The Debt Problems of the European Periphery

By Anders Åslund, Peter Boone and Simon Johnson

Last week’s renewed anxiety over bond market collapse in Europe’s periphery should come as no surprise.  Greece’s EU/IMF program heaps more public debt onto a nation that is already insolvent, and Ireland is now on the same track. Despite massive fiscal cuts and several years of deep recession Greece and Ireland will accumulate 150% of GNP in debt by 2014.   A new road is necessary: The burden of financial failure should be shared with the culprits and not only born by the victims.

The fundamental flaw in these programs is the morally dubious decision to bail out the bank creditors while foisting the burden of adjustment on taxpayers.  Especially the Irish government has, for no good reason, nationalized the debts of its failing private banks, passing on the burden to its increasingly poor citizens.  On the donor side, German and French taxpayers are angry at the thought of having to pay for the bonanza of Irish banks and their irresponsible creditors.

Such lopsided burden-sharing is rightly angering both donors and recipients.  Rising public resentment is testing German and French willingness to promise more taxpayer funds.  German Chancellor Angela Merkel’s hasty and ill thought out plan to demand private sector burden sharing, but only “after mid-2013”, marks a first response to these popular demands.  We should expect more.

Financial crises are actually not rare, and the rules for their resolution are clear. The fundamental insight is that huge amounts of financial losses, of seemingly real value, need to be distributed across creditors, debtors, equity holders and taxpayers. The first step is to bring the current budget deficit under control to achieve a primary balance, which both Greece and Ireland are now attempting. The second is to attract sufficient emergency funding, which the IMF and the EU essentially have done. But in neither Greece nor Ireland is that sufficient. They still have unaffordable debt burdens.  Therefore, one more measure is needed, namely a reduction of the public debt.

The public debt can be contained in two ways. The first and preferable option is that the state never nationalizes private bank debt as Ireland has done.  For Ireland, this opportunity has probably passed, but other countries should be warned not to make the same mistake. Kazakhstan’s refusal last year to bail out its major banks, despite strong demands from the senior creditors of these banks, has proved a far more successful path.  Banks can and should go under if they have failed. The state should only defend small and medium-sized depositors.

If the state has taken on too large debt, sovereign default is the natural outcome. In their excellent book This Time Is Different, Carmen Reinhardt and Kenneth Rogoff argue that 90 percent of GDP is the highest sustainable level of public debt for a developed country. This limit is not absolute, but there is little reason to believe that Greece and Ireland would belong to the exceptions. As Germany and France so sensibly, though perhaps not very cautiously, have argued in public, the EU needs a facility for sovereign debt default.

Sovereign defaults are always contentious, but they don’t need to end in catastrophic financial collapse.  This is especially so in Europe, as Lee Buchheit and Mitu Gulati have argued in a well-read paper on “How to Restructure Greek Debt,” because over 90% of these debts are issued under domestic law.  Troubled nations, as part of their rescue plans, can and should introduce legislation that permits a qualified majority of creditors to change terms on outstanding sovereign and bank debt, while protecting bank deposits.  Such rules could, for example, require 2/3 of non-protected creditors agree to a restructuring plan.  This reduces the risk that holdouts can prevent a deal from being reached, but still gives creditors clear powers to negotiate terms.

Well-planned debt restructuring will not cause a systemic financial collapse.  It is misleading to draw parallels from the chaotic liquidation of Lehman Brothers for the outcome of debt relief in Europe.   The direct impact of debt relief for Greece, Ireland and others is easily measured and managed.  The debtors and creditors are well known.

If Greece’s reform program included a write-down of 50% (in net present value) on its debts, and they received an additional 20% of GDP in bridge financing over the next three years, its debt burden in 2013 would be a comfortable 80% of GDP.  As Greek debt already trades below face value, the total additional losses to creditors could amount to 35% of debt, or approximately 100bn euros.   Ireland is smaller so total costs should be less.  This debt relief could be conditional on successful implementation of IMF monitored programs, similar to traditional Paris Club debt restructurings.  Fears that debt relief could spark panic selling and contagion in other debt markets can be arrested through temporary interventions by the ECB, and the EU needs to publicly declare strict criteria when debt restructuring may occur.

