"How Ireland Could Cut a Deal" - WSJ

gizmo555

Interesting piece from the WSJ, suggesting that if we have to go for a bailout, as seems increasingly likely, we could cut a much better deal on borrowing by going directly to the IMF and bypassing the ECB/EU entirely.

I have to say, I think this should be given serious consideration, especially givenn that the actions of the Germans in particular have contributed significantly to our woes. Firstly, setting Euro interest rates at low levels over the last decade to suit their economy and to a lesser extent the French served to hugely exacerbate the credit/property bubble here - in fact, it could be said to have created it. Secondly, Merkel's mouthing off is one of the main factors now driving up our bond yields. If there is a way to exercise some minimal independence and keep our cost of borrowing down into the bargain, we should go for it.

Ireland may be fast running out of options, but it still may have a few.

With its 10-year bonds now yielding nearly 9%, it would take a Damascene conversion by investors to bring borrowing costs back to a level where Dublin could realistically return to the market. A bailout looks increasingly necessary. European Commission President Jose Manuel Barroso says the European Union is ready to help Ireland financially. But could the Irish government cut a better deal elsewhere?

Ireland's objective should be to get the cheapest possible funding with the least onerous conditions. The revised economic forecasts contained in this month's preview of the coming budget predicted Ireland would achieve roughly 2.75% growth over the next two years, with inflation running at about 1.25%. That suggests Ireland would struggle with interest costs much above 4%, in line with nominal gross-domestic-product growth, if it is to achieve fiscal sustainability.


Dublin won't get such cheap funding from the European Financial Stability Facility, set up by euro-zone governments in response to Greece's difficulties. Barclays Capital estimates the facility charge interest of about 5.5% on a three-year loan. What's more, it might come with significant conditions attached. Ireland could be forced to abandon its low corporate-tax policy, a totemic symbol of what's left of Ireland's economic sovereignty, but the subject of repeated criticism from the European Commission.

Besides, the facility's credibility has been shaken by Germany's insistence that it be linked in the future with losses being imposed on private creditors. Dublin partly blames Germany's demands for burden-sharing for its predicament. There also are doubts over how the facility's complex structure will work in practice, and whether there even is a ready market for the facility's bonds or how they might be priced.

Could Ireland go directly to the International Monetary Fund instead?
IMF funding would almost certainly be cheaper than from the facility, with a loan of five to 10 times Ireland's IMF quota coming in at 2.2%-2.8%. The IMF said Wednesday that it hadn't been asked for help, but praised the government's efforts to rein in the deficit. It also is less likely to demand changes to Ireland's corporate-tax policy, seen as key to its success in attracting foreign investment.

Evading the euro zone's support mechanism may be politically tricky; given the Irish banks' reliance on the European Central Bank, the euro zone would expect a role in any rescue. Excluding the European authorities would deal a fresh blow to Europe's prestige.

But Ireland is a different case from Greece; it has undertaken this kind of fiscal repair before and succeeded. In Ireland's case in particular, a punitive lending rate and further fiscal demands make little sense. It should use what cards it still holds to strike a better deal.

ei.sdraob

facility, with a loan of five to 10 times Ireland's IMF quota coming in at 2.2%-2.8%

just out of interest what is Ireland's IMF quota, how many billions?

murphaph

gizmo555 wrote: »

Interesting piece from the WSJ, suggesting that if we have to go for a bailout, as seems increasingly likely, we could cut a much better deal on borrowing by going directly to the IMF and bypassing the ECB/EU entirely.

I have to say, I think this should be given serious consideration, especially givenn that the actions of the Germans in particular have contributed significantly to our woes. Firstly, setting Euro interest rates at low levels over the last decade to suit their economy and to a lesser extent the French served to hugely exacerbate the credit/property bubble here - in fact, it could be said to have created it. Secondly, Merkel's mouthing off is one of the main factors now driving up our bond yields. If there is a way to exercise some minimal independence and keep our cost of borrowing down into the bargain, we should go for it.

what a load of nonsense. We joined monetary union of our own free will. We ran a country with little/no banking regulation. We borrowed billions upon billions to buy property. We re-elected FF time and again despite their fanning the flames with nonsensical section 23s and so on and so on.

We as a nation are responsible for the sh!t we are in, not sodding Angela Merkel.

Inquitus

ei.sdraob wrote: »

just out of interest what is Ireland's IMF quota, how many billions?

Quotas are denominated in Special Drawing Rights (SDRs), the IMF's unit of account. The largest member of the IMF is the United States, with a current quota of SDR 37.1 billion (about $56 billion), and the smallest member is Tuvalu, with a current quota of SDR 1.8 million (about $2.7 million).

