I am extremely relieved that there is now finally, serious talk of allowing the IMF come into the Eurozone (EZ). Up until now, our policy efforts have been to do everything possible to avert the IMF coming into the EZ. We have even gone so far as to develop a mini-IMF within Europe (EFSF/ESM) to perform the necessary tasks without giving over control to this global institution. (Note: despite their involvement in the bailouts of Greece/Portugal/Ireland, the IMF is not in control of these programs, it is merely providing technical support and limited funding).
However, I have always thought this was a mistake. I have written to countless heads of State, Commissioners etc. expressing my disbelief that they have gone to such lengths to prevent the IMF coming in and performing the necessary tasks. They have built up mighty institutions, destroyed countless billions of wealth and worst of all wasted precious time for reform in their efforts to stave off the IMF's advances.
I can remember clearly the first person to rule out IMF involvement -Jean Claude Trichet; he said that having the IMF intervene in a Eurozone country would be a humiliation. I did not think then and I do not think now that that was appropriate language for a central bank governor to use -emotive, unengaged, and truculent. I regard it as the key mistake made at a European level. I have since written to countless people trying to highlight the absurdity and vainglory of what we are trying to do. Only Olli Rehn took the trouble to respond to me, simply saying that the IMF had insufficient funds to rescue Greece (which seems absurd, when you think about the resources we have given to the EFSF since).
The real reason for all of this dissembling, was that European leaders know, that the first thing the IMF will do is tell the countries in severe debt that they must first write down a great deal of it. This will cause losses to private investors throughout the region, many of them institutional investors such as pension funds. I fully understand the reluctance to expose these institutions to losses -however, after 3 years of this farcical dancing around the IMF, can anyone seriously say that going to the IMF would be worse? Furthermore, by now, the truly vulnerable institutions such as pension funds, deposit banks etc. have sold their stakes in these bonds and the current bondholders for the PIGS are mostly high-risk investors -such as hedge funds. Defaulting on these will not cause the cataclysm our leaders fear.
I am delighted to hear that finally, people are talking of the IMF taking control of this process, instead of this Frankfurt group which has grown up in recent months. The IMF has the expertise, the credibility (and with ECB support, the firepower) to fix these multiple crises. It will look at solving the problem and will not have to look over its shoulder at national bondholer interests or coalition partners. I hope this suggestion gathers momentum.
My father used to tell me that if you get the economics right the politics will look after itself. I have come over the years to invert this wisdom -once you get the politics right, the economics fall into line pretty quickly. We need to get rid of this dysfunctional system of politicians from other jurisdictions deciding what is economically best for the troubled countries. The IMF is no more democratic or accountable than the Frankfurt group, but at least their agenda is not set by bondholders or domestic elections. If they come in, then we can really start to work at putting all this horror behind us.
Wednesday, November 30, 2011
Eurozone crisis non-solutions
A broader mandate for the ECB is not just the most desirable resolution to this crisis -it is by now the only solution to the crisis.
The ongoing debate about the way forward to resolve the Eurozone crisis is being hampered by a series of non-solutions that are being flogged by different parties. These false solutions do not help with resolving the crisis, but instead reflect existing national bias'. It is a toxic brew of lazy thinking and flippancy.
I intend to address a few in turn. Eurobonds; closer budgetary scrutiny; treaty change.
EUROBONDS.
Many commentators have spoken for Eurobonds, claiming that they will extend the creditworthiness of the Eurozone as a whole to each country, allowing those currently locked out of the markets to borrow. There are well rehearsed and real problems with this, in particular, that it will reward the profligate at the expense of the prudent and encourage further bad behaviour. It will in fact return us to the same pattern of misaligned incentives that amplified the problem in the first place. This alone should be enough to rule this approach out of consideration (though Ireland, typically unsure what to do, is actually supporting this daftness), but it is moot as far as I'm concerned, because apart from the problems of agency -it just won't work.
The Eurobonds idea creates an ultra safe investment asset for MSs to sell, up to the value of 60% of their GDP. It also accepts that national bonds sold after this are potentially defaultable (though why it would be more acceptable for this to happen after common European debt has been issued as opposed to now is a bit of a mystery). As most of the troubled countries have existing debts far greater than 60% of GDP, as they borrow, they will be making their existing debts increasingly risky, and expendable. In effect, Eurobonds will put an end to national bonds, only Eurobonds will be sellable, and once troubled MSs have sold 60% of their GDP's worth of Eurobonds, they will be unable to issue national debt to refinance their remaining loans -we will be back to square one. Eurobonds are a red herring.
CLOSER BUDGETARY SCRUTINY
I am not opposed to closer European budgetary scrutiny. Indeed in Ireland, it would be refreshing to have any budgetary scrutiny at all. However, this plan will not help the current crisis. Firstly, it presupposes that the external controls on national budgets will prevent financial disasters such as happened in Ireland and Spain. Given the excellent fiscal status of both Spain and Ireland in the years running up to the crisis, it is difficult to see what budgetary scrutiny would have changed. Low debts, high surpluses -just what are we to believe budgetary scrutiny would have done? In Greece, the statistics were falsified to obscure the truth -what would scrutiny have achieved here? Indeed, the countries that have come through this crisis best are those which consistently ran deficits in the run up to the crisis. It may perform some political function to allow central European politicians sell the upcoming losses to their electorates, but it serves no real purpose in the current crisis. Closer budgetary scrutiny is a red herring.