Opponents to debt relief for Greece and Ireland are wrong to think that Europe’s current strategy makes Europe safe from systemic collapse.  The implied risk of default on Spanish, Italian and Portuguese debt rose sharply during the last month as concerns over Ireland and Greece spread, and this in turn caused yields on related bank debts to soar.  The potential economic time bombs left in Europe’s periphery are growing.  They can and must be resolved. Otherwise the economic and political risks might become overwhelming.

Anders Åslund, Senior Fellow at the Peterson Institute for International Economics; Peter Boone, associate at the Center for Economic Performance, London School of Economics and principal, Salute Capital Management; Simon Johnson, Senior Fellow at the Peterson Institute for International Economics and Professor MIT Sloan.

46 responses to “The Debt Problems of the European Periphery

  1. This proposal assumes that someone other than the banks are making policy.

  2. Are you slightly concerned about CDS contracts for Greek debt underwritten by Greek banks? Which without public backing are nearly worthless, leaving creditors who think they’re protected somewhat less protected.

    I don’t see how contagion would be stopped unless strict rules were laid out specifying losses, so that creditors would know how much they might lose – otherwise, panic. And even then, it’s hard to isolate an event due to the uncertainty surrounding derivatives (and especially counterparty risk). By which I mean:

    If Greece and Ireland go (at 50% markdown), creditors and CDS underwriters cover some amount – quite possibly, Spanish/German/French banks find themselves underwater, but how much underwater no one knows until the entire chain of CDS unwinds. Hopefully, European states have spent the last year getting a grip on the derivative obligations, and preparing to deal with them.

    Hope has been rather disappointing lately.

  3. As an aside, have you seen the price of state municipal bonds lately? Europe redux?

    Fundamentally, there are deep “imbalances” that go well beyond the US/EU/China trade triangle, although they’re quite related. The issues are distributional, but no one wants to call it as they see it.

    In many places, one piece of society owes another piece more than it’s good for. Society at large realizes that perpetual payment is unlikely, and is discounting obligations. This means financial shock, and hence, underinvestment and NGDP misses. Monetary authorities refuse to commit to compensate, largely because they’re afraid that this will merely enable fiscal authorities to defer the day of reckoning (which now seems true – hope is dead on the vine).

    With every day of insufficient NGDP growth and failure to implement needed structural changes (such as reducing obligations to overpaid civil servants and retiree overhangs, and fixing the tax system) as well as failure to initiate federal investments on a massive scale (like energy and infrastructure), the hope of “growing out of the problem” diminishes. This can be directly measured by the gap between the current unemployment rate and the unemployment rate at comparable stages in previous recoveries.

    OBLIGATIONS GROW, BUT FUTURE SUPPLY DOES NOT. In essence, debt-to-GDP skyrockets. The window for change is closing rapidly.

    Anyway, nice posts lately. Have started to read more actively again.

  4. Hey, StatsGuy. I look at it a little differently.

    It has been obvious for a couple of decades now that none of the first-world governments will ever repay their debts. But that is OK; they do not have to as long as they can roll their loans. (Or so the theory goes.)

    Broadly speaking, long-term interest rates have been declining steadily since the early 80s. Which means the level of serviceable debt has been going up steadily. Debt never gets retired; old creditors are just repaid with money borrowed from new creditors.

    It is a self-fulfilling prophecy. If you can always roll your loans at a sufficiently low rate of interest, then you will always be able to make your payments and therefore deserve a low rate of interest.

    Of course, there is a name for “existing investors have nothing to worry about as long as we can find new investors”. The goal of public policy is to reach that nice steady state of permanently sustainable Ponzi. And that’s all about confidence. Think happy thoughts!

