Euro crisis: “The Government is due to consider a potential programme of asset disposals…”

Greece were the first of the PIGS to request a EU-IMF bail-out – with the threat of contagion, as Mack’s timeline records, leading to the construction of a wider mechanism which Ireland, eventually, availed of.  The result, according to ECB executive Lorenzo Bini Smaghi, of the “choice of economic model” by “successive governments, and their voters”.

As Tim Garton Ash commented at the time, “The crisis of the eurozone has only just begun.”

A year on and, as BBC Europe editor Gavin Hewitt noted at the start of the week,

But as Europe stands on the threshold of this anniversary there is a growing belief that the bail-out has failed. It has bought time. Nothing more. Greece was heading for bankruptcy a year ago. It still is. It got a reprieve with a debt mountain that was about 300bn euros. It is higher now. The debt-to-GDP ratio is over 140% and heading towards 158%.

The Greek government, to be fair, embarked on a cultural revolution. The world of early retirement, holiday payments and tax evasion would be cleaned up. Over time the reforming zeal has faded. Austerity has reached its limits.

In a country that relies heavily on public spending the squeeze has dampened demand. Greece cannot escape the debt trap. The tighter the squeeze the more the economy contracts and the greater the debts pile up. GDP will shrink this year by 3%. Unemployment heads towards 14%.

Hans-Werner Sinn, the head of the IFO German think-tank, says “it is obvious Greece is insolvent”. He and a significant number of economists believe that a restructuring of Greek debt is coming. It is the truth that dare not speak its name in Brussels. As Mr Sinn puts it, “we need to put the debt on the table and free this country a little bit from the overwhelming debt burden”.

Perhaps…  Yesterday Greece announced plans to attempt to raise 50billion euro [£44billion; $72billion] through the sale of state assets by 2015

Government stakes in the utility power company PPC, the telecom operator OTE and ATEbank will be sold off by 2015.

The government’s mid-term budget plan also aims to save 3bn euros, of which 2bn euros will come from cutting tax breaks.

The same day, still everyone’s hero, Robert Peston considered the potential damage a porcine default could cause

Finally, if the European Central Bank – for example – ends up incurring big losses on its substantial holdings of Greek, Portuguese and Irish debt, it can always be recapitalised by solvent eurozone nations, notably by Germany and France.

However this is to ignore the node of fragility in the financial system, the faultline – which is the banking industry.

In the financial system’s network of interconnecting assets and liabilities, it is the banks as a cluster that always have the potential to amplify the impact of debt writedowns, in a way that can wreak wider havoc.

That’s built into their main function, as maturity transformers. Since banks’ creditors can always demand their money back at whim, but banks can’t retrieve their loans from their creditors (homeowners, businesses, governments), bank losses above the norm can be painful both for banks and for the rest of us.

Any event that undermines confidence in the safety of money lent to banks, will – in a best case – make it more difficult for a bank to borrow and lend, and will, in the worst case, tip the bank into insolvency.

Which, of course, is what we saw on a global systemic scale from the summer of 2007 to the end of 2008.

As ever, read the whole thing.

Which brings me back to Ireland, and yesterday’s “carefully managed show of unity” by the EC/ECB/IMF and the Irish Government.

Irish Economy’s Philip Lane pointed to the official review statements by those involved.  And it’s worth pointing to this from the notes to editors in the Irish Government statement

Structural Reforms

Product and Labour Market Reforms
  • We are adopting policies to lower costs in sheltered sectors, thus boosting purchasing power and underpinning further competitiveness gains.
  • The Government is due to consider a potential programme of asset disposals based on the Programme for Government and the Review Group on State Assets and Liabilities. The Government will discuss its plans with the European Commission, the IMF and the ECB when it has finalised its response to the Review.  [added emphasis]
  • We are committed to create conditions conducive to job creation through the Jobs Initiative, which will be announced in May.
  • The reversal of the cut in the minimum wage will be reversed with the effect on business costs being offset by a reduction in employers’ PRSI.
  • The review of the EROs/REAs and other measures to increase competition in sheltered sectors of the economy (these measures are not conditional on each other but are partof a comprehensive package designed to make work pay and improve the competitiveness of the economy).

The question is, do they still all know what to do?  Even if they can’t get re-elected once they’ve done it?

Or will domestic political pressures, in Ireland and elsewhere, hold sway?

And with what result…?

  • Time to bring back the punt and once more center the economy around the turf digging industry.

  • pippakin

    Selling off state assets in a panic sale would, imo, be a false move. It really is time to consider a ‘feck em all’ approach, reinstate the Punt and do separate deals with some countries. For instance the Brits wouldn’t want to be too aggressive so that is one country who I think would compromise.

  • Pete Baker

    “It really is time to consider a ‘feck em all’ approach…”

    Perfectly valid political position to take, pip.

    But you need to develop some ideas on the consequences of such a move.

