FT: Ireland needs help with its debt (Martin Wolf)

SkepticOne

Things have a habit of being dismissed as sensationalist by those who prefer to believe that the problem is not as great as it is. We saw this during the property bubble and it still exists today.

Accordingly, this article will be dismissed as sensationalist or populist by the in denial crowd here but anyway here's an article by Martin Wolf in today's FT (via the Irish Economy blog).

From the article:

Apart from the Armageddon of a sovereign default, two partial escapes exist. The more trivial would be a reduction in the rate of interest on Ireland’s borrowing: a 1 per cent reduction in the rate of interest would save the state 0.4 per cent of GDP a year. That would be a small help, at least. A more valuable possibility would be a writedown of existing subordinated and senior bank debt, which currently amounts to €21.4bn (14 per cent of GDP).

The ECB and the other members of the European Union have vetoed this idea, fearful of contagion. Indeed, the assistance package was partly to prevent just such an outcome. Yet the idea that taxpayers should bail out senior creditors of massively insolvent banks at such risk to the solvency of their state is both unfair and unreasonable. If the rest of the EU is determined to protect senior creditors, it should surely share in the cost of doing so. Why should the taxpayers of the borrowing country pay all? The new Irish government should make this point firmly.

[emphasis mine]


Article here. Well worth reading.

I will anticipate the next question from those who dismiss this sort of thing as populism. Who is Martin Wolf and what does he know?

Martin Wolf is chief economics commentator at the Financial Times, London. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”. Mr Wolf is an associate member of the governing body of Nuffield College, Oxford, honorary fellow of Corpus Christi College, Oxford University, an honorary fellow of the Oxford Institute for Economic Policy (Oxonia) and a special professor at the University of Nottingham. He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999 and a member of its International Media Council since 2006. He was made a Doctor of Letters, honoris causa, by Nottingham University in July 2006. He was made a Doctor of Science (Economics) of London University, honoris causa, by the London School of Economics in December 2006.

More here.

Fratton Fred

The eurozone will help out, but only when the Irish government does something that looks remotely like change, which to be honest hasn't happened yet.

Maybe when a few of the cronies are locked up, or seen to be feeling extreme amounts of pain, rather than being protected and the ludicrous coke park deal is ripped up, then more help will come.

If you look at the incompetent comments and actions if this government over the past three years, can you blame the ecb for not wanting to be overly helpful?

20Cent

Pretty much everyone except the current Gov know something needs to happen. Hopefully FG can do something but not holding my breath. A referendum is required imho.

Duke Leonal Felmet

Politics is like soccer. Every fan knows what the manager shoulda done.

Fratton Fred

Duke Leonal Felmet wrote: »

Politics is like soccer. Every fan knows what the manager shoulda done.

True, but some tactics are plainly wrong.

What Lenihan did was the equivalent of being 1 nil up with 5 minutes to play and swapping your two centre halves for forwards.

zig

Duke Leonal Felmet wrote: »

Politics is like soccer. Every fan knows what the manager shoulda done.

yes but this time, everyone knows what the manager should do.

Duke Leonal Felmet

zig wrote: »

yes but this time, everyone knows what the manager should do.

Nothing new there, then...

fred252

Fratton Fred wrote: »

The eurozone will help out, but only when the Irish government does something that looks remotely like change, which to be honest hasn't happened yet.

Maybe when a few of the cronies are locked up, or seen to be feeling extreme amounts of pain, rather than being protected and the ludicrous coke park deal is ripped up, then more help will come.

If you look at the incompetent comments and actions if this government over the past three years, can you blame the ecb for not wanting to be overly helpful?

the eurozone should help out even without those changes.

WalterMitty

21billion isnt gonna go far when we borrow that amount nearly every year. Europe will help out but it will be a Eurozone wide renegotiation and not unilateral. Theres a summit in march to thrash it out. Lkely that the EU taxpayers as a whole will all pay rather than just the taxpayers in affected countries.

kenrr

SkepticOne wrote: »

Things have a habit of being dismissed as sensationalist by those who prefer to believe that the problem is not as great as it is. .............

Accordingly, this article will be dismissed as sensationalist or populist by the in denial crowd here but anyway here's an article by Martin Wolf in today's FT (via the Irish Economy blog).