  5. and this is the crux of the problem

    if future or present debt restructuring involves burdens to debt holders, the interest rates for future roll overs must necessarily rise

    the self-fulfilling prophecy peters out

    confidence wanes

    the previously sustainable state of permanent debt fiance Ponzi ends

    the virtuous circle becomes vicious

    the only way out is devaluation, but this is not possible in the euro zone…

    do you see where this must necessarily lead (barring a massive printing frenzy by the ECB which is controlled largely by extremely hawkish Germans who remember the Weimar like it was ten minutes ago)?

    ponzis work until they don’t

    will this crack it? I doubt it, but we are closer. and the unified currency and the ponzi surely cannot both survive, barring the invention of the interweb equivalent in the next year…

  6. Your pessimistic representation of events regarding implementation of structural changes is out of place. You need to familiarize yourself with the facts: structural changes are being implemented at an unprecedented rate, more than it is socially tolerable. A faster rate could crumble the structure itself.

  7. I sympathise with that. There is far too much comment (usually from people outside the EUR zone that applies market paradigms simplistically to a situation where powerful actors have made it very clear that they will not easily accept that a very illiquid market acquires normative status in issues under the control of states. These states are not run by idiots, nor market deniers , nor market fundamentalists. They represent the most politically diverse and well informed voters on earth and have a pretty good idea how to do this. Maybe the UK should join the EUR? Or leave the Union?

    However, see my comment to this post below..

  8. Authors, this is a much better piece than the previous one about Ireland, which looked like it came from one of the Murdoch media. You are right that the Irish style bank bailout made no sense. No sense at all. What the UK did (quasi nationalization of weak institutions plus some recapitalization but leaving existing depositor protection arrangements in place) was much better, while, imho, Irelands fiscal and external position (plus the informal umbrella of EUR membership) made it a stronger risk (at the time) than the UK and a UK style approach prima facie would have been more viable.

    It would be very interesting to learn why and how this catastrophical error came about. Probably some of it had to do with property speculation involving a very large segment of the elite and probably the international overextension of the Irish banks (US, UK) played a role as well. Maybe UK style nationalization would not have worked and too many influential Irish would have lost with a deposit guarantee of only, say EEUR 100K (like in Holland). But, this is very different from Greece (where there is plenty of room to raise revenue), Spain (where all we have is a deep property recession and overpaid workers) and Portugal (where EU membership has come at much too high a price).

    The German proposals deserve much more careful analysis. Often it appears that commentators and pundits, especially from outside the EUR zone would like this experiment to fail..Why?

    Many people seem to think that “the EUR” “may not survive”. As the Portuguese said, maybe they would have to leave. That would not mean the end of the EUR of course, because the combination of Greater Germany (Germany plus Austria and The Netherlands), Scandinavia (incl the EU shadowers) and probably France, can afford it and they are all run by reasonably good and conscientious politicians. The only losses that would hurt the EU somewhat would be Spain and Italy. Italy has dome reasopnably well in this crisis and Spain is a country where national loss of face may well be worse than austerity. So #1, the EUR is not going to disappear and the political economy of its core countries is not going to change too much. Most people there consider the GFC a product of at least two avoidable Anglo Saxon policy failures: (1) uncontrolled growth in public spending without an adequate extraction capacity (2) failure to intelligently control the challenges presented by the modern financial system. That quite a few public sector financial institutions in Germany (possibly via corruption) ended up as investors in toxic waste is not quite the same as hosting the industry that produces it.

    But, this is a great occasion to strengthen the EUR (assuming it survives) by adding institutions that would penalize non-compliant governments, whilst also offering them an exit (of course to be combined with diminished trade status, not the free lunch the UK enjoys at present.

  9. “But that is OK; they do not have to as long as they can roll their loans. (Or so the theory goes.)”

    I think the economics profession needs to recognize there is a fundamental difference between currency (which is used in transactions) and debt, even if the government continues to roll debt. It has to do with how obligations are handled. If obligations exceed capacity to repay, currency depreciates because it has immediate use as a unit of exchange, but debt defaults and needs to be restructured because it isn’t used as a medium of exchange – this is a very discreet event. Perhaps one can establish some sort of mathematical equivalence here, but in reality these two events are different as we all know. Well, as most of us know.

    The ugly part of this is that the value of US govt DEBT was increasing as QEII expectations built, even as the value of the currency declined. In essence, this is selling the future to finance the present – just as the Austrian critics claim. Where the Austrians (or Austerians, if you prefer) miss the boat is the argument that government should do nothing. Not at all – government should print and immediately spend money, NOT on asset price inflation, but on REAL DOMESTICALLY PRODUCED GOODS/SERVICES. In large quantities.