  • pippakin

    Pete Baker

    The consequences could hardly be worse than the drawn out servitude we are apparently accepting. As I said some countries would be reasonable, perhaps some banks might have their arms ‘twisted’. I think it could work.

    It would, excuse the vernacular, take balls, and at the moment its looking as though our government is somewhat lacking, so don’t look for anything interesting from a bunch fiscal eunuchs..

  • Pete Baker

    “The consequences could hardly be worse…”

    Well, that’s a matter of opinion.

    But you haven’t evidenced any consideration of those consequences.

  • pippakin

    Pete Baker

    The consequences? Why should they be worse than those suffered by Iceland?

    I’m not sure where you are going, would the consequences be worse? I don’t think so. The big companies might leave, but the deal they get here is very good so where would they go? What would the EU do, boot us out? would that be in their interest? again, I don’t think so. The relationship with the UK would carry on regardless because its in both countries interest that it should do so.

    It would not be easy, but it might well be much easier and, importantly, it would be independent.

  • Pete Baker


    That would be the Iceland that’s already outside of the eurozone?

    “What would the EU do, boot us out?”

    Well, you’re the one advocating the re-adoption of the Punt.

    “It would not be easy, but it might well be much easier and, importantly, it would be independent.”

    Right… so start contemplating the consequences of that ‘independence’ in Europe.

  • The key quote in this piece is this:

    “However this is to ignore the node of fragility in the financial system, the faultline – which is the banking industry”

    This is the key to the Irish advancing their best position. A “Feck em all” approach, as advocated by Pipakin is a sort of ‘cutting off ones nose to spite their face’ but the threat of employing that option may actually yield some sort of compromise in the form of a partial debt forgiveness,. Greece is crumbling under the weight of its debt and I cant see any other option but debt forgiveness but why should not Ireland benefit from that too?

    The EU crisis could get worse tomorrow if the Eurosceptic Parties seize power in tomorrow’s Finnish general election. The Portugese bailout can not go ahead without a majority vote in the Finnish Parliament.

  • pippakin

    Pete Baker

    Try thinking not “how much worse would leaving be for us” but instead “how much worse would our leaving be for them”

  • Alias

    The question “What should the Irish government do?” can’t be answered without reference to the legal and other constraints that the government operates within, so it’s really just engaging in fantasy politics to answer that the government should default.

    Defaulting isn’t the same thing as reneging. Bondholders assess the risk of a state defaulting (missing a payment) on a loan and charge a rate commenserate with the risk, and not on the risk of a government reneging on the loan (declaring that it won’t repay it). A state is obliged under international law to repay its debts as long as it is solvent; and if it isn’t solvent, to repay, or to make arrangements to repay, as much of the debt as it is possible to repay without the obligation leading to continued insolvency. If Ireland was to renege, it’s likely to lead to a flood of lawsuits against it. Argentina, for example, is still shut out of the bond markets after it reneged more than a decade ago, despite a booming economy now. Of course, its economy wouldn’t be booming now if it didn’t renege!

    At any rate, we are on the hook as a result of our eurogombeens collaborating with the EU’s directive to contain eurosystem debts within the Irish state. It isn’t possible to get off that hook without a cost to the state in excess of 100 billion. However, that is perhaps 10% of what the final cost to taxpayers will be if we don’t put our national interest before the EU’s interest. The cost is circa 500 billion in eurosystem debts, and the same again in long-term damage to the domestic economy.

    So what can the government do? Well, it can’t do anything with the monetary system as a member of the Eurozone other than as directed by those who govern that monetary system since it doesn’t have any sovereignty over the monetary system, and indeed, doesn’t even have a monetary system to have any sovereignty over! That means that it must exit the eurozone and re-establish a sovereign Irish monetary system. Here is how this should be done.

    While the IMF is a state’s lender of last resort, it will be impossible to exit the eurozone without giving this body a guarantee to repay its portion of the IMF loan in full and without securing funding from it of circa 100 billion that will be required to re-establish a sovereign Irish monetary system. The EU cleverly brought the IMF into play to ensure that those (PIIGS) countries whose economies were destroyed by eurozone membership would not be able to exit the eurozone as a survival mechanism. However, the IMF is unlikely to have this agenda. If it does, then it might still be possible that other sources of funding from friendly countries would have to be secured. However, the EU is attampting to prevent that possibility by demanding that the state sell-off any assets that could be used as security for such loans and by seizing the assets of the state-owned banks as collateral that it has provided as the eurosystem’s lender of last resort (the ECB).

    So there is a short window of opportunity to reverse the damage caused by the eurogombeens but this window is being nailled firmly shut by the EU program of asset disposal; and as said eurogombeens are busy collaborating with it, it requires action from the people which is highly unlikely to materialise.

    If the above was done, then it would occur in tamdem with the state removing the guarantee from its banks. As these are limited liability companies, they should be allowed to fail. The impaired assets transferred from these banks to NAMA should be retained with losses attached to the banks. The State should make itself the priority creditor of these banks, ensuring that it retains as much of their assets as needed to pay the despositors and to reclaim as much of the money that the ECB has used its control of Ireland’s Central Bank to convert eurosystem debt into sovereign debt (circa 187 billion to date).