The article is not sensationalist ... it describes the depressing situation very clearly e.g.

So what might a new government seek to do? Its degrees of freedom are, alas, limited. Even excluding recapitalisation of the banks, the primary fiscal deficit (before interest payments) was close to 10 per cent of GDP last year. Under the IMF programme, this is to be turned into a surplus of 1.5 per cent of GDP by 2015. Given the lack of access to private markets, the deficit would have to be eliminated even more quickly without the official assistance. Again, the debt overhang would be huge, under any plausible assumptions. Ireland is doomed to fiscal stringency for decades, given its poor growth prospects, at least in comparison with its Tiger years.

However what is disappointing is that there is no mention whatsoever of the hard graft, very painful major measures that are necessary to overcome the problems. All we get are the two populist, pain-free "trivial" (Wolf's word) measures of 1% reduction in the loan interest rate and the usual burning-the-bondholders stuff. The relief provided by these "trivial" measures would have very little impact in lessening the extent of "fiscal stringency for decades" that Wolf mentions.

I don't see a 'denial' crowd here in terms of believing that the problem is not as great as it is ... what I tend to see is a 'denial' crowd who put considerable emphasis on and appear to believe that such a very great and serious problem can be largely solved by these types of painfree measures which are "trivial"(Wolf's word) relative to the extent of the problem to be overcome. (Apart from the fact that, under current rule of law, there is no practical way of burning bondholders without resulting in substantially increasing Govt debt even more to payout guaranteed depositors.)

Fratton Fred

fred252 wrote: »

the eurozone should help out even without those changes.

no it shouldn't. The EU has written Ireland enough blank cheques as it is.

Ray Burkes Pension

20Cent wrote: »

Pretty much everyone except the current Gov know something needs to happen. Hopefully FG can do something but not holding my breath. A referendum is required imho.

What exactly in the constitution should this referendum change?

20Cent

Ray Burkes Pension wrote: »

What exactly in the constitution should this referendum change?

A referendum on the bank debt would give the Gov a mandate to separate it from the sovereign debt. Let those who owe this debt pay it not the Irish people.

Scofflaw

20Cent wrote: »

A referendum on the bank debt would give the Gov a mandate to separate it from the sovereign debt. Let those who owe this debt pay it not the Irish people.

And if they can't? After all, that's the basic problem here - the banks can't pay their own debts, and can't currently borrow to roll them over either.

kenrr wrote:

I don't see a 'denial' crowd here in terms of believing that the problem is not as great as it is ... what I tend to see is a 'denial' crowd who put considerable emphasis on and appear to believe that such a very great and serious problem can be largely solved by these types of painfree measures which are "trivial"(Wolf's word) relative to the extent of the problem to be overcome. (Apart from the fact that, under current rule of law, there is no practical way of burning bondholders without resulting in substantially increasing Govt debt even more to payout guaranteed depositors.)

Sure - it's pretty misleading to describe the people who don't believe there's an easy pain-free solution to a large and complex problem as being the ones in denial.

WalterMitty wrote:

21billion isnt gonna go far when we borrow that amount nearly every year. Europe will help out but it will be a Eurozone wide renegotiation and not unilateral. Theres a summit in march to thrash it out. Lkely that the EU taxpayers as a whole will all pay rather than just the taxpayers in affected countries.

That remains the best solution from our point of view, if it can be achieved - a general non-market facility for the banks to tap or a general EU-wide restructuring of bank debt seems more likely than simply spreading the load across all EU taxpayers, though. Still, nearly any EU-wide solution is better than unilateral action.

cordially,
Scofflaw

fred252

Fratton Fred wrote: »

no it shouldn't. The EU has written Ireland enough blank cheques as it is.

its not free money. they get state guaranteed IOUs in return. it was in our wonderful "benefactor's" interest to lend us that money.

Scofflaw

fred252 wrote: »

its not free money. they get state guaranteed IOUs in return. it was in our wonderful "benefactor's" interest to lend us that money.

And even more in our interests. It would be nice if none of the money they were lending us was earmarked for the banks, but then it was our government that took on the banks' debts wholesale in the first place.