Ireland 838.4m

So based on that our quota is $1.265bn

Amhran Nua

gizmo555 wrote: »

Interesting piece from the WSJ, suggesting that if we have to go for a bailout, as seems increasingly likely, we could cut a much better deal on borrowing by going directly to the IMF and bypassing the ECB/EU entirely.

I'd take anything from a Murdoch mouthpiece with a major pinch of salt. The WSJ ain't the reputable publication it used to be.

amacachi

Giving tax breaks on property caused the bubble, not low interest rates.

Rabble Rabble

amacachi wrote: »

Giving tax breaks on property caused the bubble, not low interest rates.

Really - every get tax breaks? Fair enough then.

Rabble Rabble

murphaph wrote: »

what a load of nonsense. We joined monetary union of our own free will. We ran a country with little/no banking regulation. We borrowed billions upon billions to buy property. We re-elected FF time and again despite their fanning the flames with nonsensical section 23s and so on and so on.

We as a nation are responsible for the sh!t we are in, not sodding Angela Merkel.

Utter nonsense. The major cause of the boom was negative interest rates.

Spudmonkey

Rabble Rabble wrote: »

Utter nonsense. The major cause of the boom was negative interest rates.

We should deny everything? After all we were forced into taking out mortgages etc.

gizmo555

murphaph wrote: »

what a load of nonsense. We joined monetary union of our own free will.

We did, as did the Germans. Having done so, however, the union - which never made financial or economic sense, it was always political - should have been run with the best interests of all members of the union in mind, not just the two biggest.

murphaph wrote: »

We as a nation are responsible for the sh!t we are in, not sodding Angela Merkel.

We are without doubt mainly responsible, but our European partners and in particular the Germans bear some of the responsibility. The credit/property bubble could not have happened without the low interest rates and the ease of international wholesale borrowing with no f/x risk that the Euro enabled.

As for sodding Angela Merkel, the mental image alone is enough to make me queasy!

Amhran Nua

Rabble Rabble wrote: »

Utter nonsense. The major cause of the boom was negative interest rates.

How is it that most European countries didn't have a massive property bubble then?

ardmacha

There is no doubt that we caused our property boom, facilitated perhaps by lower interest rates but because the pub is open is no excuse for getting plastered.

However, Merkel and Germany generally do not accept their responsibilities in a currency union. They simply have no concept of the virtual revaluation required on their part which requires inflation rates of 4% and higher wages in Germany to allow the likes of Ireland trade our way out of the recession. They are in a way the mirror image of Ireland. But something may still be learned from this crisis.

As to the IMF loans at 2.2%-2.8% this would greatly help stop things spiralling out of control.

Koloman

murphaph wrote: »

what a load of nonsense. We joined monetary union of our own free will. We ran a country with little/no banking regulation. We borrowed billions upon billions to buy property. We re-elected FF time and again despite their fanning the flames with nonsensical section 23s and so on and so on.

We as a nation are responsible for the sh!t we are in, not sodding Angela Merkel.

I agree. Don't forget that FF got 41% of the vote in the last election. That's an awful lot of people with egg (or cheese) on their face.

RealityCheck

Amhran Nua wrote: »

How is it that most European countries didn't have a massive property bubble then?

They simply did'nt have the growth rates we did. There is no doubt the low interest rates had serious effects. There's no single reason for the boom, just a number of reasons resulting in a perfect storm of which low interest rates is one.

Rabble Rabble

Amhran Nua wrote: »

How is it that most European countries didn't have a massive property bubble then?

Different economic cycle, different property laws, different levels of inflation. The ECB rates did not suit the periphery one bit - they were negative here, and just above zero in Germany which had little inflation.

We should deny everything? After all we were forced into taking out mortgages etc.

We cant expect people to be economists. And that is not consumer debt which is causing Ireland's bailout. Consumer debt is manageable, most of it is performing. What is causing us to be bailed out, is guaranteeing banks which leant to developers, and the banks who leant to the banks lending to developers - not all of them Irish.

Thats what is spooking the bond markets.

Citizen_Cutback

The net effect of the fallout of the last two years will be seen to have had the effect of quadrupling our National debt.

I think the ECB should lend us about €120 billion @2% interest to support NAMA and Anglo workouts and refinance our existing National debt.

Servicing this debt would be affordable and allow us to get on with sorting out our Budget deficit.

Zynks

Amhran Nua wrote: »

How is it that most European countries didn't have a massive property bubble then?

Here are some of my guesses why:
1. Other (any decent) governments would have created mechanisms to control the widespread property hysteria instead of providing further incentives
2. They must have a decent press that wouldn't sell out so easily to advertisers
3. At least a good few have decent tenancy laws that help keep market equilibrium
4. Their consumers seem to have more common sense than us who think it is party time just because money is cheap. And they are less likely to believe that you can make a living from buying to rent financed by variable rate loans
5. I guess they have financial regulators that have a better hold of what's going on
6. Their political parties look less like soccer team support groups and may have the national interest more at heart
7. We are greedier than the average Europeans

jimmycrackcorm

Citizen_Cutback wrote: »

The net effect of the fallout of the last two years will be seen to have had the effect of quadrupling our National debt.