    THAT was what the US public wanted from Team Obama in 2008. And instead we got… ugh.

    BTW, all currencies are semi-sustainable Ponzi schemes. So is gold.

    BTW, what does Bond Girl think about California these days?

  10. “They represent the most politically diverse and well informed voters on earth”

    That doesn’t seem to be in question (though in the US, one has grave doubts). This does not ensure optimal negotiation results will emerge, however. The management of Greece/Spain/Ireland do not seem “optimal” in any sense of the word. If we accept your argument above – that voters aren’t dumb – we must wonder “why?”.

  11. “Often it appears that commentators and pundits, especially from outside the EUR zone would like this experiment to fail..Why?”

    1) To keep the dollar as the sole reserve currency, unchallenged by the EUR

    2) Because the EUR is a terrible solution – an utter destruction of financial and political sovereignty. The ECB now determines nominal wage levels in Ireland. How well has that worked out? Ireland is now being punished for doing _exactly_ what Germany/France wanted, because the “solutions” demanded served no one’s interest but theirs.

  12. So whatever happened to capitalism. You take the risk to win, to take the risk to lose? Seems like the new capitalists believe that they are only entitled to win. Why should the taxpayer pay for their folly. Where is their responsibility.

    It seems as though the louder they scream about government spending, the more they want their tax benefits, government spending on their behalf and bailouts. Entitlements? What are their benefits called? Entitlements for the rich.

  13. “Chancellor Angela Merkel’s hasty and ill thought out plan to demand private sector burden sharing” – obviously the writer is extremely biased! What’s wrong with this idea? All EU finance ministers have agreed to implement exactly such a measure for the EU, so all of them are taking hasty and ill thought out plans to be implemented as European law?! Yeah right – I assume the writer has no problem with the previous scenario: all profits to the banks, all risks to the taxpayer.

  14. Kieran O'Neill

    Learn from Obama.
    GO BIG.It worked for them. Not us.
    The only way for Europe is to write check to self 3 trillion Euros and be independent and ignore The US. The World Bank and The IMF are preditors and keep digging as you are in a hole. We all knew we would come to this The EU, me first kill the little guy attude arrogance. Im up screw you and blame the Main Street when it was Wall St that dumped us all into this mess. To big to fail intimidation has become take a loan and save the Euro. Austerity is a doom and we all know it its paying the bill of decievers and thieves. The more we fix the problem with no help we give a green light to white Collar Theft.
    I say sue the US Banks that pushed us into this mess. They do not even know the owners of the properties they hold mortages for much less the value of the derivetive packages they sold to us. Europe has one chance that is GO BIG and write check to self and repay over fifty years and restructure the entire continent and Rule the God Dam World. Russia, Turkey and EU twenty seven Nations must lead the New World. A Constitution might be a good begining. The Bamboo Curtain will Burn as the Berlin wall fell. Africa is the new bread basket . India and Pakistan and the middle Orient is alive . America is going further into the pit and no one seem’s to give a dam . The USA takes 20% of its budget to give to the Pentagon and spends 50% of that on Armenents. Bomb Iran and create an ecological distar that will take a thousand years to clean up. They occupy 49 Nations and support 49 Nations in Afghanistan. There was no WMD and the Iraq War was planned long before the 911 ever happened. We have now ten thousand people dead and 100,000 wounded. Iraquie Citizens 650,000 dead one million wounded. 3 million displaced and the entire Middle easr in a debacle. Bush and Tony blair sell books trying to rewrite history, as the GOP is elected into a gridlock that will bring no new Leadershio to the World. Europe is the only hope now. The US almost bankrupted the whole World as they soon may do again if we fail to to see the foresight if we fail to be not Leaders once bitten twice shy. This all started in the battle of the somme 4 million men died in 30 days in France from all over the World WW1 1914 September. and we never stopped fixing finance with war sales for a hundred years. Eight Nations have nukes and thats a god idea to stop the war machine and refinance the World.

