reduce our general wage levels
b) inward investment will continue to fall due to high cost of doing business here resulting in increased unemployment
c) domestic demand will remain low due to high personal debt and unemployment preventing any kind of domestic driven recovery
d) export driven recovery won't happen because our costs are too high resulting in the price of our produce being uncompetitive on international markets.
e) unemployment will worsen our fiscal position preventing Ireland (due to pressure from lenders for Ireland to balance the books) from stimulating the economy through increased spending
f) higher interest rates in Euroland will be a barrier to a recovery in Ireland since we will be one of the last to emerge (if we ever do).

It's a vicious circle that is almost impossible to extract oneself. The solution is to leave the euro imo - consequences are:
a) Immediate reduction in cost of doing business here resulting in increased inward investment.
b) Cost of exports are immediately lower resulting in increased demand on international markets for Irish produce facilitating an export driven recovery.
c) Cost of imports will be too high favouring domestic producers thereby boosting employment in Irish companies facilitating a domestic driven recovery
d) We will be able to keep interest rates low until we've properly recovered.
e) Should solve the public versue private sector debate though we still need to make the public service more efficient

Problem with this approach is our (Ireland's and our personal) debt is denominated in euro leading most likely to default. Euro personal debt would have to be redenominated in Irish punts at a rate that is consisent with current euro debt / euro earning ratio. Lenders inevitably would have to take a hit on the fx.

The above approach is similar to what is recommended for Latvia and what happened in Argentina in 2001 - see link below. Latvia continues to peg its currency to the euro while Argentina pegged its currency to the dollar until it was forced to devalue. It was only when Argentina devalued that it emerged from recession.

http://www.cepr.net/documents/publications/latvia-recession-2010-02.pdf

Any views?

Nate--IRL-- · 14-02-2010 3:17pm

You haven't addressed Capital Flight. How would you deal with that? And what about future funding after default?

Nate

ei.sdraob · 14-02-2010 3:28pm

yes lets default that would magically solve all our problems

and make us all richer

(ignoring for momemnt that most of our debt will remain in euro, and money will pour out faster than you can say "euro")

whatcouldpossiblygowrong

kaymin · 14-02-2010 3:30pm

Nate--IRL-- wrote: »

You haven't addressed Capital Flight. How would you deal with that? And what about future funding after default?

Nate

If it was done as of a point in time without discussion / speculation then it's too late for capital flight.

Yes, no doubt there would be problems sourcing funding in the aftermath, however, Argentina have succeeded in raising funds - investors will always invest if the risk to return ratio is right. No doubt interest rates would have to be high until things stabilised, however, this would be a price worth paying if it meant more jobs for Irish people imo.

kaymin · 14-02-2010 3:40pm

ei.sdraob wrote: »

yes lets default that would magically solve all our problems and make us all richer

(ignoring for momemnt that most of our debt will remain in euro, and money will pour out faster than you can say "euro")

whatcouldpossiblygowrong

It won't make us richer since our spending power abroad will be much reduced. It will make us more competitive though.

Yes our debt is in euro but if Ireland defaults (by insisting on the debt being redenominated in Irish punt) then it will be manageable.

PeakOutput · 14-02-2010 3:50pm

laughable idea

eoinbn · 14-02-2010 3:51pm

kaymin wrote: »

It's a vicious circle that is almost impossible to extract oneself. The solution is to leave the euro imo - consequences are:
a) Immediate reduction in cost of doing business here resulting in increased inward investment.
b) Cost of exports are immediately lower resulting in increased demand on international markets for Irish produce facilitating an export driven recovery.
c) Cost of imports will be too high favouring domestic producers thereby boosting employment in Irish companies facilitating a domestic driven recovery
d) We will be able to keep interest rates low until we've properly recovered.
e) Should solve the public versue private sector debate though we still need to make the public service more efficient

a) Investment won't pick up until worldwide demands picks up.
b) Our exports become more competitive, true. However devaluing is similar to wage cuts, so what would stop an all out strike by unions?
c) So we will start buying Irish made cars, electronics, clothes etc? Over the last 10 years Ireland made drugs, houses and food. Devaluing will make home grown foods more viable, but that's about it. Fossil fuels will skyrocket in price increasing energy and heating costs.
d) If we keep interest rates low it means that saving rates will be low. If savings are low then the banks can't lend. If they borrow from international markets they will have to pay international rates(i.e higher rates) and they will be forced to increase the interest rates. Strong economies are built on HIGH increase rates and high saving rates- e.g Japan '45-80's. Within 5 years of lowering interesting rates they had ruined a lot of what they had done over the previous 40 years.

kaymin · 14-02-2010 4:09pm

eoinbn wrote: »

a) Investment won't pick up until worldwide demands picks up.
b) Our exports become more competitive, true. However devaluing is similar to wage cuts, so what would stop an all out strike by unions?
c) So we will start buying Irish made cars, electronics, clothes etc? Over the last 10 years Ireland made drugs, houses and food. Devaluing will make home grown foods more viable, but that's about it. Fossil fuels will skyrocket in price increasing energy and heating costs.
d) If we keep interest rates low it means that saving rates will be low. If savings are low then the banks can't lend. If they borrow from international markets they will have to pay international rates(i.e higher rates) and they will be forced to increase the interest rates. Strong economies are built on HIGH increase rates and high saving rates- e.g Japan '45-80's. Within 5 years of lowering interesting rates they had ruined a lot of what they had done over the previous 40 years.

