Only solution is for Ireland to leave the euro

kaymin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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--

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

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.

Nate--IRL--

SkepticOne wrote: »

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

What happens to your credit rating (and cost of borrowing) if you default on a loan? What are we currently borrowing now today? What happens when we can no longer borrow?

Nate

SkepticOne

Nate--IRL-- wrote: »

What happens to your credit rating (and cost of borrowing) if you default on a loan? What are we currently borrowing now today? What happens when we can no longer borrow?

Likewise what happens if you can't continue to pay a loan? I'm not saying it is the case at present but a time may come when the burden of paying off a loan becomes greater than the burden of defaulting (inability to borrow) etc. An argument based on the fact that our debts are huge can be used both ways.

But the other point is that if we've such huge debts shouldn't we be paying them off, not looking for new ways to borrow?

kaymin

PeakOutput wrote: »

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

Fair enough re: the percentages although I think many people have given up seeking work / entered into further studies and consequently are not included on the live register.

Yes, competitiveness is my primary concern. The only way we'll emerge from this slump is if we become more competitive.

I agree, I think we should get rid of the minimum wage. There's been plenty of studies that have shown it prevents unskilled workers obtaining employment (because companies are better off investing in automation than employing people).

I don't see how keeping a strong currency will assist our export driven recovery (that's the whole point of my argument). Domestic demand is not going to spur a recovery given our high indebtedness / unemployment.

kaymin

Flamed Diving wrote: »

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?

Did I say that?

All the experts got it wrong when Argentina experienced growth after their devaluation and default. It's good to have an open mind.

imitation

kaymin wrote: »

Yes, competitiveness is my primary concern. The only way we'll emerge from this slump is if we become more competitive.

The slump is the natural response to the original problem, we`ll have to ride it out if we leave the euro or not. Odds are if we leave the euro now we`ll just get the worst of both worlds, 14% of the population aren`t going to get instantly re-employed just because of devaluation.

SkepticOne

imitation wrote: »

The slump is the natural response to the original problem, we`ll have to ride it out if we leave the euro or not. Odds are if we leave the euro now we`ll just get the worst of both worlds, 14% of the population aren`t going to get instantly re-employed just because of devaluation.

I think a lot depends on your view of the how much further pain there's going to be. If like Lenihan you believe "we've turned a corner" and unemployment is not going to rise much further then leaving the Euro now would not bring us much advantage since we would already have made the adjustments that are necessary.

kaymin

Flamed Diving wrote: »

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

We did manage to cope well enough for the 20 years before the euro was introduced. Realignments in the EMS were fairly frequent, averaging about one a year in the 1980s, and the Irish pound depreciated steadily against the Deutsche Mark. These depreciations reflected wider weaknesses in the Irish economy in those years and prevented a loss of competitiveness from compounding those weaknesses.

cson

Competitiveness doesn't happen overnight OP. It's not some switch you can just flick on - I'm sure other countries would have copped it at this stage if it was that simple. Ireland is slowly beginning to bottom out with regard to the general cost of things here, it's a slow process but there is a foundation for competitiveness to grow out of.

SkepticOne

cson wrote: »

Competitiveness doesn't happen overnight OP. It's not some switch you can just flick on - I'm sure other countries would have copped it at this stage if it was that simple. Ireland is slowly beginning to bottom out with regard to the general cost of things here, it's a slow process but there is a foundation for competitiveness to grow out of.

Would your view change if it turned out that we're due another, say, three years economic difficulty with unemployment rising to about 22%?

kaymin

cson wrote: »

Competitiveness doesn't happen overnight OP. It's not some switch you can just flick on - I'm sure other countries would have copped it at this stage if it was that simple. Ireland is slowly beginning to bottom out with regard to the general cost of things here, it's a slow process but there is a foundation for competitiveness to grow out of.

But if your product costs €1 to make one day and the equivalent of 80c to make the next day (due to a 20% devaluation) then you are more competitive immediately. I'm not as optimistic as you regarding our cost base though. In my view there will be alot more pain to come before we become competitive and I'm not sure we will ever achieve competitiveness given the route we have to take while still using the euro (i.e. no devaluation option).