I think the ECB should lend us about €120 billion @2% interest to support NAMA and Anglo workouts and refinance our existing National debt.

Servicing this debt would be affordable and allow us to get on with sorting out our Budget deficit.

I think the ECB should tell us to tear up the croke park agreement and cut SW rates and then lend us the money cheaply.

murphaph

RealityCheck wrote: »

They simply did'nt have the growth rates we did. There is no doubt the low interest rates had serious effects. There's no single reason for the boom, just a number of reasons resulting in a perfect storm of which low interest rates is one.

Our huge growth from exports stopped around 2000. The growth rates seen after that were fake. They were based on the very credit you are now (partially) blaming for the crisis. If we hadn't borrowed all that money to pour into now worthless concrete, our growth rates would have been very modest or non-existant.

The interest rates themselves did not have serious effects. The total lack of regulation and extremely reckless lending policies of the banks are at fault. The same low interest rates were available in every Eurozone country. Britain has also had a (much less intense) boom and bust, despite being outside monetary union and completely free to set their own interest rates but they did what we did: borrowed heavily and ramped up public sector and welfare spending to buy votes, whilst many more (responsible) Euroland states refrained from the credit pull and carried on as normal.

We really have nobody to blame but ourselves (as a nation). It is nobody else's fault. I never once expected that Ireland (or other peripheral countries) would be on an equal footing with Germany. Imagine Germany had said "ok, let's run the Eurozone as if Ireland and Germany were economic equals"-Germany would now be in a very weak position and would be unable to help anyone. We should be extremely grateful that at least someone in the Eurozone was attempting to stick to stability and growth pact rules!

We did not have to accept monetary union. We voted on it and accepted it. I am sort of glad we are stuck in monetary union now though as it will force future governments to actually govern. The old devaluation trick (which makes EVERYONE poorer at the stroke of a pen) is unavailable to our government now. They have to show fiscal discipline. We will never be lent the sums of money we have been ever again.

The repurcussions of this travesty should (hopefully) have far reaching consequences that see reform of the way Ireland is actually governed and sees people wake up and take an interest in the economy beyond "can we afford that 42" plasma TV?".

RealityCheck

murphaph wrote: »

Our huge growth from exports stopped around 2000. The growth rates seen after that were fake. They were based on the very credit you are now (partially) blaming for the crisis. If we hadn't borrowed all that money to pour into now worthless concrete, our growth rates would have been very modest or non-existant.

The interest rates themselves did not have serious effects. The total lack of regulation and extremely reckless lending policies of the banks are at fault. The same low interest rates were available in every Eurozone country. Britain has also had a (much less intense) boom and bust, despite being outside monetary union and completely free to set their own interest rates but they did what we did: borrowed heavily and ramped up public sector and welfare spending to buy votes, whilst many more (responsible) Euroland states refrained from the credit pull and carried on as normal.

We really have nobody to blame but ourselves (as a nation). It is nobody else's fault. I never once expected that Ireland (or other peripheral countries) would be on an equal footing with Germany. Imagine Germany had said "ok, let's run the Eurozone as if Ireland and Germany were economic equals"-Germany would now be in a very weak position and would be unable to help anyone. We should be extremely grateful that at least someone in the Eurozone was attempting to stick to stability and growth pact rules!

We did not have to accept monetary union. We voted on it and accepted it. I am sort of glad we are stuck in monetary union now though as it will force future governments to actually govern. The old devaluation trick (which makes EVERYONE poorer at the stroke of a pen) is unavailable to our government now. They have to show fiscal discipline. We will never be lent the sums of money we have been ever again.

The repurcussions of this travesty should (hopefully) have far reaching consequences that see reform of the way Ireland is actually governed and sees people wake up and take an interest in the economy beyond "can we afford that 42" plasma TV?".

I meant to say the inflation rate . As the interest rates were less than the inflation rate the effective interest rate was negative. Giving the illusion of free money.

I don't dispute much of what you are saying. All I am arguing is that it played a part but maybe not the most serious part. We went from an interest rate of around 6% before the euro to as low as 2% for a while in the mid 00s while in the euro. In the past 10 years there was a lot of fiscal expansion with a lot of easy credit doing the rounds, especially from Greenspan in America after 9/11. Control of interest rates was therefore important.

I was never talking about devaluation. Interest rates are an important tool used to prevent overheating in an economy. There is no comparision between it and devaluation.

ei.sdraob

RealityCheck wrote: »

I meant to say the inflation rate . As the interest rates were less than the inflation rate the effective interest rate was negative. Giving the illusion of free money.