a) If Ireland has a lower cost punt denominated economy then it should experience more inward investment compared to its higher cost euro denominated economy. There is investment available albeit at a much lower level compared to when the world economy was working properly.
b) The main reason for the unions to strike is their view that the burden is not being shared equally - they wouldn't be able to use this argument anymore at least.
c) Yes there would be pain but it would be worth it imo.
d) Saving rates are currently at record high levels despite very low interest rates.

kippy · 14-02-2010 4:13pm

Leaving the Euro is about as laughable as the taxpayers buying up all the bad debt from the banks at little or no advantage to the taxpayer....oh wait...

Seriously, leaving the Euro is not a viable option.

ei.sdraob · 14-02-2010 4:16pm

kaymin wrote: »

It won't make us richer since our spending power abroad will be much reduced. It will make us more competitive though.

making us much poorer overnight, and making everyone poorer equally, im afraid there wont be any industries left after the shock that will able compete...

kaymin wrote: »

Yes our debt is in euro but if Ireland defaults (by insisting on the debt being redenominated in Irish punt) then it will be manageable.

go ahead and insist that the "debt being redenominated in Irish punt" good luck then trying to raise another 20 odd billion euro to run the governments gravy train, no one in right mind would lend the country money after such default

anyways this topic was discussed to death before, of all the daft ideas this will accomplish least and cause much damage as the negatives would outweigh the positives

kaymin · 14-02-2010 4:18pm

kippy wrote: »

Leaving the Euro is about as laughable as the taxpayers buying up all the bad debt from the banks at little or no advantage to the taxpayer....oh wait...

Seriously, leaving the Euro is not a viable option.

I'm against NAMA but I'm curious to know why leaving the euro is not a viable option.

In fact it may be forced upon us if the issues with Greece spread to the larger economies. I can't see the prudent German and French taxpayers wanting to pay for the actions of other nations.

kaymin · 14-02-2010 4:24pm

ei.sdraob wrote: »

making us much poorer overnight, and making everyone poorer equally, im afraid there wont be any industries left after the shock that will able compete...

go ahead and insist that the "debt being redenominated in Irish punt" good luck then trying to raise another 20 odd billion euro to run the governments gravy train, no one in right mind would lend the country money after such default

anyways this topic was discussed to death before, of all the daft ideas this will accomplish least and cause much damage as the negatives would outweigh the positives

Why won't there be any industries left?

Yes, we still need to sort out the public service - at least the government would have no option but to take the necessary action.

Accomplish least? - we become competitive again overnight - isn't that what the everybody is trying to achieve at the moment (but not successfully).

silverharp · 14-02-2010 4:33pm

meanwhile everyone's mortgages will go back up to 7% or 8% overnight and or everyone will still owe Euros while their salaries depreciate by 30%

PeakOutput · 14-02-2010 4:36pm

kaymin wrote: »

Accomplish least? - we become competitive again overnight - isn't that what the everybody is trying to achieve at the moment (but not successfully).

no they are trying to save the country which being competitive is part of

if you want to live in an icelandic like economy just move to iceland but i dont so leave my country alone please

kaymin · 14-02-2010 4:43pm

Silverharp2 wrote: »

meanwhile everyone's mortgages will go back up to 7% or 8% overnight and or everyone will still owe Euros while their salaries depreciate by 30%

I acknowledged this when i included the following in my original post:
Problem with this approach is our (Ireland's and our personal) debt is denominated in euro leading most likely to default. Euro personal debt would have to be redenominated in Irish punts at a rate that is consisent with current euro debt / euro earning ratio. Lenders inevitably would have to take a hit on the fx.

But at least people will have jobs and earnings with which they can pay the 7 or 8 % interest rates. House prices might even fall to reasonable levels.

thebman · 14-02-2010 4:45pm

We can't leave the euro for many reasons.

It is one of the few things going for us at this point. Does anybody believe that we would raise the necessary bonds required to cover expenditure if we left the Euro.

We are seen as a basket case, leaving the euro would leave us isolated and exposed to the market reality.

Devaluation isn't a solution, fixing the problems is the solution. Its the harder way to do it but there is no quick fix for our problems as they are sizable and have built up since about 2004 so we should just take the time and pain to solve them and ensure they don't happen again.

Even if leaving the euro and printing money would fix the problem, we would not learn anything so it would only fix it temporarily until we all end up back here and wanting to devalue again.

No lets go look at ourselves and form a sustainable economy.

PeakOutput · 14-02-2010 4:50pm

kaymin wrote: »

I acknowledged this when i included the following in my original post:
Problem with this approach is our (Ireland's and our personal) debt is denominated in euro leading most likely to default. Euro personal debt would have to be redenominated in Irish punts at a rate that is consisent with current euro debt / euro earning ratio. Lenders inevitably would have to take a hit on the fx.

