Eating the Irish

dublogic

Just read this article in the NY Times by Paul Krugman and it articulated my thoughts better then I ever could.

"Eating the Irish
By PAUL KRUGMAN, NY Times
Published: November 25, 2010


What we need now is another Jonathan Swift.

Most people know Swift as the author of “Gulliver’s Travels.” But recent events have me thinking of his 1729 essay “A Modest Proposal,” in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. “I grant this food will be somewhat dear,” he admitted, but this would make it “very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children.”

O.K., these days it’s not the landlords, it’s the bankers — and they’re just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what’s happening to Ireland now.

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

But there is no alternative, say the serious people: all of this is necessary to restore confidence.

Strange to say, however, confidence is not improving. On the contrary: investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.

Now what? Last weekend Ireland and its neighbors put together what has been widely described as a “bailout.” But what really happened was that the Irish government promised to impose even more pain, in return for a credit line — a credit line that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.

Does it really have to be this way?

In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland.

But at this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake. "

zeds alive

I have read lots articles like this by some of the worlds leading and respected economists who all seem to think that Ireland defaulting is the best thing to do , So if this seems to be the general consensus among some of the greatest minds in the world , who the hell are the Irish government listening to that they think encuring decades of debt is the right thing to do?

johnnyskeleton

The solution suggested in that article is that the way out of debt is to devalue your currency while maintaining spending at nominal levels.

This is something that appears to fix the problem, but it merely papers over the cracks.

The reality is that we have to go through a period of deflation and falling confidence, consumer demand, spending etc. We have to go through a period of deflation because the country is too expensive and we can't leave the euro. But even if we could leave, would we want to? All leaving the euro would do is make things seem better for 2-3 years while the seeds are sown for the next credit bubble in 5-10 years' time.

Sticky_Fingers

zeds alive wrote: »

I have read lots articles like this by some of the worlds leading and respected economists who all seem to think that Ireland defaulting is the best thing to do , So if this seems to be the general consensus among some of the greatest minds in the world , who the hell are the Irish government listening to that they think encuring decades of debt is the right thing to do?

Their European paymasters who cannot afford Ireland to fail so they are forcing more money down our throats in the deluded attempt that it will somehow magically make the vast losses the ECB and the bondholders have already suffered magically disappear.

They must be high if they think this is a good idea...

karlth

zeds alive wrote: »

I have read lots articles like this by some of the worlds leading and respected economists who all seem to think that Ireland defaulting is the best thing to do , So if this seems to be the general consensus among some of the greatest minds in the world , who the hell are the Irish government listening to that they think encuring decades of debt is the right thing to do?

Krugman is not talking about Ireland defaulting. Iceland certainly didn't.

He is talking about bond holders at least sharing the burden of their failed investments instead of them being shoved onto the taxpayer. The Irish government shouldn't have to carry this load by itself.

zeds alive

johnnyskeleton wrote: »

we can't leave the euro. But even if we could leave, would we want to?

I think it was Paul Krugman that also said that he couldn't understand why we even joined the single currency in the first place considering the majority of or trade was with Britain and the USA , he said it would have made more sense to adopt the dollar or the pound before the euro.

Tipp Man

dublogic wrote: »

Just read this article in the NY Times by Paul Krugman and it articulated my thoughts better then I ever could.

"Eating the Irish
By PAUL KRUGMAN, NY Times
Published: November 25, 2010



Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

. "

Sorry but this paragraph is complete rubbish. Between 2008 and 2014 (so from the start of the bank crisis) the Irish government will have borrowed in excess of 100 billion to fund public sector spending. Far too many people simply forget to mention just how much we are borrowing for the public sector spending

The amount borrowed for the public sector spending in that period will be roughly equal to the money borrowed for the bank mess.

We could probably cope with either a public sector spending mess or a banking mess. However the 2 combined are proving to be death of this country

Scofflaw

The problem is that like many another of these articles, it contains factual inaccuracies and shaded truths. Iceland didn't default, their unemployment rose by eight or nine times rather than our four times, their GDP growth is still behind ours, their credit rating is lower than that of Greece, and they still owe the debts they've accumulated from their bailouts. As a condition of the IMF money, they had to raise their interest rates to 18% from 7%.