    All of that would require constitutional change, and much of it would be highly dubious since it would involve unilateral treaty amendment. For example, the Maastrict Treaty which surrenders sovereighty over Ireland’s monetary and macroeconomic policy to the EU is now incorporated into the Lisbon Treaty so whereas before it would have been constitutionally possible to exit the eurozone by holding a referendum to remove the treaty from the constitution, now it will require the permission of our colonial owners, sorry our European partners, who are highly unlikely to provide it.

    So what is likely to happen? Well, nothing other than whatever the EU wants to happen. That might involve some eurobond but isn’t likely to provide a situation that removes Ireland from indentured slave status or sees bondholders agreeing that their losses properly belong to them and not to the taxpayers of foreign states. Once you give up your sovereignty, you don’t get it back. Something it has in common with virginity…

  • Henry94

    To have any hope Ireland needs to grow the private sector and cut the public sector. That’s hard to do because cuts in public spending takes money out of the economy so less is spent. To compensate costs must fall for business and consumers.

    I was happy to see reports that Michael Noonan is telling NAMA to start selling property. That will cause property to fall further and that is a good thing. We need cheap property and the policy of trying to put a floor under the market was wrong and futile.

    Cheap property means starting salaries can fall and more businesses can start up. Keeping young people from emigrating by encouraging job growth is key to survival.

    Selling public companies is the right thing to do as is cutting the cost of public pay and welfare. Child Benefit for the well off should be the first cut.

    We need to get ourselves in shape as if we only has a government debt problem and not a bank problem. That way the bank debt ultimately becomes affordable. Meanwhile the spread of the crisis in Europe might mean a collective solution emerging. That would mean the ECB taking over all the bank debts and printing the money to pay them. Or the eurozone might fall apart. Either would be good.

    Getting our own house in order while kicking the bank problem can down the road is about the best we can do. There is no political appetite for anything more radical at this time. That may change of course.

  • Euro crisis: “The Government is due to consider a potential programme of asset disposals…”

    Hmmm ….. will that solve the problem or just transfer and delay its satisfactory resolution, and concentrate it in another who will then be exposed to their failed model policies, leaving and loading them with current and future liabilities and perceived responsibilities which they cannot possibly even hope to discharge without inviting ruin and revolution and corrupt systems collapse …… which would be classed by many as a Blessed AIRelief?

    This is an interesting parallel read which doesn’t bode well for the crooks and chancers on the other side of the pond, either …..

  • Alias

    Actually, cheap property means that the assets of the banks will fall further in value, and so the banks will require further capitalisation. It also means that the extraction of wealth from the Irish economy by the EU increases. Since the imported eurosystem money was converted into property, each drop of 10% means that the economy must generate an extra circa 60 billion in wealth from non-property related industry and that this wealth must be exported in substitution for the money that was converted into property and duly erased from the national balance sheet. In addition, it means that an ever-increasing number of devalued assets will be returned to the state-owned banks from the mortgage holders, further devaluing the assets of the banks and increasing the taxpayers exposure to the right-offs. As the ECB increases interest rates, few mortgage holders with moratoriums (circa 24% of them) will see the wisdom in holding onto an asset that is worth 30% of what they paid for it.

    Taxpayers were told that they would make a profit on NAMA by holding onto the property until it increased in value. Now it seems they are being told that the plan is not to make a profit but to expose them to massive losses on their ‘investment.’ So the plan to dispose of assets in a fire-sale is simply plan to remove these assets from the state and use them to repay guaranteed eurosystem debt, thereby ensuring that the state will not have any assets available to use as collatoral should it wish to borrow money from sources other than the EU, i.e. should it try to exit the eurozone.

    Lastly, the current plan calls for taking circa 500 billion of wealth “out of the economy” so there isn’t going to be any functioning domestic economy at the conclusion of it. That’s simply the lemmings being led to think that their impending mass-suicide is a short swin at the Forty Foot…

  • Alias

    “…will not see the wisdom in holding onto an asset that is worth 30% of what they paid for it.”

  • Alias

    “Getting our own house in order while kicking the bank problem can down the road is about the best we can do.”

    Let’s look at the ‘logic’ behind that. Public spending was 60 billion and tax revenue fell to 30 billion. That would have meant that public spending on state services should be cut by half to balance the books. Instead of cutting it by half, they committed half of tax revenue to bailing out the eurosystem. With tax revenue continuing to fall, that means that public spending on state services must now be cut by three quarters (and rising) of what it was to balance the books. Given that that quarter is the cost of EU regulation, I’d say that is a eurogombeen’s idea of getting the “house in order.”

    “That’s hard to do because cuts in public spending takes money out of the economy so less is spent.”

    Cuts in public spending leave money in the economy since the taxes are what take it out of it. That is again proved true by the recent increases in taxes resulting in a drop in tax revenue.