But at least people will have jobs and earnings with which they can pay the 7 or 8 % interest rates. House prices might even fall to reasonable levels.

are you absolutely taking the piss?

inflation would be massive because our banks would fail overnight and the goverment would have to print money constantly sure we would be competitive for foreign investment because we would turn into a 3rd world country overnight and we would be paid a salary appropriate with that position

domestic produce would still be relatively affordable but forget about imports but sure they arent that important, people dont usually need fruit or cars or oil

the only reason we are not a completely destroyed economy is the euro and the eu and central control over our currency

there is another way to get competitive.........lower the minimum wage

kaymin · 14-02-2010 4:57pm

thebman wrote: »

We can't leave the euro for many reasons.

It is one of the few things going for us at this point. Does anybody believe that we would raise the necessary bonds required to cover expenditure if we left the Euro.

We are seen as a basket case, leaving the euro would leave us isolated and exposed to the market reality.

Devaluation isn't a solution, fixing the problems is the solution. Its the harder way to do it but there is no quick fix for our problems as they are sizable and have built up since about 2004 so we should just take the time and pain to solve them and ensure they don't happen again.

Even if leaving the euro and printing money would fix the problem, we would not learn anything so it would only fix it temporarily until we all end up back here and wanting to devalue again.

No lets go look at ourselves and form a sustainable economy.

Having the ability to borrow is worsening our position. At least if we weren't able to borrow then the government would have to take the necessary action. I think its only a matter of time before investors stop lending to us anyway.

I'm not suggesting we print money. And I think we'll face market reality whether we stay in the euro or not.

Our economy will only become sustainable if it becomes competitive. I just don't see this happening the way things are going. History has given very few examples of economies that improved their competitiveness to the extent we need without a devaluation.

kaymin · 14-02-2010 5:05pm

PeakOutput wrote: »

are you absolutely taking the piss?

inflation would be massive because our banks would fail overnight and the goverment would have to print money constantly sure we would be competitive for foreign investment because we would turn into a 3rd world country overnight and we would be paid a salary appropriate with that position

domestic produce would still be relatively affordable but forget about imports but sure they arent that important, people dont usually need fruit or cars or oil

the only reason we are not a completely destroyed economy is the euro and the eu and central control over our currency

there is another way to get competitive.........lower the minimum wage

eh, no I'm not taking the piss. It's a discussion on a topic with positives and negatives.

Haven't our banks already failed?

Yes imports become less affordable or perhaps not affordable at all. But sure that's how it is for most of the unemployed.

Ireland has resources - we can grow vegetables and fruit in Ireland. And we have huge gas resources off Mayo.

ei.sdraob · 14-02-2010 5:07pm

kaymin wrote: »

Having the ability to borrow is worsening our position

not having the ability to borrow would mean kissing goodbye to welfare and public services

however much i think these two expenditures are "overweight"
what your proposing would bring the country to its knees altogether

kaymin wrote:

Why won't there be any industries left?

see the part above about society collapsing due to not being able to pay welfare and public service altogether, no public service > no industry
however much one might not like the public service for being wasteful we do need them

kaymin wrote:

Yes, we still need to sort out the public service - at least the government would have no option but to take the necessary action.

and were doing that now, what you propose is akin to taking the floor from underneath the economy and hoping it somehow survives the fall and rebounds

kaymin wrote:

Accomplish least? - we become competitive again overnight - isn't that what the everybody is trying to achieve at the moment (but not successfully).

the Chinese are very competitive now by keeping their people poor via currency manipulation, do you want to be in that position?

we currently have a dirty room in the house, instead of cleaning the room what you want to do is burn the house down to the ground

thebman · 14-02-2010 5:10pm

kaymin wrote: »

Having the ability to borrow is worsening our position. At least if we weren't able to borrow then the government would have to take the necessary action. I think its only a matter of time before investors stop lending to us anyway.

I don't really think it is. Despite all the bad talk, we are moving in the right direction and as long as we are moving in the right direction, investors will invest.

Leaving the Euro would be the equivalent of Toyota saying we are going to stop making cars under the name Toyota and start doing it under Oyota because of recent problems with our public image and this recalls. Who wants to invest in Oyota, we promise we won't make dodgy cars again?

I don't think it would fool anybody. It just makes it look like you have no intention of fixing the problems or moving in the right direction and want to just go back to where you were and do the same thing again.

Our economy will only become sustainable if it becomes competitive. I just don't see this happening the way things are going. History has given very few examples of economies that improved their competitiveness to the extent we need without a devaluation.

How many countries have previously been in a position where devaluation was impossible? Governments will always take the way out that will leave them with most votes from their people.

Winty · 14-02-2010 5:14pm

Why dont we join Sterling?

kaymin · 14-02-2010 5:19pm

ei.sdraob wrote: »

not having the ability to borrow would mean kissing goodbye to welfare and public services

however much i think these two expenditures are "overweight"
what your proposing would bring the country to its knees altogether

see the part above about society collapsing due to not being able to pay welfare and public service altogether, no public service > no industry
however much one might not like the public service for being wasteful we do need them

and were doing that now, what you propose is akin to taking the floor from underneath the economy and hoping it somehow survives the fall and rebounds

the Chinese are very competitive now by keeping their people poor via currency manipulation, do you want to be in that position?

we currently have a dirty room in the house, instead of cleaning the room what you want to do is burn the house down to the ground

Who said anything about having no public service? It needs to be reformed and made efficient. The IMF have slashed numbers and wage levels in the public service in Latvia - we can do likewise.

