Former IMF Ireland mission chief slams ECB treatment of Ireland

porsche959

The European Central Bank acted in an "outrageous" manner and went beyond its remit when it pressured Ireland to commit to years of austerity, according to Ajai Chopra.

http://www.independent.ie/business/irish/chopra-says-ecbs-threats-to-ireland-were-outrageous-31152447.html

Given these outspoken, honest and damning comments, surely it is time for the Eurofanatics on this forum and elsewhere to hand their heads in shame and admit that they got it wrong.

BoJack Horseman

porsche959 wrote: »

Given these outspoken, honest and damning comments, ....

I assume you were in such a rush to push your agenda you forgot to read the article:

Mr Chopra accepted that if you are the lender of last resort, such as the ECB was, it was reasonable for it to ask Ireland about the condition of its banks, and to say that if it isn't possible to have them recapitalised via the markets, an international rescue package should be sought.

"My reading of the letters is that, if you're the lender of last resort and you see this [a spike] happening with your liquidity support, I think it's perfectly reasonable for you to ask the borrower, 'what is the condition of your banks, are they solvent and do you have a plan to make these banks viable?'

"Every lender of last resort has to be asking these questions and also be saying, 'look if you can't recapitalise these banks by borrowing on the market, you'd better get an international rescue loan to recapitalise your banks'."

I think that recapitalising via the troika mechanism @ about 5% interest was a lot smarter than paying the markets @12+% at the time to do the same.

Don't you agree?

porsche959 wrote: »

surely it is time for the Eurofanatics on this forum and elsewhere to hand their heads in shame and admit that they got it wrong.

Obvious empty rhetoric is obvious.

porsche959

BoJack Horseman wrote: »

I think that recapitalising via the troika mechanism @ about 5% interest was a lot smarter than paying the markets @12+% at the time to do the same.

http://economic-incentives.blogspot.ie/2009_04_01_archive.html

hfallada

porsche959 wrote: »

http://www.independent.ie/business/irish/chopra-says-ecbs-threats-to-ireland-were-outrageous-31152447.html

Given these outspoken, honest and damning comments, surely it is time for the Eurofanatics on this forum and elsewhere to hand their heads in shame and admit that they got it wrong.

Without the Troika, there would have been no political will to balance the budget. Government borrowing is nothing more than deferred taxation and its completely wrong for another Generation to pay for the previous ones excessive lifestyle. We need to cut back on spending and raise taxes. If you study economics, they say its better to do this over a longer spend of time to allow people to adjust. But when you cant borrow and borrowing Billions every year, sometimes smart cuts are needed.

All of the Eastern European countries who had budgetary issues, did what Ireland did. Which was high tax increases rapidly and large spending cuts. There economic growth sank and then rose quickly as like Ireland. Lets look at France, who keeps delaying serious expenditure cuts and tax increases. Their economy is flat lining.

Government borrowing is deferred taxation. It was not fair to delay austerity and make the future Generations pay for this recession.

BoJack Horseman

porsche959 wrote: »

http://economic-incentives.blogspot.ie/2009_04_01_archive.html

Morto....

Brace for knowledge.... Governments don't fund themselves by taking out a tracker mortgage, so graphing the ECB rate is irrelevant.

As anyone knows, Ireland in 2010 was struggling to borrow at ever increasing rates..... (Shown below).



As Mr Shopra & I agree, having an agreed bailout mechanism was & always was much more preferable than sourcing finance from the markets.
I mean, who wants to pay way more interest than they need to?
Try harder.

Kermit.de.frog

You borrow, you owe. Irish people lived beyond their means collectively and hence the trouble we got in to.

The important thing is it never happens again.

Icepick

How is borrowing €100,000,000,000 to fund welfare spending even considered austerity?

View

porsche959 wrote: »

http://economic-incentives.blogspot.ie/2009_04_01_archive.html

The ECB sets its interest rate based on the inflation rate within the Eurozone, hence it set it correctly.