Talking up Iceland's situation as if it offered a general solution for Ireland's position is silly - there are specific moves the Icelanders took that would be worth following, but the idea that Iceland somehow waved away the crisis with a brief shock flies in the face of the facts.

Burning the bondholders is the only real recommendation that comes out of that article - something the EU/IMF are pushing for our government to do, while our government resists the pressure.

cordially,
Scofflaw

karlth

Scofflaw wrote: »

The problem is that like many another of these articles, it contains factual inaccuracies and shaded truths. Iceland didn't default, their unemployment rose by eight or nine times rather than our four times, their GDP growth is still behind ours, their credit rating is lower than that of Greece, and they still owe the debts they've accumulated from their bailouts. As a condition of the IMF money, they had to raise their interest rates to 18% from 7%.

A few comments about the situation in Iceland:

• The interest rate is currently 5.5% after 18% briefly one year ago. Unemployment is around 7% after hovering around 1-2% during the boom years.
• Iceland's credit rating is low but the CDS spreads are two or three times lower than Ireland's.
• The IMF loan has not been used, it was intended to bolster our currency fund.

A sovereign default in Iceland was never an option and neither should it be for Ireland. It is a very bad idea.

What should be done is that the senior bond holders should be pressured into sharing the losses of their investments.

Whiskeyjack

The question is then if we do burn the bondholders while opting not to default will we then be able to pay it off?

karlth

Whiskeyjack wrote: »

The question is then if we do burn the bondholders while opting not to default will we then be able to pay it off?

If the bondholders shared the load then Ireland's need for a loan wouldn't be as large.

wiseguy

zeds alive wrote: »

I think it was Paul Krugman that also said that he couldn't understand why we even joined the single currency in the first place considering the majority of or trade was with Britain and the USA , he said it would have made more sense to adopt the dollar or the pound before the euro.

Ah Krugman never bothers with reality and facts

Europe is our main export destination as per CSO

SkepticOne

This is what economists such as McWilliams, Kelly and others have been arguing for a long time. Make those who take risks take the consequences of those risks when they go wrong. Don't involve people who had no part in those decisions and would not have stood to gain had the risk paid off.

SkepticOne

wiseguy wrote: »

Ah Krugman never bothers with reality and facts

Europe is our main export destination as per CSO

It probably is Iceland's main export destination too yet they are not part of the Euro.

Whiskeyjack

karlth wrote: »

If the bondholders shared the load then Ireland's need for a loan wouldn't be as large.

So we could get by without one? If true that's somewhat frustrating as it seems the only way we'll get them to pay any of the cost is due to EU/IMF intervention:

http://www.irishtimes.com/newspaper/breaking/2010/1126/breaking6.html

The_Honeybadger

Scofflaw wrote: »

Burning the bondholders is the only real recommendation that comes out of that article - something the EU/IMF are pushing for our government to do, while our government resists the pressure.

cordially,
Scofflaw

Any idea why? Why are the government resisting this pressure when it would greatly reduce our burden? Is there something we are not being told?

karlth

Whiskeyjack wrote: »

So we could get by without one? If true that's somewhat frustrating as it seems the only way we'll get them to pay any of the cost is due to EU/IMF intervention:[/url]

It is certainly more complex as Ireland has the Euro and cannot print itself of the current situation.

johnnyskeleton

zeds alive wrote: »

I think it was Paul Krugman that also said that he couldn't understand why we even joined the single currency in the first place considering the majority of or trade was with Britain and the USA , he said it would have made more sense to adopt the dollar or the pound before the euro.

Well if that's true (and I don't think it is), our biggest trading partner now is the Eurozone and there is no sign of a let up in US / UK exports. So by joining the Eurozone we have increased our exports dramatically, which is a good outcome.

sollar

Tipp Man wrote: »

Sorry but this paragraph is complete rubbish. Between 2008 and 2014 (so from the start of the bank crisis) the Irish government will have borrowed in excess of 100 billion to fund public sector spending. Far too many people simply forget to mention just how much we are borrowing for the public sector spending

The amount borrowed for the public sector spending in that period will be roughly equal to the money borrowed for the bank mess.