What I'm proposing gives the economy something to work with. We're fighting a losing battle at the moment due to our lack of competitiveness.

The Chinese government is protecting jobs in China. The rights and wrongs of this is a different argument. The Irish punt would be floating, the Chinese renminbi doesn't float freely.

If we could 'clean the room' as you put it, fine, but I don't think we're capable. Time will tell.

PeakOutput · 14-02-2010 5:22pm

kaymin wrote: »

positives and negatives.

there are no positives when its all balanced out. any perceived positive is greatly outweighed and turned into a negative overall when put against the destruction to the country this would cause

Haven't our banks already failed?

no, they almost did but because of support from the ecb the goverment has been able to salvage them.

Yes imports become less affordable or perhaps not affordable at all. But sure that's how it is for most of the unemployed.

ah ok so because the unemployed cant afford some things nobody else in the country should be able to? that makes a hole load of sense

Ireland has resources - we can grow vegetables and fruit in Ireland.

sure we can but we wont be able to afford to IMPORT the necessary equipment required to grow oranges and bannanas and everything else that wont grow naturally in our enviroment and even we could the cost would be two much for our new poverty stricken workforce anyway so we would be left with what? beef pork and potatoes again......great

And we have huge gas resources off Mayo.

that will now be worth far far less because we cease to be in a position of power at the negotiating table because everyone and their mother will know that they are vital to our survival

ei.sdraob · 14-02-2010 5:26pm

Winty wrote: »

Why dont we join Sterling?

been there done that

kaymin wrote: »

Who said anything about having no public service?

we have a 25billion hole in our finances as i demonstrated in recent thread, by defaulting no one will loan Ireland that sort of money

kaymin wrote: »

It needs to be reformed and made efficient. The IMF have slashed civil service numbers and wage levels in the public service in Latvia - we can do likewise.
.

thats whats happening now, slowly but surely

kaymin wrote: »

What I'm proposing gives the economy something to work with.
.

there wont be an economy left if we default and devalue, you'll be dragging down and killing healthy companies

kaymin wrote: »

We're fighting a losing battle at the moment due to our lack of competitiveness.
.

which has little to do with the currency of exchange

kaymin wrote: »

The Chinese government is protecting jobs in China. The rights and wrongs of this is a different argument.

The Chinese government is keeping a giant army of near slave labour poor, while the party leaders get to keep the profits from this giant sweatshop corporation, it will all end in tears

kaymin wrote: »

The Irish punt would be floating, the Chinese reminbi doesn't float freely.

how is that different from now?

ignoring for a moment that an Irish punt would be sinking not floating...

kaymin wrote: »

If we could 'clean the room' as you put it, fine, but I don't think we're capable. Time will tell.

the least we can do is try

thebman · 14-02-2010 5:31pm

The other thing is that any successful person with the ability to leave the country will leave if we leave the Euro as they know currency devaluation is coming and won't want to be part of it.

kaymin · 14-02-2010 5:36pm

PeakOutput wrote: »

no, they almost did but because of support from the ecb the goverment has been able to salvage them.

Splitting hairs. They've failed in my view.

PeakOutput wrote: »

ah ok so because the unemployed cant afford some things nobody else in the country should be able to? that makes a hole load of sense

Considering the unemployed comprise an increasing proportion of the population and the government is acting on behalf of the entire population, yes I think it makes sense.

PeakOutput wrote: »

sure we can but we wont be able to afford to IMPORT the necessary equipment required to grow oranges and bannanas and everything else that wont grow naturally in our enviroment and even we could the cost would be two much for our new poverty stricken workforce anyway so we would be left with what? beef pork and potatoes again......great

I remember eating bananas and oranges in the days of the punt.

PeakOutput wrote: »

that will now be worth far far less because we cease to be in a position of power at the negotiating table because everyone and their mother will know that they are vital to our survival

A contract has been signed with Shell so this argument is probably redundant but do you really think Uganda was taken advantage of in their negotiations with Tullow Oil / CNOOC and the other oil companies. I think they hammered out a good deal despite these reserves being vital to the future of their economy.

kaymin · 14-02-2010 5:38pm

thebman wrote: »

The other thing is that any successful person with the ability to leave the country will leave if we leave the Euro as they know currency devaluation is coming and won't want to be part of it.

Currency devaluation / leaving the euro is not something that you announce in advance.

thebman · 14-02-2010 5:40pm

kaymin wrote: »

Currency devaluation / leaving the euro is not something that you announce in advance.

Yes it is. It takes time to do a currency swap over by starting it you have announced it and the next day, everyone starts moving that can.

imitation · 14-02-2010 5:47pm

Leaving the euro is a foolish idea, for all the reasons stated above, our loans would be in euros, currency valuation would plummet from day one. It would be an economic Armageddon. Anybody with any sense would withdraw there money in euros, if they couldnt there would be riots.