If there is a deviation between the rate it sets and the Taylor rule predicted rate that Ireland should have had, it is because our domestic inflation rate deviated from the inflation rate within the Eurozone. This was (largely) due to our domestic fiscal policies.

It is our domestic responsibility to minimise that inflation rate deviation by pursuing appropriate fiscal policies. We did not do this.

In that regard, our position is comparable to what would happen to a US state that runs an inflation rate far higher then the overall US inflation rate - namely, the question is how much of a mess you end up in, not will you do so.

Lastly, if you note, Taylor did not assume that each US state set its own interest rate - rather he assumes a single US interest rate and it is assumed each US state will live with that and adjust accordingly.

View

porsche959 wrote: »

http://www.independent.ie/business/irish/chopra-says-ecbs-threats-to-ireland-were-outrageous-31152447.html

Given these outspoken, honest and damning comments, surely it is time for the Eurofanatics on this forum and elsewhere to hand their heads in shame and admit that they got it wrong.

Had the IMF felt strongly about it, they could have lent us the money at lower rates than the Eurozone states, they did NOT.

As such it is rank hypocrisy for an ex- IMF official to claim they had a problem with our austerity plans when the IMF - when acting on ther own - are famed for the brutality of their austerity plans.

porsche959

Kermit.de.frog wrote: »

You borrow, you owe. Irish people lived beyond their means collectively and hence the trouble we got in to.

The important thing is it never happens again.

"The important thing is it never happens again. "

Given that the eurozone remains in place, it is almost guaranteed to.

porsche959

View wrote: »

Had the IMF felt strongly about it, they could have lent us the money at lower rates than the Eurozone states, they did NOT.

Structures didn't allow that, but the issue is not just to do with the rate, it is the amount and being forced to foot bill for bondholders.

View wrote: »

As such it is rank hypocrisy for an ex- IMF official to claim they had a problem with our austerity plans when the IMF - when acting on ther own - are famed for the brutality of their austerity plans.

Not in recent years, they have had a much more reasonable approach and have learned from past mistakes.

porsche959

BoJack Horseman wrote: »

Morto....

Brace for knowledge.... Governments don't fund themselves by taking out a tracker mortgage, so graphing the ECB rate is irrelevant.

As anyone knows, Ireland in 2010 was struggling to borrow at ever increasing rates..... (Shown below).

It's morto you should be indeed. What you don't seem to appreciate is that the graph I put up shows the deviation between the ECB interest rate and the one that would have been appropriate for Ireland (given its inflation rate) in the run-up to the crash - a key factor in blowing up the unsustainable real estate bubble in Ireland. 'View' grasped the point I was trying to make (although I disagree with him about implications and interpretation. )

BoJack Horseman

porsche959 wrote: »

What you don't seem to appreciate is that the graph I put up shows the deviation between the ECB interest rate and the one that would have been appropriate for Ireland

What point are you trying to make?

Ireland wasn't borrowing from the ECB or any fund pegged to it, so their baseline rate at the time is entirely irrelevant.

Ireland could either borrow from the EU/IMF/UK/SWE/Denmark or from the bond markets.

The bailout had an average interest rate of 5.8% (reduced to just above 3% subsequently).

Had Ireland not done do, the only alternative was the market @ 9%-10%

Please don't tell us you are confusing the ECB with the bond markets?

And while the initial interest rate was high (but still below market value) do tell why you think the alternative to the bailout was preferable, considering it was vastly more expensive?

frankbrett

porsche959 wrote: »

Structures didn't allow that, but the issue is not just to do with the rate, it is the amount and being forced to foot bill for bondholders.



Not in recent years, they have had a much more reasonable approach and have learned from past mistakes.

The EU/IMF bailout monies were to fund the day to day running of the country so aren't directly linked to bondholders.

The bank recapitalisations were funded by borrowings, funds from the NPRF and the promissory note arrangement. that's not to say there was no relationship between the two but funding in the bond markets to fund the multi billion annual deficits was becoming unfeasible, particularly in the run up to the expiry of the original guarantee in 2010.