Had out government not unilaterally (and without consultation) decided to guarantee all bank debt, but instead to let the banks go down, we would still have needed an IMF/EU bailout - just a lot sooner.

cordially,
Scofflaw

cson

@ WalterMitty: That's interesting, an EU wide Income Levy so to speak? To be pooled into a central fund?

rumour

Scofflaw wrote: »

That remains the best solution from our point of view, if it can be achieved - a general non-market facility for the banks to tap or a general EU-wide restructuring of bank debt seems more likely than simply spreading the load across all EU taxpayers, though. Still, nearly any EU-wide solution is better than unilateral action.

cordially,
Scofflaw

Our?

Are you representing someone? a slip perhaps?

Duke Leonal Felmet

rumour wrote: »

Our?

Are you representing someone? a slip perhaps?

Do we find out after all this time that Scofflaw is Irish???

:shocky:

Scofflaw

Duke Leonal Felmet wrote: »

Do we find out after all this time that Scofflaw is Irish???

:shocky:

I admit it...luckily I have Vulcan blood on one side.

amused,
Scofflaw

SkepticOne

kenrr wrote: »

However what is disappointing is that there is no mention whatsoever of the hard graft, very painful major measures that are necessary to overcome the problems. All we get are the two populist, pain-free "trivial" (Wolf's word) measures of 1% reduction in the loan interest rate and the usual burning-the-bondholders stuff. The relief provided by these "trivial" measures would have very little impact in lessening the extent of "fiscal stringency for decades" that Wolf mentions.

I think the reason he doesn't dwell upon the normal painful measures (i.e. tax rises, budget cuts, etc.) is not because he doesn't agree with them but for two reasons: 1) they are discussed elsewhere at length and 2) one of the points of his article is that these measures on their own are not enough to get us out of the hole. The fiscal problem is only one problem.

Dannyboy83

Assuming we do default, then I guess it will just be a soft default anyway.
i.e.
Everything due gets paid back, just a little behind schedule.

It's fairly evident at this stage that, unlike Iceland for example, the Irish pay back all of their debts, all of the time. We are even paying back debts that we apparently shouldn't repay, unguaranteed etc.

So what is the major risk associated with lending to us at this stage?

ilovesleep

Dannyboy83 wrote: »

Assuming we do default, then I guess it will just be a soft default anyway.
i.e.
Everything due gets paid back, just a little behind schedule.

It's fairly evident at this stage that, unlike Iceland for example, the Irish pay back all of their debts, all of the time. We are even paying back debts that we apparently shouldn't repay, unguaranteed etc.

So what is the major risk associated with lending to us at this stage?

Google sovereign defaults. Plenty of countries defaulted in the past. Ireland is not on the list. Its something to be proud of.

Voodoo_rasher

read this article and see how our debt could be substantially reduced. we dont need that sort of help.

shame the extent of this lamentable saga will not be realised in time - see Comment 23.

http://bocktherobber.com/2008/07/the-oil-company-the-crooked-politician-and-the-theft-of-irelands-energy-resources

Pete_Cavan

Voodoo_rasher wrote: »

read this article and see how our debt could be substantially reduced. we dont need that sort of help.

shame the extent of this lamentable saga will not be realised in time - see Comment 23.

http://bocktherobber.com/2008/07/the-oil-company-the-crooked-politician-and-the-theft-of-irelands-energy-resources

Ireland Norway
Royalties zero 51.5%
Corporation tax 25% 78%
Shared ownership zero 50%

There should be another row on that table reading;

Barrells of oil produced: Ireland - 0 Norway - 20 billion

The obvious question is if we are giving the stuff away, and we have trillions of euro worth of it, why is nobody taking it? We have SFA in the way of oil or gas and what little is there is extremely difficult (and expensive) to tap. We seem to get this crap every week now and it is just getting ridiculous.

Dannyboy83

ilovesleep wrote: »

Google sovereign defaults. Plenty of countries defaulted in the past. Ireland is not on the list. Its something to be proud of.

My point is, even if we did default, it would only be a soft default anyway; It's evident that we'll pay back every cent, just not on the approved timetable.

That's not the same as lending to someone who mightn't pay you back.
We'll pay you back and then some, just we'll take longer to do it.

I don't see the risk in lending to Ireland anymore.