Most of all though, its a stupid short sighted idea, the euro worked fantastically for us in the good times, now that its bad in one single recession we should dump it ? This isnt the great depression, people arent staving on masse in the streets, there is no call for it. Leaving it would basicly be leaving the EU and would drive off every MNC in the country. Holding tough is the sensible choice.

kaymin · 14-02-2010 5:52pm

ei.sdraob wrote: »

which has little to do with the currency of exchange

Well it does really since the cost of imports need to be translated into our local currency and the cost of our exports have to be translated into the local currencies of our export markets. Price differences for the most part will determine whose product is bought.

ei.sdraob wrote: »

how is that different from now?

ignoring for a moment that an Irish punt would be sinking not floating...

It's not different. I was responding to your comment which suggested I favoured currency manipulation similar to what the Chinese do.

kaymin · 14-02-2010 5:58pm

imitation wrote: »

Leaving the euro is a foolish idea, for all the reasons stated above, our loans would be in euros, currency valuation would plummet from day one. It would be an economic Armageddon. Anybody with any sense would withdraw there money in euros, if they couldnt there would be riots..

As per my original post, I indicated that loans would have to be redenominaed in punts and lenders would have to take the fx hit. It's not something that could be announced in advance => you wouldn't be able to withdraw your euros.

imitation wrote: »

Most of all though, its a stupid short sighted idea, the euro worked fantastically for us in the good times, now that its bad in one single recession we should dump it ? This isnt the great depression, people arent staving on masse in the streets, there is no call for it. Leaving it would basicly be leaving the EU and would drive off every MNC in the country. Holding tough is the sensible choice.

Euro didn't work fantastically for us though - we have had the boom / bust because we couldn't control interest rates. Why would every MNC leave the country? Didn't Intel recently announce that of the 14 reasons they located in Ireland 20 years ago (when we had the punt), only one reason remained valid (tax rates).

Flamed Diving · 14-02-2010 5:59pm

Firstly, the problem of Ireland's foreign debt (both public and private) would still remain, however, having a new currency does not mean that all of these debts are now Punt-denominated. Any loans that we obtained in Euro, will have to be paid back in Euro, meaning that any devaluation for the Punt vs the Euro is an effective percentage increase on the debt we already owe. This would take our already struggling businesses and finally deliver the death blow, our banks would become even more insolvent than they currently stand, needing further capitalisation injections from the state or simply left to collapse.

By leaving the Euro and signalling to the market that we are devaluing the Punt will also lead to capital flight, which will further devalue the Punt, which will lead to capital flight, and so on. With the Punt in freefall the following scenario becomes very likely:

In order to keep the value of the punt from declining, the Central Bank of Ireland had to do the opposite of what it would have done when capital starting coming in: it went into the market to exchange dollars and Euro for Punts, supporting its own currency.

But there is an important difference between trying to keep your currency down and trying to keep it up: the Central Bank of Ireland can increase the supply of Punts as much as it likes, because it can simply print them; but it cannot print Euro. So there was a limit on its ability to keep the Punt up. Sooner or later it would run out of reserves.

The only way to sustain the value of the currency would have been to reduce the number of Punt in circulation, driving up interest rates and thus making it attractive once again to borrow dollars to reinvest in Punt. But this posed problems of a different sort. As the investment boom sputtered out, the Irish economy had slowed—there was less construction activity, which meant fewer jobs, which meant lower income, which meant layoffs in the rest of the economy. The economy was no longer living in the style to which it had become accustomed. To raise interest rates would be to discourage investment further, and perhaps push the economy into an unambiguous slump.

All of this was according to the standard script: it was the classic lead-in to a currency crisis, of the kind that economists love to model—and speculators love to provoke.

As long as the Punt-Euro exchange rate seemed likely to remain stable, the fact that interest rates in Ireland were several points higher than in the Eurozone provided an incentive to borrow in Euro and lend in Punt. But once it became a high probability that the Punt would soon be devalued, the incentive was to go the other way—to borrow in Punt, expecting that the Euro value of these debts would soon be reduced, and acquire Euro, expecting that the Punt value of these assets would soon increase. Local businessmen borrowed in Punt and paid off their Euro loans; wealthy Irish sold their holdings of government debt and bought ECB bonds; and last but not least, some large international hedge funds began borrowing Punt and converting the proceeds into dollars/Euro.

All of these actions involved selling Punt and buying other currencies, which meant that they required the central bank to buy even more Punts to keep the currency from falling, which depleted its reserves of foreign exchange even faster—which further reinforced the conviction that the Punt was going to be devalued sooner rather than later. A classic currency crisis was in full swing.

Like many governments before and no doubt many to come, Ireland's waited as its reserves ran down. On that day, the Irish had to let the Punt go...most people thought that the devaluation of the Punt would pretty much end the story...And so there would not be a devastating recession. They were wrong.

Not only does this scenario follow Macroeconomic theory, but it is derived from an actual currency crisis, namely the Thai crisis of July, 1997. What you read above was an extract from Paul Krugman's "The Return of Depression Economics" with some adjustments made to make it read like an Irish crisis.

