Bollitics - Ireland, the Euro and the future of the EU

[snowychap]

Oh dear france is looking dodgy now

Why? What's happened?

[Meath_Villan]

Bank shares took a dive etc etc on rumor of credit downgrade due to its growing public deficit ....thats all

[peterms]

Belgium seems to be moving as well. Bond prices now closer to Italy than France.

Now might be a good time to buy a Karl Marx "I told you this would happen" t-shirt.

[snowychap]

Now might be a good time to buy a Karl Marx "I told you this would happen" t-shirt.

Or, more (in)appropriately, invest in them. :winkold:

[Awol]

...And Italy....

Contagion strikes Italy as Ireland bail-out fails to calm markets

The EU-IMF rescue for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc. Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union...

and

"The crisis is intensifying and worsening," said Nick Matthews, a credit expert at RBS. "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."

Ah, QE...It's just zeros on a computer until someone promises to pay it back.

Also an interesting snippet from wikileaks that's relevant here:

Link

...[Mervyn] King believes Europe's sovereign debt crisis will accelerate political union. "Leaders in Germany and France have recognised that allowing monetary union to happen without corresponding political cohesion was a mistake and one that needed to be rectified," King told American diplomats...

...but us Eurosceptics are just paranoid reactionaries, right? If you can't do it with tanks, do it with banks.

Ambrose Evans-Pritchard firmly nails what's happening in Ireland and the eurozone:

Ireland's Debt Servitude

Stripped to its essentials, the €85bn package imposed on Ireland by the Eurogroup and the European Central Bank is a bail-out for improvident British, German, Dutch, and Belgian bankers and creditors.

The Irish taxpayers carry the full burden, and deplete what remains of their reserve pension fund to cover a quarter of the cost.

This arrangement – I am not going to grace it with the term deal – was announced in Brussels before the elected Taoiseach of Ireland had been able to tell his own people what their fate would be.

The Taoiseach said afterwards that Brussels had squelched any idea of haircuts for senior bondholders: a lack of “political and institutional” support in his polite words: or “they hit the roof”, according to leaks.

One can see why the EU authorities reacted so vehemently. Such a move at this delicate juncture would have set off an even more dramatic chain reaction in the EMU debt markets than the one we are already seeing.

It is harder to justify why the Irish should pay the entire price for upholding the European banking system, and why they should accept ruinous terms.

I might add that if it is really true that a haircut on the senior debt of Anglo Irish, et al, would bring down the entire financial edifice of Europe, then how did any of these European banks pass their stress tests this summer, and how did the EU authorities ever let the matter reach this point? Brussels cannot have it both ways.

Ireland did not run large fiscal deficits or violate the Maastricht Treaty in the boom years. It ran a fiscal surplus, (as did Spain) and reduced its public debt to near zero. German finance minister Wolfgang Schauble keeps missing this basic point, but then we don’t want to disturb a comfortable – and convenient – German prejudice.

Patrick Honohan, the World Bank veteran brought in to clean house at the Irish Central Bank, wrote the definitive paper on the causes of this disaster from his perch at Trinity College Dublin in early 2009.

Entitled “What Went Wrong In Ireland?”, it recounts how the genuine tiger economy lost its way after the launch of the euro, and because of the euro.

“Real interest rates from 1998 to 2007 averaged -1pc [compared with plus 7pc in the early 1990s],” he said.

A (positive) interest shock of this magnitude in a vibrant fast-growing economy was bound to stoke a massive credit and property bubble.

“Eurozone membership certainly contributed to the property boom, and to the deteriorating drift in wage competitiveness. To be sure, all of these imbalances and misalignments could have happened outside EMU, but the policy antennae had not been retuned in Ireland. Warning signs were muted. Lacking these prompts, Irish policy-makers neglected the basics of public finance.”

“Lengthy success lulled policy makers into a false sense of security. Captured by hubris, they neglected to ensure the basics, allowing a rogue bank’s reckless expansionism,” he wrote.

Let me add that the ECB ran a monetary policy that was too loose even for the eurozone as a whole, holding rates at 2pc until well into the credit boom and allowing the M3 money supply to expand at 11pc (against a 4.5pc target). The ECB breached its own inflation ceiling every month for a decade. It did this to help Germany through its mini-slump, and in doing so poured petrol on the bonfire of the PIGS. So please, NO MORE HYPOCRISY FROM BERLIN.

The truth is that the EMU venture is one of shared culpability. Yes, the Irish should have regulated their banks properly and restricted mortgages to a loan-to-value ratio of 80pc, 70pc, or 60pc, forcing it down as low as needed – as Hong Kong and Singapore do – to stop idiotic bubbles.