As for the IMF, as we see now in Greece, they are the most onerous loans, in terms of cash flow, due to amortisations, rates, due to the penalties for exceeding the quota and the time based surcharge and hedging, due to receiving and repaying a basket of currencies. Whereas, the EU funds, as bullet payments, can have maturity deferred and rates lowered where feasible.

View

porsche959 wrote: »

Structures didn't allow that, but the issue is not just to do with the rate, it is the amount and being forced to foot bill for bondholders.

Or, in other words, the ex-IMF official is all talk now and was no action back then.

porsche959 wrote: »

Not in recent years, they have had a much more reasonable approach and have learned from past mistakes.

That's not what they either said or did when we were in bailout talks. Nor, indeed is it how they are beheaving with the current states they are dealing with at the moment.

View

porsche959 wrote: »

It's morto you should be indeed. What you don't seem to appreciate is that the graph I put up shows the deviation between the ECB interest rate and the one that would have been appropriate for Ireland (given its inflation rate) in the run-up to the crash - a key factor in blowing up the unsustainable real estate bubble in Ireland. 'View' grasped the point I was trying to make (although I disagree with him about implications and interpretation. )

As I pointed out previously, it was and is our responsibility to ensure our domestic inflation rate does not deviate significantly from the Eurozone inflation rate. As our government - like most other governments - is the single largest spender in the economy, we had it in our control to act in a prudent fashion but did not do so.

Instead we basically engaged in economic "bungee jumping" where we ran our economy on the basis that we were totally unconnected to the wider Eurozone - raising salaries, spending and prices at multiple times the rest of the Eurozone.

Had the people of, let's say, Westmeath raised their prices year-after-year at multiple times the rate of Offaly or Roscommon, we'd have laughed our heads off at them and yet that is exactly the folly we engaged in.

micosoft

View wrote: »

Or, in other words, the ex-IMF official is all talk now and was no action back then.



That's not what they either said or did when we were in bailout talks. Nor, indeed is it how they are beheaving with the current states they are dealing with at the moment.

This.
Most curious the spate of IMF officials have second thoughts.

It also has to be said that nobody involved in the bailout think it was perfect or even close to good. It was based on the information AT THE TIME. This retrospective analysis that if we knew what we know now we could have saved the country billions is nonsense of the highest order.

Godge

porsche959 wrote: »

http://www.independent.ie/business/irish/chopra-says-ecbs-threats-to-ireland-were-outrageous-31152447.html

Given these outspoken, honest and damning comments, surely it is time for the Eurofanatics on this forum and elsewhere to hand their heads in shame and admit that they got it wrong.

Eh, with the fastest growing economy in Ireland, we got it wrong?

Very confused.

hmmm

The markets were closed to Ireland at the time of the bailout; you can show all the graphs you want - they are incorrect because we could not borrow money at any price. Once the Irish government made the decision to bail out the banks, the only place they could turn to was the Troika.

hmmm

micosoft wrote: »

This.
Most curious the spate of IMF officials have second thoughts.

Spate? Who else other than Mr. Chopra?

porsche959

Right on cue, an excellent piece from Cormac Lucey which rams the point home.

http://cormaclucey.blogspot.ie/2015/04/professor-honohan-mistaken-on-origins.html

porsche959

View wrote: »

As I pointed out previously, it was and is our responsibility to ensure our domestic inflation rate does not deviate significantly from the Eurozone inflation rate. As our government - like most other governments - is the single largest spender in the economy, we had it in our control to act in a prudent fashion but did not do so.

Instead we basically engaged in economic "bungee jumping" where we ran our economy on the basis that we were totally unconnected to the wider Eurozone - raising salaries, spending and prices at multiple times the rest of the Eurozone.

Had the people of, let's say, Westmeath raised their prices year-after-year at multiple times the rate of Offaly or Roscommon, we'd have laughed our heads off at them and yet that is exactly the folly we engaged in.

I don't accept any of this because I don't accept its basic premise. I was taught at college that inflation in a small open economy is generated by external factors, it has nothing to do with government policy of that economy. Government of such an economy can effect unemployment/wage inflation, by, for example, yielding to excessive wage demands, but not price inflation, at least to a significant degree.

porsche959

hmmm wrote: »

The markets were closed to Ireland at the time of the bailout; you can show all the graphs you want - they are incorrect because we could not borrow money at any price.