This is the very likely cost of leaving the Euro, at this moment in time. Any feasible gains in competitiveness would be more than wiped out by the losses and insolvency damage caused by a devaluation, especially for a country which has the 4th highest private debt in the world.

ei.sdraob · 14-02-2010 5:59pm

kaymin wrote: »

Well it does really since the cost of imports need to be translated into our local currency and the cost of our exports have to be translated into the local currencies of our export markets. Price differences for the most part will determine whose product is bought..

1. most of our exports are to eu excluding UK and is in euro

2. if our currency devalues then the costs of any imports (which is just about everything) will shoot up in price, and directly impact the exports in negative fashion
take the cost of oil for example, if you devalue it will still cost the same amount in dollars but now your Irish ZimDollar buys less of it, the cost of oil alone directly impacts just about every product and service in this country, and thats only oil

kaymin wrote: »

It's not different. I was responding to your comment which suggested I favoured currency manipulation similar to what the Chinese do.

ok

i would really like to see someone produce figures as to how leaving the euro would be advantageous, alot of arguments being made and not backedup by anything

kaymin · 14-02-2010 6:12pm

Flamed Diving wrote: »

Firstly, the problem of Ireland's foreign debt (both public and private) would still remain, however, having a new currency does not mean that all of these debts are now Punt-denominated. Any loans that we obtained in Euro, will have to be paid back in Euro, meaning that any devaluation for the Punt vs the Euro is an effective percentage increase on the debt we already owe. This would take our already struggling businesses and finally deliver the death blow, our banks would become even more insolvent than they currently stand, needing further capitalisation injections from the state or simply left to collapse.

By leaving the Euro and signalling to the market that we are devaluing the Punt will also lead to capital flight, which will further devalue the Punt, which will lead to capital flight, and so on. With the Punt in freefall the following scenario becomes very likely:

In order to keep the value of the punt from declining, the Central Bank of Ireland had to do the opposite of what it would have done when capital starting coming in: it went into the market to exchange dollars and Euro for Punts, supporting its own currency.

But there is an important difference between trying to keep your currency down and trying to keep it up: the Central Bank of Ireland can increase the supply of Punts as much as it likes, because it can simply print them; but it cannot print Euro. So there was a limit on its ability to keep the Punt up. Sooner or later it would run out of reserves.

The only way to sustain the value of the currency would have been to reduce the number of Punt in circulation, driving up interest rates and thus making it attractive once again to borrow dollars to reinvest in Punt. But this posed problems of a different sort. As the investment boom sputtered out, the Irish economy had slowed—there was less construction activity, which meant fewer jobs, which meant lower income, which meant layoffs in the rest of the economy. The economy was no longer living in the style to which it had become accustomed. To raise interest rates would be to discourage investment further, and perhaps push the economy into an unambiguous slump.

All of this was according to the standard script: it was the classic lead-in to a currency crisis, of the kind that economists love to model—and speculators love to provoke.

As long as the Punt-Euro exchange rate seemed likely to remain stable, the fact that interest rates in Ireland were several points higher than in the Eurozone provided an incentive to borrow in Euro and lend in Punt. But once it became a high probability that the Punt would soon be devalued, the incentive was to go the other way—to borrow in Punt, expecting that the Euro value of these debts would soon be reduced, and acquire Euro, expecting that the Punt value of these assets would soon increase. Local businessmen borrowed in Punt and paid off their Euro loans; wealthy Irish sold their holdings of government debt and bought ECB bonds; and last but not least, some large international hedge funds began borrowing Punt and converting the proceeds into dollars/Euro.

All of these actions involved selling Punt and buying other currencies, which meant that they required the central bank to buy even more Punts to keep the currency from falling, which depleted its reserves of foreign exchange even faster—which further reinforced the conviction that the Punt was going to be devalued sooner rather than later. A classic currency crisis was in full swing.

Like many governments before and no doubt many to come, Ireland's waited as its reserves ran down. On that day, the Irish had to let the Punt go...most people thought that the devaluation of the Punt would pretty much end the story...And so there would not be a devastating recession. They were wrong.

Not only does this scenario follow Macroeconomic theory, but it is derived from an actual currency crisis, namely the Thai crisis of July, 1997. What you read above was an extract from Paul Krugman's "The Return of Depression Economics" with some adjustments made to make it read like an Irish crisis.

This is the very likely cost of leaving the Euro, at this moment in time. Any feasible gains in competitiveness would be more than wiped out by the losses and insolvency damage caused by a devaluation, especially for a country which has the 4th highest private debt in the world.

I did say in my original post that leaving the euro would be accompanied by a default on national and personal debt (by fixing the euro / punt exchange rate and letting the lenders suffer the fx movements thereafter).

What this fx rate should be fixed at I don't know but should be at a level commensurate with our productivity / national debt (as re-denominated) to minimise the risk of further speculation against the punt.

imitation · 14-02-2010 6:14pm

kaymin wrote: »

As per my original post, I indicated that loans would have to be redenominaed in punts and lenders would have to take the fx hit. It's not something that could be announced in advance => you wouldn't be able to withdraw your euros.