We could probably cope with either a public sector spending mess or a banking mess. However the 2 combined are proving to be death of this country

It sure is difficult to find a thread without the ps being brought into it.

If we only had 150,000 unemployed then that alone would give us a balanced budget (excluding the banking crisis). This is not a problem of the public service. This is a problem of a collapsed private sector brought about by bad banking, fianna fail mismanagement and the credit crunch.

Public service pay is 16 billion (gross i may add)..... the same figure will soon be going out on interest alone.

What we can't afford is 21 billion social welfare bill and lost tax reciepts due to 450,000 unemployed.

Amhran Nua

sollar wrote: »

What we can't afford is 21 billion social welfare bill and lost tax reciepts due to 450,000 unemployed.

Social welfare isn't just the unemployed, its child benefit and a whole host of other things as well. Given an average cost of €200 per person unemployed per week gives a saving of €3 billion if 300,000 were taken off it. Spending, especially public sector expenditure, went through the roof over the last ten years. If costs were at 2004 levels we'd be breaking even right now, even with high unemployment.

Krugman, although I disagree with several of his articles, is correct in this one.

sollar

@ Amhran nua,

yeah but factor in the extra tax revenues with 300,000 more in employment.

Amhran Nua

sollar wrote: »

@ Amhran nua,

yeah but factor in the extra tax revenues with 300,000 more in employment.

Unless each of those people ends up paying around €75,000 a year in taxes each, its not going to be anywhere near enough. Cuts all round, I'm afraid, and steep ones.

sollar

We were only paying 11 billion in welfare in 2004, 12 billion in 2005.

http://www.cso.ie/statistics/expend_social_welfare.htm

Its still a much bigger problem than public sector pay imo.

karlth

karlth wrote: »

A few comments about the situation in Iceland:

• The interest rate is currently 5.5% after 18% briefly one year ago. Unemployment is around 7% after hovering around 1-2% during the boom years.
• Iceland's credit rating is low but the CDS spreads are two or three times lower than Ireland's.
• The IMF loan has not been used, it was intended to bolster our currency fund.

A sovereign default in Iceland was never an option and neither should it be for Ireland. It is a very bad idea.

What should be done is that the senior bond holders should be pressured into sharing the losses of their investments.

+1

we should never have guaranteed the banks
Lenihan and Cowen should be in jail for what they have done to us

thebman

SkepticOne wrote: »

It probably is Iceland's main export destination too yet they are not part of the Euro.

Well they'd have to join the EU first which they won't as fishing is one of their main industries and they don't wish to share their fishing waters.

later12

Scofflaw wrote: »

Burning the bondholders is the only real recommendation that comes out of that article - something the EU/IMF are pushing for our government to do, while our government resists the pressure.

I'm not sure anyone still doubts that the bondholders will be 'burned'. some might like that to be more literal than others, and some would argue over the nature and magnitude of the haircut that bondholders are to receive.

As it currently stands, with still no agreement within Europe as to what procedure should be followed in wielding the scissors on financial haircuts, it would be ludicrous of the current administration in this country to suddenly and prematurely make pronouncements on the issue.

Sure, nobody believes bond holders won't suffer, but although investors themselves know this, it is hardly in our current interests to start harping on about it.

Dannyboy83

Scofflaw, anybody, somebody........can SOMEBODY please explain why we are not reforming spending?

Why are we not cutting 20 billion from spending over 4 years?
Why are we pretending there will be growth, when all signs say the opposite?

I simply cannot understand why we are not doing it.
Lativa did it and they are recovering.

Why do we refuse to balance our books?

sollar

Deleted User wrote: »

+1

we should never have guaranteed the banks
Lenihan and Cowen should be in jail for what they have done to us

With typical fianna fail arrogance they thought they had all the answers and thought they pulled a master stroke with the bank guarantee..... look at things now!!