But almost nobody understood the implications of monetary union: in Dublin, in Berlin, in Brussels, and Frankfurt. They were almost all beguiled, (though I doubt that the ECB’s Axel Weber and Jurgen Stark ever were).

Given this, why should the Irish people accept the current terms? As Citigroup said in a note today, the EU part of the package will come at around 7pc — higher than the fee paid by Greece.

By 2014, interest payments on Ireland’s public debt (then 120pc of GDP) will be €10bn, while tax revenues will be €36bn. This ratio is well above the average default trigger of 22pc, as calculated in a Moody’s study.

Nominal Irish GNP has contracted by 26pc since the peak. It is nominal, not real, that matters for debt dynamics.

Ireland is in a classic debt-deflation trap , as described by Irving Fisher in his 1933 Economica paper.

Yes, it has a very vibrant export sector, and can perhaps claw its way out of the trap – which Greece and Portugal cannot hope to do in time, in my view. In a way that makes the choice even harder.

The question is, should the Dail vote against the austerity budget on December 7, Pearl Harbour Day. And should the next government – with Sinn Fein in the coalition? – tell the EU to go to Hell, do an Iceland, wash its hands of the banks, and carry out a unilateral default on senior debt by refusing to extend the guarantee?

The risks are huge, but then the provocations are also huge. And there is a score to settle. Did the EU not disregard the Irish `No’ to Lisbon, just as it disregarded the first Irish `No’ to Nice? Did it not trample all over Irish democracy?

It is not for a British newspaper to suggest which course to take. Both outcomes are ghastly, but as one Irish reader wrote to me: if Eamon De Valera could defy world opinion in 1945 by sending condolences to Germany for the death of the Fuhrer, today’s leaders need not worry too much about scandalizing those who made them swallow Lisbon.

Compliance is traumatic. Default is traumatic. What the Irish have before them is a political choice about what they wish to be as a people, and a nation.

Let me finish with a few words by Dan O’Brien, the Economics Editor of the Irish Times, that caught my eye.

“Nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.”

My sympathies.

[peterms]

...but us Eurosceptics are just paranoid reactionaries, right?

That's right. You should have more faith in the euro and the ECB.

I know this because the president of the ECB says so.

Europe's top central banker tried to calm the financial markets after another turbulent day when the borrowing costs of several major economies remained at unsustainably high levels.

Amid signs that the contagion from Ireland's debt crisis was spreading to some of the biggest economies in the 16 nation eurozone, the premium demanded by investors to hold Spanish, Italian and Belgian government bonds compared with German bonds touched record levels.

French, Portuguese and Irish bonds were also caught up in the rout. However, Europe's political leadership remains adamant that the currency can survive and Jean-Claude Trichet, the European Central Bank president, waded into the argument by calling for more, not less, harmonisation within the eurozone as the way out of trouble.

Speaking at a hearing of the economic and monetary affairs committee of the European parliament in Brussels, he said: "We have got a monetary federation. We need quasi-budget federation as well. Yes, we could achieve that if there is strong monitoring and supervision of what there is. Because what exists doesn't correspond with the actual situation that we are facing. It is a situation where we need quasi-federation of the budget."

Analysts saw the remarks as significant and were described by Elisabeth Afseth, fixed income researcher at Evolution Securities, as "quite astonishing".

The euro briefly fell below $1.30 for the first time since mid-September after Sunday's €85bn (£71bn) bailout for Ireland failed to contain concerns that other EU countries would need international assistance.

There were also tensions in the money markets where the closely followed rate at which banks lend to each other in dollars – three-month dollar Libor - was fixed at its highest level since late August at 0.3% amid heightened anxiety about the health of major banks in the eurozone. Shares in British, French and Spanish banks were lower while the Portuguese central bank warned the country's banks could face "intolerable risk" if the country's austerity measures failed.

The borrowing costs of companies were also rising as investors raced to havens such as US and German government bonds and commodities such as gold.

Trichet, who will oversee a crucial ECB meeting on Thursday, insisted to MEPs that eurozone detractors would be proved wrong. "I would say, by the way, that pundits are tending to underestimate the determination of governments and the determination of the college that makes up the eurogroup, and indeed the 27-member state council."

But detractors remained out in force. Citigroup's chief economist Willem Buiter, a former member of the Bank of England's monetary policy committee, said: "There is no such thing as an absolutely safe sovereign."

He described Ireland as "insolvent", Portugal as "quietly insolvent", Greece as "de facto insolvent" and Spain in need of large-scale restructuring of the debt of its banks. Buiter said the eurozone's problems were an "opening act" and Japan and the US could soon be caught up in the Irish fallout. Stephen Lewis, of Monument Securities, reckoned the eurozone in its current guise was reaching its end but "it will limp along for a while to come".