  15. There is, of course, another obvious Better solution. Something that the elitists associated with Pete Peterson would never support: start Enforcing Our Laws, throw all the Finance Criminals in jail, and redistribute all of their Criminal Wealth back to The People. Yes, it doesn’t seem right that The People should get all the Shiny New Things that the Finance Criminals created with their Counterfeit Money. But at this point, why should the Finance Criminals be allowed to keep Anything. After all, the Finance Criminals are Criminals and The People are Victims (come on, I dare you to argue otherwise).

    Many pundits are now finally switching to this Better approach (e.g. Joseph Stiglitz). Finally there is a growing movement that says “The economic crisis was completely a result of FRAUD perpetrated by the Finance Elite. FIRST we have to start Enforcing Laws to Restore Trust and Stability. The Fraud must First be Stopped: the Criminals must be Indicted, Prosecuted, Convicted, Jailed, and Stripped of their Criminal Wealth”.

    All this polite Pete Peterson Talk is doing NOTHING but covering up the Massive Crimes perpetrated by the Finance Elite. This entire article is arguing that the Finance Elite should give a little, while retaining as much as possible. Why should they be allowed to keep anything? They not only created a massive ponzi scheme (that is now completely exposed), but they did it with criminal intent (they dared to assume that they would be left with all the physical assets after the scheme ended – this must not be allowed to happen).

    There is no fixing anything until the Finance Criminals go to Jail For Life. Yes, For Life. Everyone should know that what they’ve done will never again be tolerated. No more of this negotiating with Criminals.

  16. @ Nemo___Well said ;^))

  17. Re: @ PK___Last I looked Germany, and France Debt/GDP is much greater than Ireland’s? It’s not the restructuring their concerned about – but the level of the “Int’l Playing Field” in regards to “Corporate Taxes”. JMHO

  18. @ wolf___Begeisterungsruf!

  19. A interesting debate about the Irish crisis on RTE’s Prime Time last night.

    http://www.rte.ie/news/player.html#programme=Prime%20Time

  20. LOL That is a good point. And why I expect more trouble ahead.

  21. Steve, I don’t disagree with your idea of belling the cat, but which of us mice is going to do it?

    The criminals are in charge. The reason they won’t go to jail is the same reason the cat won’t wear a bell: it doesn’t want to.

  22. StatsGuy:
    Ireland would have done what FrancoGermania wants when it will stop being a tax haven for the global plutocracy.
    Ireland is not being punished. Ireland is getting a spectacular indigestion for having eaten too many cookies when FrancoGermania was out, building Airbuses. The cookie jar is now going to be removed, and even Cameron, who also loves to build Airbuses, agree…
    PA

  23. M. Mosby:
    Good point. But before the mice walk the cats to jail, may be we should talk about it. Talk the talk before walking the walk.
    Calling the criminals criminal will entice the less dishonorable part of the elite to do the same.
    PA

  24. “Greece deficit revised to largest in EU”
    “The real reason Europe is so happy to have Ireland over a barrel”
    There is no doubt in my mind that Basel II & III are endogenously using their surrogate IMF to foment this breach of trust!
    The European Community Union (ECU) should approach the UK using a autonomous (referendum?) dialogue persuading an amicable fortuitous inclusion into the European Union (EU). The UK cannot ride the tailcoats of the ECU indefinitly without paying a toll? Afterall their corporate tax rate is quite low,…?
    Ref:

    http://www.financialpost.com/news/Greece+deficit+revised+largest/3829067/story.html

    http://www.financialpost.com/news/real+Europe+happy+have+Ireland+over+barrel/38290000/story.html

  25. Soros saw a structural flaw in the European Exchange Rate Mechanism in 1992 (relative to GBP) and exploited it to a degree hitherto unimaginable.

    The present situation smells very similar. Current speculators (including not just small hedge funds but also the trading desks of some of the largest finance firms in the world) benefit from two new developments: the invention of (a totally unregulated) CDS market and the structural flaws to be found in the Euro. E.g. Euro nations can borrow euros by floating national bonds. Actually, I believe the full ‘maturation’ of the CDS market came after the Euro (Jan 1, 1999) – so the latter was first.

