Archive for October 27th, 2011

“It’s shite being Scottish! We’re the lowest of the low! The scum of the fucking Earth!  The most wretched, miserable, servile, pathetic trash… that was ever shat into civilization! Some people hate the English. I don’t! They’re just wankers! We, on the other hand, are colonized by wankers! Can’t even find a decent culture to be colonized by! We’re ruled by effete arseholes! It’s a shite state of affairs to be in, Tommy!” from the movie Trainspotting

Substitute Scotland with Ireland, and England with Europe in the above and you might get an idea of feelings today after the latest marathon 2-part EU summit concluded in the small hours this morning, and resulted in the obligatory summit communiqué, available here. In short, the European bailout fund which started at €250bn and rose to €440bn is now to be boosted to have €1tn of “firepower”, EuroZone banks are to get €100bn of recapitalization by July 2012 so as to boost confidence and absorb losses, and Greece is to get a 50% write-down in its debt. There’s also talk about more oversight of national finances and a tax on banking transactions (as part of a global regime). Bank shares in Europe have rallied today in response. Interest rates demanded on government bonds have come down slightly meaning lenders think there are better chances of getting their bond investments back.

Delve into the communiqué though, and you can’t fail to notice the woolliness of the actions to be taken – the EU “recommends the definition by the end of the year of the process to achieve this objective” in relation to raising the Italian pension age might take the biscuit, but the second Greek bailout is still undefined and holders of Greek debt are to be “invited” to take a 50% write-off, it’s not clear what happens if they decline the “invitation”; most significantly though, there is no detail on how the mooted €1tn funding of the bailout fund will be sourced. It is also unclear how EU countries will adopt new rules giving the EU pre-approval rights over EuroZone national budgets where deficits are being run up; but at least that won’t concern us here inIrelandfor a long time, as we need Troika approval before we blow our noses.

But there’s nothing of consequence for Ireland in the latest summit. Perhaps that shouldn’t be surprising in a EuroZone with 330m people and a GDP of €9,200bn -our 4.6m population and €150bn GDP gets lost in the mix and it is France and Germany that dominate proceedings. But with the gross injustice of having to pay USD 1bn (€711m at today’s exchange rate) to Anglo’s unsecured, unguaranteed senior bondholders next Wednesday, 2nd November, it is worth having a quick review of the quality of the people who are, according to the Government, forcing us to stump up 100% of the cost of the Anglo bond, but at the same time just agreed to a 50% write-down (or write-off) of Greece’s sovereign debt. They may not be “effete arseholes” but they’re hardly superior geniuses either.

Prone to tantrums
It would be hard to beat the handbag-clutching outrage displayed by some leaders in Europeduring this crisis. Who can forget the ear-bashing delivered by European Commission president, Portugal’s Manuel Barroso to former MEP and current TD Joe Higgins back in January 2011. Manuel seemed almost asthmatic in his eagerness to pass the blame for the Irish financial crisis to Ireland, and stop any suggestion that policies in Europe and in particular, the ECB might have contributed to the national crisis. And whilst that might have been dismissed as a storm in a teacup, the continuing umbrage taken at the temerity of ratings agencies, who had the absolute gall to downgrade countries with 120% debt:GDP, would have been more serious if it wasn’t farcical. Talk of creating a European ratings agency might have subsided, but the “howling at the moon” by European leaders will not be quickly forgotten. The dismissal of the work of ratings agencies as “so-called clairvoyance” by Olli Rehn’s office in July 2011 after the Portugese downgrade would probably win the prize for European petulance.

So Ireland was one country within the community of 17 in the euro area, suffered an economic shock when the property and banking sectors imploded and found itself with a nasty deficit when tax revenues collapsed and spending stayed elevated and was exacerbated by bailing out its banks. And the country needed some time to adjust spending and taxation so as to reach a point where it could run a balanced budget. The country fesses up to its problems and seeks a bailout programme to tide it over the period of readjustment. And what do our friends do? Firstly they charge us a 3% premium (I think the mafia call it a “vig”) over cost for the funds so that we can, in part, repay European banks guaranteed and secured bonds; not only that, but then one of our partners insists that we change our tax system for corporations as a quid pro quo for a slight reduction in the profit being earned on our bailout. Charming!

Remember the stress tests in 2010 that gave both Bank of Ireland and Allied Irish Banks clean bills of health only for both banks to need nearly €20bn of a bailout months later. And then more recently on a warm Friday in July 2011, we all gathered around the monitors to hear the results of the second European banks stress tests. Would it be 15 or 30 banks that failed the stress tests and would they need €30bn or €50bn of new capital? Why no, said the EBA, just eight banks didn’t have enough capital and €2.5bn would do the trick. How we laughed when one week later, one Spanish bank by itself needed €2.8bn of new capital and €3bn of emergency liquidity! And three months later, the €2.5bn requirement has grown to €100bn. Funny, funny people with impeccable comedic timing.

Just plain dumb
When you recall that we have known since at least last year that Greece faces a 150% debt:GDP, you really have to admire the denial and delusion of claims at the heart of Europe that austerity alone could rescue Greece and return it to financial health. And with a great flourish at the July summit when a 21% debt writedown was proposed, it was still obvious that this wouldn’t be enough. And even today with a target of delivering Greece to a debt:GDP of “only” 120% by 2020, it again seems incredible, when you consider Greece’s reputation for attracting investment and the continuing weaknesses in its economy. Minister Noonan might have justifiably claimed thatIrelandwas not Greece, but Greece is not Italy either and doesn’t have the ability to attract investment and generate income so as to sustain a 120% debt:GDP. A further write-down will inevitably be in prospect for Greece.

Of course it would be an exaggeration to claim thatIrelandhad been “colonized” byEurope. And although feelings towardsEuropehave probably cooled a little, in general there is still support for the European project, despite the behaviour of some leaders. It is though, galling for this country to have to pay out €150 per man, woman and child next Wednesday to unsecured, unguaranteed bondholders in a bank that is costing the nation €29.3bn, a bank without depositors, that doesn’t lend, that is a warehouse of doubtful quality loans and which is being run down in as short a period as possible. Galling. But it is something else to realize the caliber of those insisting on the payment, and what that says about our abilities…

Finally, two small points on our own Government’s actions. We are being told that if we were to get a 50% writedown on our debt, we would need endure years of austerity. Given that a 50% writedown would simplistically mean forgiveness of €80bn of debt, I wonder if we could actually endure some more austerity; and anyway if our debt:GDP fell to 60%, would we really have austerity for more than a couple of years; surely with such low debt and a growing economy, we might be able to get back into bond markets sooner rather than later. And secondly, I can’t help but notice that the much-touted Comprehensive Spending Review which was to have been completed in September 2011 has still not been published. Nor has the 4-year plan which was signaled in August 2011 and was to be published in October 2011 and would provide a degree of certainty as to new taxes and levies in the next four years. Neither will be popular in the sense that both will make more tangible the future austerity measures. And I notice what appears to be an agreed position across the Cabinet as to the message to be deployed to deflect criticism of the repayment of the USD 1bn Anglo bond next week and that message is : Anglo will pay the bond out of its own resources, the taxpayers’ resources will not be affected, Anglo has recently sold North American assets for billions and it is from the proceeds of these sales that Anglo will repay the bond. This is patent nonsense but it seems to be part of the policy to dampen down what should be an outbreak of outrage.

[Apologies to readers who might find the quotation from Trainspotting at the top to be too colourful, but I think its earthiness and authenticity is justified. That said, let’s maintain the usual standards in any comments posted]


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