Scofflaw

Dannyboy83 wrote: »

Scofflaw, anybody, somebody........can SOMEBODY please explain why we are not reforming spending?

Why are we not cutting 20 billion from spending over 4 years?

Given that there are doubts over whether cutting €15bn is too much austerity, why €20bn?

Dannyboy83 wrote: »

Why are we pretending there will be growth, when all signs say the opposite?

Essentially, because that's what the economists are predicting - see here for example. They might be wrong, but that's what they're saying - and to be fair to NCB, they issued a pretty consistent series of warnings over Irish property prices and domestic debt throughout the bubble years.

Dannyboy83 wrote: »

I simply cannot understand why we are not doing it.
Lativa did it and they are recovering.

Why do we refuse to balance our books?

Isn't most of the forum taken up with arguments over how the books should be balanced, but not at the expense of group X or Y having less money?

cordially,
Scofflaw

Hayte

http://www.cso.ie/statistics/botmaintrpartners.htm

In 2009 we exported more to the US, UK and the rest of the world combined than the entire EU and we import the most from the UK/NI who can still be considered our biggest trade partner.

Its also worth mentioning that the UK has already tried an export led recovery this year which largely failed to impress even though the pound was at an incredible low.

Inverse to the power of one!

Burning the bondholders is the only real recommendation that comes out of that article - something the EU/IMF are pushing for our government to do, while our government resists the pressure.

This!

Risk includes the possibility of loss, theres a lot of small print around it. We might be hemmed in because the Euro currency and Economy can't survive a default on our part, but we sure as hell can let the private entities that chose to take the risk of their own accord lose what they bet.

Hayte

mickeyk wrote: »

Any idea why? Why are the government resisting this pressure when it would greatly reduce our burden? Is there something we are not being told?

They are trying to make it as consensual as possible and spreading the debt between bondholders in a way that doesn't make them reel so badly that investors won't be deterred from ever investing in Irish financial institutions for the foreseeable future.

I don't agree with all of the things Krugman says in his opinion pieces but market "confidence" is really key to the Irish recovery strategy. It isn't really working but the point is that the government guarantee, NAMA, all of that - it makes sense but only if it gives foreign investors confidence to keep their money in Ireland.

However the price of insuring against Irish debt default is rising anyway and the price of Irish debt is falling. This kind of creates the conditions for a huge speculator's market where its simply more profitable in the short term to bet on Irish debt default and decrease in the value of Irish debt than it is to invest. Its sort of like a spiral of speculation that amplifies investor panic, makes everyone edgy and start pulling their money because oh god we are going to make huge losses here! And investors are already hedging themselves against such an event so they stand a better chance of mitigating their losses by hoping for failure.

The US bailout was under different circumstances though they needed to re capitalize their banks like we did, it wasn't a problem for them to restore market confidence. They let the crap banks like Lehman fail and the ones with serious money making capacity like Goldman Sachs they kept alive and they quickly returned to profitability. Their national debt is huge but thats mainly to do with military spending and general aversion to paying tax. They can run huge deficits because they are incredible producers and they can pay it down ridiculously quickly if they have to. Like check out the gdp per capita of California alone. It produces so much that if it were a country, it would be in the G10. On the issue of spending, inevitable comparisons will be made to Californa because its amazing how the state isn't bankrupt. But when you look at its incredible ability to produce then you start to see why. We don't produce like California does. In fact, alot of what we export are products from foreign companies who are only over here to dodge the higher taxes in their own country. So when Cali needs to borrow money, the interest rate is tiny because the lender has faith that it can be paid back quickly and in full. Ireland gets really high interest rates if we want to borrow money on the national level from the likes of the European Central Bank reflecting their distrust that we can pay it back in a timely fashion. Our bank's collateral isn't hot either - alot of overvalued property in large part. So big lenders will only lend money to us if theres alot in it for them otherwise its not worth the risk. That sounds counter-intuitive I know - only offer high interest rate loans to a country that has demonstrated its inability to pay but they probably have other ways to mitigate loss.