    The speculators (aka bond vigilantes) had a run at Greece but when governments started talking about things like putting restrictions on CDS markets they knew that they’d need to lie low for a while but they also knew that when they returned all of Ireland, Portugal, Spain and, who knows, maybe Italy would be waiting. The environment would be, as the expression goes, target rich. So now they’re back with guns blazing away – shouldn’t be a surprise.

    I know it’s very morally satisfying to talk about the excesses of the ‘peripheral’ nations but maybe there’s a different – and very interesting – side to this moral calculus.

  26. Anders Åslund, Peter Boone and Simon Johnsonn wrote:

    “The potential economic time bombs left in Europe’s periphery are growing. They can and must be resolved. Otherwise the economic and political risks might become overwhelming.”

    Collapse Of The Entire World Economy In 24 hours

    Paul Kanjorski on Cspan (Sept, 2008) on You Tube

    Scroll/advance video to the 2-minute mark for the salient comments.

    Food for thought – I feel conditions have deteriorated since. I put all of our retirement investments in Black Swan mode, 6-weeks prior to the 2008 crash, where they remain still. In the near term, I feel more comfortable focussing on asset preservation. My 2-cents.

  27. Kanjorski video:

  28. Steve K, above, makes this admirable and relevant point:

    “….start Enforcing Our Laws, throw all the Finance Criminals in jail, and redistribute all of their Criminal Wealth back to The People.”

    Certainly, there are extant forfeiture provisions in the US Criminal Code, for these manifold crimes and for this “den of predatory vipers and thieves”, making up its’ massive RICO enterprise called “Wall Street.”

    But how can anything positive happen, when “your” money can buy an entire tripartite government, where the very existence of such a model appears designed to preclude such undue influence and corruption?

    But don’t you dare to swipe a lean cut of beef, or a sweater off the rack; you’ll see just how effective “our”……”justice system”… is, in addressing those crimes.

  29. EUR is a terrible solution? All these little economies lack scale and can (if they want) share the benefits of being part of a larger political-economic unit. Not only a customs union of course because that would benefit large outsiders most. Well, integration means loss of some aspects of sovereignty. I have no problem with that, and an added bonus is that an outfit like the ECB can be structurally more independent and thus credible. And as we know, small democracies can not look after themselves. Just look at the Irish! This is all about plugging further loopholes for local rent seekers.

  30. Re: @ Anonymous___Sorry for all the “oops”…I’m just to old to learn new tricks said the seeing eye dog that lost his spec`i-ta-cle`s (me, with the collar around my neck tongue tied?) Ref: Google if all else fails…
    Budget 2010: corporation tax slashed to 24p

    http://www.guardian.co.uk/2010/jun/22/budget-2010-corporation-tax-slashed-to-24p

  31. “And as we know, small democracies can not look after themselves.”

    sarcasm?

  32. “I’m just to old to learn new tricks”

    You are too modest, earle, florida.

    This (http://tinyurl.com/) is an easy trick. :-)

  33. “….start Enforcing Our Laws, throw all the Finance Criminals in jail, and redistribute all of their Criminal Wealth back to The People.”

    Sounds like you are trying to herd cats..

  34. @ Hank___Ms. Joan Burton was spot on, and the moderator was excellent, period! The political hacks glorifying the IMF made me sick – this is about the EU taking care of its own, and not throwing them overboard. The Bloody British BS’ is behind what’s happening to the Irish – these, “Her Majesty Bafoon’s” that slither upon the grassy knolls in the mist of twilight worshipping thy “Satan` IMF” from across the “Pond of Blood Soaked Tributaries”! Germany will come to their rescue, diluting this poisonous cup of treachery that has plagued the “Irish Emerald Isle” for eternity…no more! PS. As Warren Buffett the “Great One” was quoted today: we would all be eating hamburgers at McDonald’s for Thanksgiving, had the Federal Reserve not come to our rescue/bailout? Well guess what – Buffett isn’t too worry, but for the rest of America’s working stiffs, we’ll be eating out at McDonald’s, pathetic! The Christmas Carol without an ending for Dicken’s has been kidnapped by the cycloptic publisher’s of regalia advarice.