Absolutely. I'm certainly not disputing any of that and didn't mean to imply otherwise. But the ECB used this situation to extort a promise from the government to repay the private debts of bondholders, whereas in fact these debts were down to bank failures which were ultimately the fault of the ECB for setting interest rate too low and encouraging excessive risk taking.

Whatever you look at it, it comes back to the euro - a weapon of mass economic destruction!

BoJack Horseman

porsche959 wrote: »

But the ECB used this situation to extort a promise from the government to repay the private debts of bondholders

The ECB asked the government to create a plan to provide liquidity assistance as up to then the ECB were left on the hook for it.

Can you demonstrate how this equates to forcing the government to cover the Anglo collapse?

frankbrett

BoJack Horseman wrote: »

The ECB asked the government to create a plan to provide liquidity assistance as up to then the ECB were left on the hook for it.

Can you demonstrate how this equates to forcing the government to cover the Anglo collapse?

At the time of the bailout, the gains from burning bondholders in Anglo were 'only' €1.75bn. The fallout from a default was deemed to be more costly than the potential Savings.

BoJack Horseman

frankbrett wrote: »

At the time of the bailout, the gains from burning bondholders in Anglo were 'only' €1.75bn. The fallout from a default was deemed to be more costly than the potential Savings.

I just want to see how the,ECB forced the 'bailout of bondholder' thing (when they had no authority to compel this).

View

porsche959 wrote: »

I don't accept any of this because I don't accept its basic premise. I was taught at college that inflation in a small open economy is generated by external factors,

That is clearly nonsense.

External factors certainly play a role in the inflation rate. Should, for instance, the price of oil riseor fall, it will impact us. Then again, it will also impact every other Eurozone country's inflation rate.

Clearly, most external factors will impact Eurozone countries in largely the same way (although not necessarily identically I stress).

Hence, unless there are either significant barriers to imports to us (but not to other EZ states) OR there is large scale price fixing going on, external factors are not going to account for large inflation differentials between Ireland and the overall EZ inflation rate.

Of these, the first should not exist in a "small open economy" by definition and the second is a matter for domestic conpetition policy to deal with. A domestic factor in other words.

porsche959 wrote: »

it has nothing to do with government policy of that economy. Government of such an economy can effect unemployment/wage inflation, by, for example, yielding to excessive wage demands, but not price inflation, at least to a significant degree.

Should a government increase spending on wages and services at rates that are multiple times the core Eurozone inflation rate, of course, it will result in price inflation (unless there is strong deflationary pressure elsewhere in the economy to counteract it).

Such increased government spending means money is pumped into an economy. That usually results in greater demand for goods and service.

Stores could demand and get higher prices because people had more money to spend and could "afford" the higher prices demanded (and "competition" did not result in increased supplies at low prices to match demand). The same applied to the rates tradesmen could demand and get.

In addition, failure to tackle cosy little business arrangements - e.g. Our legal profession to pick one repeatedly highlighted by the OECD, it will impact the economy via higher costs which will impact prices ultimately.

Likewise a willingness by the government to pay for wages, goods and services at rates above the prices paid elsewhere - both domestically and internationally - results in money being misspent in the economy.

One set of data, I saw, showed that in the ten years, 1997-2007, our cumulative inflation rate was double that of the Eurozone average (almost 50% V's almost 25%). You just can't have that sort of inflation rate differential without it coming back to bite you.

Sand

View wrote: »

That is clearly nonsense.

External factors certainly play a role in the inflation rate.

Clearly, most external factors will impact Eurozone countries in largely the same way (although not necessarily identically I stress).

That you have to acknowledge the role of external factors in a small open economy, and apply caveats to your own statement of tenuous validity should be warning enough that its not clearly nonsense. Incorrect maybe, unproven sure, but not clearly nonsense.