A crucial test takes place on Thursday when Spain is due to issue three-year bonds. Afseth said: "If Spain is unable to sell the bonds or only at a high interest rate then that will highlight the problems and the lack of confidence [in the market]".

Spain has around €9bn left to raise on the markets this year and €150bn next year while Italy, which has also been caught up in the Irish contagion, has €340bn of funding needs in 2011.

Ten-year borrowing costs for Spain rose to 5.59% while the difference with German Bunds was 3.12 percentage points – the largest gap since the euro was launched.

Italy described its public finances as "sound" even as it became engulfed in fears that it might face difficulties raising funds on the market.

[Gringo]

Bank shares took a dive etc etc on rumor of credit downgrade due to its growing public deficit ....thats all

That's not really a problem, all the 'real' french money will be stashed in Luxembourg, just like all the surplus german cash sits in Geneva.

[Awol]

This by the ECB from Dec 2009 is long but well worth a read (if you're also a politics geek) to understand the EU mindset. The level of self delusion gives a good pointer as to why they are likely to follow the bailouts through to the bitter end.

Withdrawal and expulsion from the EU and EMU, some reflections

[TrentVilla]

I'm amazed that the ECB has the time to be getting up to all this stuff with the Ashes underway

[snowychap]

Not sure about which thread was the most appropriate for this:

Spain imposes state of alert

The Spanish government has declared a state of alert after a strike by air traffic controllers grounded flights, stranding thousands of travellers.

The measure will allow widldcat strikers to be charged with a crime under the military penal code.

It is the first use of the law since it was created after the death of military ruler Gen Francisco Franco in 1975.

About half of the controllers are at their stations but most are refusing to work, in a dispute over working hours.

There are huge crowds of passengers at Spain's airports, many hoping to get away at the start of a national holiday, many of them frustrated and angry, says the BBC's Sarah Rainsford in Madrid.

The army was called in to take charge of the country's air space on Friday, but cannot direct air traffic.

Austerity drive

Announcing the state of alert, Deputy Prime Minister Alfredo Perez Rubalcaba said the air traffic controllers were trying to protect "unacceptable privileges".

Spain is engaged in a big austerity drive to cut its budget deficit.

"Our airports are still at a standstill, and according to the Spanish constitution, the government is imposing a state of alert," Mr Rubalcaba said.

"The immediate effect is that the controllers are are now under orders to go back to work and can be charged with a crime under the military penal code if they refuse. The state of alert will initially last for 15 days."

Our correspondent says the controllers could be charged with disobedience, but it is not clear what sentence any conviction would carry.

Some flights were operating to parts of Spain, including the Canary Islands and Majorca but flagship carrier Iberia, and budget airline Ryanair said they were cancelling all their flights until Sunday morning.

Iberia warned people not to travel to airports and said travellers at Spain's airports should leave if they could.

The controllers' unsanctioned action began Friday afternoon in Madrid, with staff calling in sick.

It spread across the nation, forcing travellers to find last-minute hotel rooms or sleep on airport floors. Some passengers were taken by coach to their destinations.

The controllers were already involved in a dispute about their working hours, but were further angered by austerity measures passed by the government on Friday which would partially privatise AENA.

"We have reached our limit mentally with the new decree approved this morning obliging us to work more hours," said Jorge Ontiveros, a spokesman for the Syndicate Union of Air Controllers.

"We took the decision individually, which then spread to other colleagues who stopped work because they cannot carry on like this. In this situation we cannot control planes."

'Hostages'

The head of AENA, Juan Ignacio Lema, said the strike was "intolerable", and told the controllers to "stop blackmailing the Spanish people".

Spanish Transport Minister Jose Blanco has also condemned the strike, saying those involved were "using citizens as hostages".

Hundreds of national and international flights have been cancelled across the country, leaving angry passengers left stranded in airports.

Some were left stranded on runways as their planes had to turn back. Others had to travel by bus to regional destinations.

"All flights are blocked, there's a huge lot of people here, sitting around everywhere. Right now everyone is calm, but we don't know what's happening," said one traveller at Barajas airport.

"The captain came out to say Spanish airspace had suddenly shut, with no prior warning," another passenger stuck in a plane at Palma told Spanish radio.

One woman at Barajas airport said it was "a disgrace". "How can a group of people be so selfish as to wreck the plans of so many people?"

[Meath_Villan]

Cant wait for this budget on tuesday

[Gringo]

Not sure about which thread was the most appropriate for this:

Spain imposes state of alert

Well I didn't notice much more alertness, and it all seems to be over now. Speaking locally, I couldn't find anyone who (was bothered or) could explain what a state of alert meant. Though one old bloke mentioned Franco (and yes I know the law was introudced post franco).