  35. statsguy its not just CDS written by Greek banks. i assume that it’s collateralized daily somehow, else why buy from them (although i’ve seen stupider trades in my days trading CDS). so these trades wont be a complete bust. but i bet the notional exposure of CDS written by other incompetent banks around the world is much larger, and, as i’m sure we’ll find, completely unknown to the banking regulators. finally, the incremental 100bn lose on default is sure to be understated, if only because much of the debt is not currently marked to market.

  36. We’ve been living with a really distorted set of economic principles for quite a while now. The financiers, bankers, and corporate giants (GM, and AIG come to mind) absolutely refuse to eat their own dog food. All their profits are privatized, but when things go sour all the risk gets socialized. For the rest, there’s a very watered-down version of capitalism, with much too little in the way of financing for the smallest enterprises. It’s all been turned upside down.

  37. Exaggeration! And depending on the international context of the state in question, institutional development etc, probably a statement that could be defended in a rational choice political economy model. But, of course, there are small democracies that appear to be looking at themselves, have good institutions, good fiscal discipline, sustainable trade policies (i.e. neither protectionist nor excessively open) and no history of trying to solve domestic problems by opportunistic depreciation. Ireland does not have all of these, but it has the EU. And that seems to be be a bit of a problem for certain people there, who also happen to have a decent hand. Pity the Irish taxpayers etc seem to have had no representation when things were ruined, but will certainly have to pay some penalty for their elite’s failure to provide good government.

  38. Bayard Waterbury

    My response is the same as it has been. This will test the power and resolve of the financial oligarchy on a global basis. That is because, as we all know very well, there is a very high level of connectedness throughout the global banking system, and, thus, this is not just an Irish, Greek, or other national problem, but, rather, substantially a global one. Our American banks are heavily involved, and, if the foreclosure mess gets a lot worse, they won’t be able to deal with the additional burdens that the market disruptions will create. I said long ago, we and the Europeans should have done just what Khazakhstan did. Let ‘em go. Why kill the entire population with financial cholera, when we can eradicate the problem at the source. Our economy could be well on its way toward healing. As it is we drag out the pain ad infinitum.

  39. The writer is probably well aware of the agency problems associated with banking, and their potential to run out of control under certain circumstances. That does not mean that he condones the particular form of expropriation by private interests that goes on in poorly regulated banking systems with the capacity to extort a bail out by the State. In this case -and that is probably the heart of the matter, there was not only an extortion opportunity vs the Irish State, but also one to the EU.

    But all of this would probably not have turned into a problem (look at the problems of especially the state-owned parts of the German banking system over the years: you could not name scam that they had not been the victim of, and apparently without learning one iota, but the German economy is doing extremely well compared to every civilized economy in the OECD) if the Irish banks had not been heavily exposed to the US economy and the Irish gvt had taken appropriate measures to do something about the absurd speculation in property there. Also, I guess (but not more than that) that the policies of the UK are not helping. Well, at least the Irish seem to be hurting the UK banks and thus indirectly the UK banks’ most important shareholder. That may give some comfort to a people otherwise relegated to dark beer.

  40. This still seems a banking fractional reserve problem.
    Ireland banks owe:
    * UK banks (revealed) $260 billion?
    * German banks (revealed) $204 billion?
    * Others ???
    Banker’s friend: UK Prime minister offers some billions contribution! UK outgoing chancellor committed 70 billion pounds to EU for bailouts! All of this seems only ‘mend UK bank errors’ not mend the system.

    This looks like another socialise act to cover bank bonuses, bank profits, bank capital!

    The best fix? I have yet to hear what constitutes the desired fix. So how can we judge various fix tasks if we don’t know exactly what we are trying to achieve?

    Do global bank links necessitate a global fix or can we nations do their own thing?

    Seems continuing fractional credit generation has long been out of control and >$600 trillion of derivatives in a $60 trillion world GDP scene is absurd. Should we not seek to put a ceiling in place with immediate write-downs of all this fairy money?

    I see plenty of valid criticisms but where is the vision of the fixed economic world?