Ireland certainly had some (limited) options, but the source of massive inflation in Ireland was the unprecedented flow of credit into banks and the economy here. The increase in government spending was a symptom and political reaction, not the cause. A stupid move, sure, but I struggle to see what policy the Irish government could have pursued to cut the credit tsunami off without capital controls or control of interest rates.

Such increased government spending means money is pumped into an economy. That usually results in greater demand for goods and service.

Stores could demand and get higher prices because people had more money to spend and could "afford" the higher prices demanded (and "competition" did not result in increased supplies at low prices to match demand). The same applied to the rates tradesmen could demand and get.

Government spending is a fraction of Irish GDP, roughly 33% all through the boom. It only spiked to 60%+ during the crash as GDP declined and bank bailouts were paid for.

Meanwhile, in 1997 Irish banks were lending about 60% of Irish GNP to the non-financial Irish economy. This exploded from the birth of the Euro and indeed the central banks dumping credit on the world in reaction to the 2001 dot com bubble. By 2008 Irish banks were lending up to 280% of Irish GNP to the non-financial Irish economy. The scale of credit growth is understated, as Irish GNP was growing between 1997 and 2008.

Basically, yes, the government ran its budget stupidly - especially after Cowen was installed, but Irish government spending is a much smaller factor in the Irish boom and bust than Irish bank credit growth. Everything you describe is vastly more rooted in the Irish banks lending money to anyone and anything with a pulse. The effect of government spending was relatively small and was if anything a political reaction to the stress and strain the economy was under from the credit explosion.

ardmacha

Sand wrote: »

Government spending is a fraction of Irish GDP, roughly 33% all through the boom. It only spiked to 60%+ during the crash as GDP declined and bank bailouts were paid for.

A spending proportion, even when adjusting for GDP/GNP which is not high by European standards.

Sand wrote: »

Basically, yes, the government ran its budget stupidly - especially after Cowen was installed, but Irish government spending is a much smaller factor in the Irish boom and bust than Irish bank credit growth. Everything you describe is vastly more rooted in the Irish banks lending money to anyone and anything with a pulse. The effect of government spending was relatively small and was if anything a political reaction to the stress and strain the economy was under from the credit explosion.

As you correctly say, it was difficult for the government to control things anyway. But, like the alcoholic, the first step is to admit that you have a problem. In a scenario where the government was talking things up, that the book was perfectly sustainable, then it is impossible to propose measures based on the unsustainability of the boom. Public spending rose because the economy rose, much of this simple inflation in the general economy raising public costs.

But one problem is Ireland is that in the boom there was no real concern for value for money in public spending, the money was there and more was spent if required. Then came a sudden reversal to cuts, where there was no concern for value for money either, but rather how expediently the cut could be made regardless of the long damage it might do. Now this might have been inevitable to some extent, but the planning process could have been put in place for the long term, but there is little evidence of this.

Tea drinker

Kermit.de.frog wrote: »

You borrow, you owe. Irish people lived beyond their means collectively and hence the trouble we got in to.

The important thing is it never happens again.

You are lumping banking debt and structural deficit, and coming up with the idea we need to flagellate ourselves more.
This beating of the sinful Irish having behaved in an irreverent manner and now needing to get forgiveness through punishment was trotted out by the gov and media as a weak minded explanation for:
1. Gov regulation of banks failaing
2. Gov collusion with banks at taxpayer epense
3. Failed Gov management of their staff which we have to pay.

I have absolutely no sins I need to pay hundreds of Euro a month for.
What about the rise in suicide rates since the crash (massively under recorded as they are)

The gov and the pork barrel voters meant that we got a corrupt Gov which basically lost a war, with a few thousand casualties, many displaced persons, and a massive war debt.

I love it when FF starts berating SF in the Dail "where's the bodies where's the bodies" when we all know that FF lost war and it's bodies are in every graveyard in the country, with a death rate higher than that of the troubles.

Put the blame where it belongs, on the gov and Banks. And us for letting them away with. Not for partying.
And what's with the act of contrition and 3 hail Mary's in the banking enquiry?
No one off to Jail?