Hi Germany, you know the way you owe us 100 billion euro (or whatever it is), how about we owe you 100 billion punt, which is worth 100 billion euro.. wait its worth €50 billion now, oh wait €25 billion now.. were still good right ? They`d never stand for it, and why should they take the hit ? If we got away with it I would imagine they`d have to invent a new level of credit rating just for us.

Euro didn't work fantastically for us though - we have had the boom / bust because we couldn't control interest rates. Why would every MNC leave the country? Didn't Intel recently announce that of the 14 reasons they located in Ireland 20 years ago (when we had the punt), only one reason remained valid (tax rates).

That specious reasoning, I have a strong believe we wouldnt have been as half as attractive for foreign investment if we werent in the euro, but as its one of those things we`ll never know people just shrug it off.

Intel located in Ireland for numerous reasons I`m sure, I`d imagine being part of the EU single market was a huge part of it. It was clear we were getting more integrated with the EU too. If we left the euro we`d be sending a very clear signal to the EU what direction we are heading in (ie. out). More over if we are the first to leave the euro and give the impression its a revolving door system (which would have huge impact) I dont think we would be on anybodys christmas card list for a long time.

kaymin · 14-02-2010 6:15pm

ei.sdraob wrote: »

i would really like to see someone produce figures as to how leaving the euro would be advantageous, alot of arguments being made and not backedup by anything

Meaning me since i'm the only person arguing for Ireland to leave the euro.
I don't have any financial data that you ask about and would be very surprised if anyone did for obvious reasons.

PeakOutput · 14-02-2010 6:17pm

kaymin wrote: »

Considering the unemployed comprise an increasing proportion of the population and the government is acting on behalf of the entire population, yes I think it makes sense.

unemployment is at what12/13/14% ? so you think is fair to completely screw the economy so that the rest of the country(85%) is put on an equal buying power footing with them? which will also be reduced because they still wont have jobs ad now their currency will be worth less and the goverment will have no money to lend them because the ecb isnt there to lend it to them any more and for every punt the goverment prints to fill this gap it devalues the currency further

I remember eating bananas and oranges in the days of the punt.

we had a strong economy and a strong currency then, we dont have a strong economy now and without the euro we dont have a strong currency

kaymin · 14-02-2010 6:22pm

imitation wrote: »

Hi Germany, you know the way you owe us 100 billion euro (or whatever it is), how about we owe you 100 billion punt, which is worth 100 billion euro.. wait its worth €50 billion now, oh wait €25 billion now.. were still good right ? They`d never stand for it, and why should they take the hit ? If we got away with it I would imagine they`d have to invent a new level of credit rating just for us..

To quote from that report I included a link to in my original post:
It is also worth noting that Argentina’s currency collapse was combined with a record $100 billion default on its debt, and a collapse of the financial system. The consensus opinion was that the Argentine economy would be in serious trouble for years to come. There were also predictions of hyperinflation. However, after the default and currency collapse in January 2002, the Argentine economy contracted for only one quarter.

imitation wrote: »

That specious reasoning, I have a strong believe we wouldnt have been as half as attractive for foreign investment if we werent in the euro, but as its one of those things we`ll never know people just shrug it off.

Intel located in Ireland for numerous reasons I`m sure, I`d imagine being part of the EU single market was a huge part of it. It was clear we were getting more integrated with the EU too. If we left the euro we`d be sending a very clear signal to the EU what direction we are heading in (ie. out). More over if we are the first to leave the euro and give the impression its a revolving door system (which would have huge impact) I dont think we would be on anybodys christmas card list for a long time.

If that was the case then I'd have thought Intel would have listed 2 reasons that makes Ireland attractive to them.

kaymin · 14-02-2010 6:26pm

PeakOutput wrote: »

unemployment is at what12/13/14% ? so you think is fair to completely screw the economy so that the rest of the country(85%) is put on an equal buying power footing with them? which will also be reduced because they still wont have jobs ad now their currency will be worth less and the goverment will have no money to lend them because the ecb isnt there to lend it to them any more and for every punt the goverment prints to fill this gap it devalues the currency further

How many family members rely on each of those persons comprising of the 12/13% unemployed but available for unemployment? It's alot more than 15%. The point is, by devaluing the unemployed have a much greater chance of employment since Ireland will have become more competitive.

Flamed Diving · 14-02-2010 6:30pm

kaymin wrote: »

What this fx rate should be fixed at I don't know.

Do you even know of a means for calculating this? History is littered with countries that set a rate too low/high and suffered greatly, as a consequence.

ei.sdraob · 14-02-2010 6:34pm

kaymin wrote: »

Meaning me since i'm the only person arguing for Ireland to leave the euro.
I don't have any financial data that you ask about and would be very surprised if anyone did for obvious reasons.

not only you

we had a very long thread on same topic recently in this forum after a certain David McWilliams produced an article along the same lines
tho the above guy never references or backups his opions despite claiming to be an "expert" and an "academic"

but seriously of someone came along and said "if we leave the euro, in timeframe X we would Y better off, here is the data check it yourselves" then it be quite different (and interesting) discussion
as FD posted earlier something like this was tried manys of time before, and never ended well

kaymin · 14-02-2010 6:36pm

Flamed Diving wrote: »

Do you even know of a means for calculating this? History is littered with countries that set a rate too low/high and suffered greatly, as a consequence.