  41. Re: @ Joe McHugh___It won’t matter, frankly because of the disturbing, and very real fact, homeowner’s are be foreclosed on at an alarming rate (just in the United States alone ~ 14%) since 2008. This will go unimpeded until all the dirty paper is laundered by the Federal Reserve…with no living/breathing homeowner to contest the Banking Industries “Mark-too-Market”, until sometime in 2014 or thereabouts. By then the economy will/should be back on its feet. All this trauma will mysteriously fade away as do disasterous/unwanted memories of guilt…piled knee high on the gullible public for not being financially prudent! A “Pychopathic Transfer of Remorse by a Facist Government”? I hope I’m not being to harsh for an optimist?

  42. Nobody wants to suggest how to bell the cat?

    Looks like the politicians talk big but just do what the banks command? Now exactly what limey benefits accrue from giving money to the Irish banks? Oh yes actually British banks will get the money as they are creditors of idiot Irish bankers.

    Suggestion for all taxpayers: keep your money and let the banks eat the problem via their fractionsl funding jn reverse!

    Maybe our B S Bernanke banker stooge could learn something if he is able to believe he is not infallible.

  43. Excellent suggestions made in the article. I would prefer if you guys were making decisions in Europe.

  44. By Leaders Announced Agreement, Ireland and its banks received a seigniorage bailout from The EU, IMF, and the UK on November 22, 2010. This lending establish the UK as a fully integrated part of a European region of global governance, and disannulled the sovereignty and nationhood of Ireland.

    Jean Claude Trichet, Dominique Strauss-Khan and David Cameron are now Ireland’s sovereigns and seigniors. Their supranational budget rules impose regional global governance, specifically economic governance, upon Ireland. The bailout clearly constitutes intensified fiscal federalism in the Eurozone, and unifies not only Ireland, but the UK into a European region of global government. The Leaders’ Agreement waived Ireland’s national sovereignty. It is no longer a sovereign nation state. This is simply part of the vision of the Club of Rome in 1974, when it called for the creation of ten regions of global governance. Ireland’s budget is now directed by others from outside and this means more internal devaluation, that is more austerity.

    International Monetary Fund chief Strauss-Kahn, in a speech at the European Banking Congress in Frankfurt, Germany, spoke of sovereign crisis according to Phillip Aldrick of The Telegraph. The crisis is now held in abeyance, it has not been abated.

    There is a trigger for all things economic. It was German Chancellor Angela Merkel’s call for a Permanent Crisis Mechanism, a commonly accepted tool which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.

    I ask why would Mrs. Merkel suggest such a thing? I believe it is because the Germans, knowing that they have a strong and export productive economy, can do without a common currency. The announcement of Germany to push for the Permanent Crisis Mechanism, together with the Basel III requirements is the kiss of death for all of the all European Financial Institutions, EUFN, and accounts for the 4.5% fall in Banco Santander Madrid, STD on November 22, 2010. Lending via European banks died, November 22, 2010 with the announcement of a Ireland bailout agreement.

    In as much as Mr Strauss-Kahn says there is a sovereign crisis, I believe a sovereign will arise to address the crisis. Perhaps this person will be Herman van Rompuy.

    And I believe the sovereign will be accompanied by a seignior, an old English word meaning top dog banker who takes a cut. He will provide credit seigniorage to all European Financial Institutions and corporations and persons residing in the currency union.

    And in so doing he will command great authority. An example of such authority is EU’s Economic Affairs Commissioner Olli Rehn’s October 2, 2010 statement in FT article, Ireland May Have To Sacrifice Low Tax Status: “In the coming decade, it’s a fact of life that after what has happened, Ireland will not continue as a low-tax country, but it will rather become a normal tax country in the European context,” he said.

    I believe the seignior (perhaps it will be Mr. Rehn), will pave the way for a global currency system, to replace all current currencies, as they expire in the current bout of global debt deflation that commenced that November 5, 2010, when the currency traders sold most of the world’s currencies, as the bond vigilantes sustained the Interest Rate on the US 30 Year Government Bond above 4%, causing the US Dollar, to rise.

    Evidence abounds, and is clear, cogent and convincing that fiscal seigniorage has failed in Europe. As the end of credit approaches, then a Supra Government, of the Sovereign And Seignior, will be the Federal Government of Europe, and sole fiscal and credit seignior. This triune power will be the first, last and only provider of credit in the Eurozone.