I don't dispute much of what you are saying. All I am arguing is that it played a part but maybe not the most serious part. We went from an interest rate of around 6% before the euro to as low as 2% for a while in the mid 00s while in the euro. In the past 10 years there was a lot of fiscal expansion with a lot of easy credit doing the rounds, especially from Greenspan in America after 9/11. Control of interest rates was therefore important.

I was never talking about devaluation. Interest rates are an important tool used to prevent overheating in an economy. There is no comparision between it and devaluation.

There are othermore direct-tools available such as taxation and not pouting oilt into fire with subsidies, Canada used them and they are not as screwed.

Rabble Rabble

jimmycrackcorm wrote: »

I think the ECB should tell us to tear up the croke park agreement and cut SW rates and then lend us the money cheaply.

Its going to be a shock to the right wingers on here when Europe - which is a high tax, high (public) spend environment does none of this and instead asks for a reduction in corporation tax - to benefit them - as a way out of this mess, a mess partly caused by the sclerotic growth in Germany and France and the ECB running low interest rates, and partly caused by German and other banks leanding to Irish banks ( which we are now paying for).

The Irish consumer is not really defaulting.


If Irish people werent such self-flagulators this would annoy you quite a bit - if you need 120B to pay off the banks, you are paying it to the creditors of the Irish banks. These banks are situated all over Europe; without the bank guarantee, or reneging on it the contagion would spread to other European banks and either those banks and their shareholders would take the hit, or the economies where the banks operate would socialise the losses of their banks. ( As Ireland is socialising the debts AIB whose major losses are investing in Anglo, not consumer debt)

Instead the 4 million people in Ireland are paying back money to banks outside Ireland, who invested in Irish capitalist enterprises which should never have been guaranteed. These capitalist enterprises, their owners and creditors are your new masters. Their bad investments are your, and your children's burden.

Your 42 inch plasma had little to do with the 120B.

Anyway, enjoy. I am sympathetic to Ireland as an Irish-English person living in England, I know that British people would riot against the European banks, but if you want to emburden yourself and your children for mistake made by German banks ( as well as Irish banks) or take hundreds of thousands of tax dollars for years to pay Abromovich ( an creditor to Irish banks), who is already a billionaire. Go for it.

It suits the Catholic guilt to blame yourself for everything.

RealityCheck

ei.sdraob wrote: »

There are othermore direct-tools available such as taxation and not pouting oilt into fire with subsidies, Canada used them and they are not as screwed.

True but we were new to the whole "prosperity" thing , we did'nt have the maturity to realise the errors in our ways. FF were economically illiterate. Interest rates would have mattered considering that I reckon. We would have had a bubble alright but maybe not as severe.

Rabble Rabble

murphaph wrote: »

The old devaluation trick (which makes EVERYONE poorer at the stroke of a pen) is unavailable to our government now. They have to show fiscal discipline.

why making everybody "poorer" at the stroke of a pen is bad, when Ireland has to try to make everybody poorer with taxes, reduced pensions, reduced wages etc. is beyond me.

devaluation affects judges, the unemployed, and capitalists equally. What Ireland's "fiscal discipline" is now doing is not affecting all groups equally, and some not at all.

Basically you like the harder unfair way, and one which could reduce aggregate demand to cause a second recession, rather than the easier way. Self flagellation again.

Devaluation is a good thing. Look at the UK.

Inquitus

Rabble Rabble wrote: »

Anyway, enjoy. I am sympathetic to Ireland as an Irish-English person living in England, I know that British people would riot against the European banks

England is a morally bankrupt shíthole, I spent 20 years living there, but no matter how bad things are here there's not a hope in hell I will relocate my wife and 3 kids to that kip. Its fine if you are young and single, but its no place to raise kids.

Rabble Rabble

RealityCheck wrote: »

True but we were new to the whole "prosperity" thing , we did'nt have the maturity to realise the errors in our ways. FF were economically illiterate. Interest rates would have mattered considering that I reckon. We would have had a bubble alright but maybe not as severe.

what kind of taxation would counter easy credit? The headline prices were rising anyway.

Rabble Rabble

Inquitus wrote: »

England is a morally bankrupt shíthole, I spent 20 years living there, but no matter how bad things are here there's not a hope in hell I will relocate my wife and 3 kids to that kip. Its fine if you are young and single, but its no place to raise kids.

some parts are nice. I was hoping, though, to have Ireland as a fallback option. So dont mess it up :-)

RealityCheck

Rabble Rabble wrote: »

what kind of taxation would counter easy credit? The headline prices were rising anyway.

Good point we really needed to have and use every tool available to counter the external (and internal) pressures. We would have had some sucess with taxation had we never reduced it. It was a PD goal to have the tax rates at 30 and 10%, while FF wanted to give away money to all and sundry. Economic suicide on all fronts. Socialism and capitalism at their worst :eek:.