I expect the means of calculating would have to take account of the following:
a) GNP /GDP and likely growth
b) National debt now and in the near future
c) Money supply and likely growth
d) Credit ratings

Ultimately the same factors that investors take account of when they trade currencies / invest in government bonds would be relevant.

ei.sdraob · 14-02-2010 6:48pm

kaymin wrote: »

I expect the means of calculating would have to take account of the following:
a) GNP /GDP and likely growth
b) National debt now and in the near future
c) Money supply and likely growth
d) Credit ratings

Ultimately the same factors that investors take account of when they trade currencies / invest in government bonds would be relevant.

i hope its not calculated by the same people who invented "Long Term Economic Value" when pimping NAMA

Flamed Diving · 14-02-2010 6:49pm

kaymin wrote: »

I expect the means of calculating would have to take account of the following:
a) GNP /GDP and likely growth
b) National debt now and in the near future
c) Money supply and likely growth
d) Credit ratings

Ultimately the same factors that investors take account of when they trade currencies / invest in government bonds would be relevant.

That's good, not forgetting that you must include the figures for all your trading partners as well. You still don't have a model, but lets just shelve that. Now, consider the many countries (I'm assuming you have read about past currency crises, if you haven't, then you should probably drop this idea and start reading) that thought they did know the correct figure using such data and got it wrong. They knew a hell of a lot more about economics than you clearly do. They had access to much more data than you do. What makes you so confident that you know better than all of these countries?

Flamed Diving · 14-02-2010 6:53pm

Here is an instructive and easy to read paper by the current Central Bank Governor, Patrick Honohan. It gives a brief overview of Ireland's currency history and the section on the 1955 crisis is especially important as it shows what happens when Small Open Economies such as Ireland decide to piss against the wind.

http://homepage.eircom.net/~phonohan/BNL.pdf

thebman · 14-02-2010 6:53pm

kaymin wrote: »

If that was the case then I'd have thought Intel would have listed 2 reasons that makes Ireland attractive to them.

Not really, we aren't the only country in the Euro so there are other countries that share that advantage.

Also, one could presume they think we aren't in a rush to leave the Euro.

ei.sdraob · 14-02-2010 7:21pm

http://www.independent.ie/national-news/policies-that-fg-ignored-revealed-by-lee-2062794.html

ouch, no wonder he was laughed at for his "policy" ideas

PeakOutput · 14-02-2010 7:26pm

kaymin wrote: »

How many family members rely on each of those persons comprising of the 12/13% unemployed but available for unemployment? It's alot more than 15%. The point is, by devaluing the unemployed have a much greater chance of employment since Ireland will have become more competitive.

i can say the exact same thing about the other 85% of the workforce

is your only argument competitiveness? because that can be achieved in far far far better ways

edit; the quality of employment and pay of the job creation after the devaluing is not important? in that case we can just get rid of the minimum wage and a few employment rights laws, keep our strong currency and have the same affect, if that is having any sort of job is the only thing that matters

Nate--IRL-- · 14-02-2010 7:29pm

kaymin wrote: »

I did say in my original post that leaving the euro would be accompanied by a default on national and personal debt (by fixing the euro / punt exchange rate and letting the lenders suffer the fx movements thereafter).

What this fx rate should be fixed at I don't know but should be at a level commensurate with our productivity / national debt (as re-denominated) to minimise the risk of further speculation against the punt.

So you are proposing that we Default on approximately €1.671 trillion worth of debt? And you anticipate no problems for Ireland in doing so?

http://www.irishtimes.com/newspaper/opinion/2009/0203/1232923383096.html

According to the latest figures from the International Monetary Fund and the Bank for International Settlements, total gross indebtedness of Irish residents, that is the State, the banks and the non-financial personal and corporate sector, stood at a gargantuan €1,671 billion at the end of 2008. This is over eight times national income, and compares to a mere €504 billion at the end of 2002 and €970 billion at the end of 2005. The greater part of the rise in this debt arises not from the State – its debt merely doubled from €27 billion in the fourth quarter of 2005 to €51.2 billion by the third quarter of 2008 (or €77.1 billion if the monetary authority liabilities are added) – but from the private sector.

The debt owed by the private sector rose from €876 billion to €1,594 billion over the period. Much of this represents real borrowings by Irish people and companies. As of September 2008, €591.2 billion in debt securities was outstanding by non-financial domestic companies – up from €473.6 billion in December 2006. Overall foreign claims on the Irish economy stood at a gargantuan seven times our national income. In absolute terms, this mountain of debt is one-sixth of the USA’s and greater than that owed by Japan.

Nate

SkepticOne · 14-02-2010 7:41pm

Nate--IRL-- wrote: »

So you are proposing that we Default on approximately €1.671 trillion worth of debt? And you anticipate no problems for Ireland in doing so?

This could also be seen as an argument in favour of defaulting and leaving the Euro.

Only solution is for Ireland to leave the euro

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