Might have to do some digging, but seems like the sort of naughty law that the uk govts have been trying to introduce in recent times.

[peterms]

Looks like Iceland's decision to make the bondholders accept responsibility for their private bank losses was the right thing to do:

Iceland exits recession

Decision to force bondholders to pay for banking system's collapse appears to pay off as economy grows 1.2% in third quarter

Iceland's decision two years ago to force bondholders to pay for the banking system's collapse appeared to pay off after official figures showed the country exited recession in the third quarter.

The Icelandic economy, which contracted for seven consecutive quarters until the summer, grew by 1.2% in the three months to the end of September.

Iceland famously agreed in a referendum to reject a scheme to repay most of its debts that were once worth 11 times its total national income.

In contrast to Ireland, Iceland's taxpayers refused to foot the bill for the debts accumulated by the banking sector. Bondholders were told to accept dramatic reductions in the value of repayments on bank debt after the sector borrowed beyond its means to fund ambitious investments abroad.

The return to growth is likely to put pressure on Irish politicians to explain why Dublin rejected a more radical restructuring of its debts and a departure from the eurozone.

Iceland's currency has fallen by around a quarter, helping its exports.

Economists on the right and left have recommended country deep in debt restructure repayments with bondholders, in effect writing off much of the debt.

Nobel prize winner Paul Krugman (pictured) has repeatedly called on Ireland, Greece and Portugal to consider leaving the euro area and defaulting on debts.

Iceland's recession has proved less severe and shorter than many analysts and the International Monetary Fund had feared.

Iceland's OMX share index is up 17% this year, the third-biggest gain in Europe after Denmark and Sweden, though it remains, at 575, well below its peak of 7500.

Last year Iceland's president Olafur R Grímsson said: "The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn't pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks."

[tonyh29]

Does that mean Iceland can pay off it's debt to the UK now ?

interesting , though I wonder what the long term ramifications of that decision by Iceland are ?

[peterms]

Ireland's banking issue explained in simple terms.

[LondonLax]

Does that mean Iceland can pay off it's debt to the UK now ?

interesting , though I wonder what the long term ramifications of that decision by Iceland are ?

Yes, it was our council government money and our pension funds that Iceland lost and decided they were not going to pay back. It is basically theft.

Meanwhile in other news, Allied Irish Bank is set to pay out 40million euros in bonuses next week. Not bad work if you can get it...

[DanishVillan]

You didn´t invest in Iceland but in its banks as far as I know.

Companies goes bust, investors suffer, except the rich and the crooks...Isn´t that capitalism at its finest.

Why should the Icelandic people accept that bill? It isn´t their fault other nations, including my own, has lost their guts and just let the looting continue.

Would you be willing to pay any and all bills that your banks or someone like BP could run into, just because some international uberbank said you had to?

[peterms]

Does that mean Iceland can pay off it's debt to the UK now ?

interesting , though I wonder what the long term ramifications of that decision by Iceland are ?

Yes, it was our council government money and our pension funds that Iceland lost and decided they were not going to pay back. It is basically theft.

The banks lost it, not the Icelandic people. And so like any other speculative investment in any other company, shareholders lost money. The only difference was that, because it was to do with banks which are internationally owned, the banks said that ordinary people had to pay, in a way which would have been laughable if the failing local pub or unprofitable chemist had claimed that people at large should pay for these businesses' losses.

In Iceland's case, that would mean a population of some 320,000, or about a quarter of Birmingham, bailing out wealthy investors from across the world. Probably that's why in the referendum only 2% of them voted to do so. History does not record the mental state of those who voted this way.

Our councils had money invested there. Why, god only knows. Presumably based on credit ratings from the same incompetents who are still pontificating today. And this some 25 years after LB Hammersmith and Fulham lost millions speculating on derivatives, an issue which seemed to prompt councils to be a bit more cautious about investing. It's hardly an issue for Mr and Mrs Ragnarsdottir and their neighbours to sort out.

This whole banking scam is nothing to do with ordinary people. It's losses made by international private corporations, nothing to do with the general public of whichever country the bank happens to be headquartered. How on earth it's possible to make ordinary people believe they have any responsibility for these losses escapes me. It is wholly and completely an issue for the banks and their owners.

[ONO]

For those down south - are AIB still up shit creek?

[DanishVillan]

The "funny" thing is, that when those Icelandic bankers were hounded of the island with pitchforks in their arses, where did some of them run?

Good old London...And you didn´t care...You were busy placing Iceland on the terrorlist.