TREATY CHANGE
Treaty change is quite impossible in a useful timeframe -furthermore, the ratification process will introduce a new aspect of uncertainty into an already volatile situation. In particular, the likelihood of the UK passing a referendum on closer economic cooperation with the dysfunctional Eurozone is remote. Significant treaty changes will lead us into a world of pitfalls that we must avoid. Treaty change is a red herring.
QUANTITATIVE EASING
I have been quite a fan of quantitative easing in the US and the UK. I have a long standing belief that a small amount of inflation is a very healthy thing as it prevents money hoarding and compels wealth to be invested productively and profitably. In short it prevents depressions. Quantitative easing involves the Central Bank printing money, and then using this new cash to purchase government debts. The new liquidity released into the system creates a stimulus and prevents deflation. In a highly leveraged economy (such as Ireland), deflation is the path to disaster.
Nonetheless, at present in the Eurozone, inflation is running at over 2%, so deflation is not a problem except in certain localities. This does not bode well for the consequences of QE.
However, this will not last for long as forced austerity is probably going to descend on the continent once national budgets are agreed in December. Inflation will likely tick downwards as austerity bites, and perhaps then Quantitative Easing can be used to ease the money supply and relieve the debts of Greece. Finally, it must be made clear that this is a once off, and we must convince markets, funds etc. that the next time there is a sovereign crisis in Europe, they will have to eat their losses. A first step towards this would be to prevent financial institutions from using sovereign bonds as Tier 1 capital. Increasing their risk exposure to these assets should concentrate minds.
However, that is not an end to it -Quantitative Easing poses particular problems in the Eurozone. As it is a common currency, all holders of Euros across the Eurozone will lose wealth as the supply of money expands, while all indebted persons will benefit from the reduction in the value of their debts, and the proceeds from this money printing will be used to relieve the national debts of just a handful of highly indebted countries (or probably only Greece). This is undoubtedly unfair. It rewards personal and national bad behaviour and could be seen to give encouragement to the profligate.
However, unlike the other solutions currently being discussed -it will work. It is not a red herring, it is a real solution, and therefore, for all its lack of appeal, I support this approach. Combined with a coordinated austerity drive to balance Eurozone budgets, Quantitative Easing will increase the money supply, relieve the debt burden of Greece cause only modest, controllable inflation and save the Euro.
The ongoing debate about the way forward to resolve the Eurozone crisis is being hampered by a series of non-solutions that are being flogged by different parties. These false solutions do not help with resolving the crisis, but instead reflect existing national bias'. It is a toxic brew of lazy thinking and flippancy.
I intend to address a few in turn. Eurobonds; closer budgetary scrutiny; treaty change.
EUROBONDS.
Many commentators have spoken for Eurobonds, claiming that they will extend the creditworthiness of the Eurozone as a whole to each country, allowing those currently locked out of the markets to borrow. There are well rehearsed and real problems with this, in particular, that it will reward the profligate at the expense of the prudent and encourage further bad behaviour. It will in fact return us to the same pattern of misaligned incentives that amplified the problem in the first place. This alone should be enough to rule this approach out of consideration (though Ireland, typically unsure what to do, is actually supporting this daftness), but it is moot as far as I'm concerned, because apart from the problems of agency -it just won't work.
The Eurobonds idea creates an ultra safe investment asset for MSs to sell, up to the value of 60% of their GDP. It also accepts that national bonds sold after this are potentially defaultable (though why it would be more acceptable for this to happen after common European debt has been issued as opposed to now is a bit of a mystery). As most of the troubled countries have existing debts far greater than 60% of GDP, as they borrow, they will be making their existing debts increasingly risky, and expendable. In effect, Eurobonds will put an end to national bonds, only Eurobonds will be sellable, and once troubled MSs have sold 60% of their GDP's worth of Eurobonds, they will be unable to issue national debt to refinance their remaining loans -we will be back to square one. Eurobonds are a red herring.
CLOSER BUDGETARY SCRUTINY
I am not opposed to closer European budgetary scrutiny. Indeed in Ireland, it would be refreshing to have any budgetary scrutiny at all. However, this plan will not help the current crisis. Firstly, it presupposes that the external controls on national budgets will prevent financial disasters such as happened in Ireland and Spain. Given the excellent fiscal status of both Spain and Ireland in the years running up to the crisis, it is difficult to see what budgetary scrutiny would have changed. Low debts, high surpluses -just what are we to believe budgetary scrutiny would have done? In Greece, the statistics were falsified to obscure the truth -what would scrutiny have achieved here? Indeed, the countries that have come through this crisis best are those which consistently ran deficits in the run up to the crisis. It may perform some political function to allow central European politicians sell the upcoming losses to their electorates, but it serves no real purpose in the current crisis. Closer budgetary scrutiny is a red herring.
TREATY CHANGE
Treaty change is quite impossible in a useful timeframe -furthermore, the ratification process will introduce a new aspect of uncertainty into an already volatile situation. In particular, the likelihood of the UK passing a referendum on closer economic cooperation with the dysfunctional Eurozone is remote. Significant treaty changes will lead us into a world of pitfalls that we must avoid. Treaty change is a red herring.
QUANTITATIVE EASING
I have been quite a fan of quantitative easing in the US and the UK. I have a long standing belief that a small amount of inflation is a very healthy thing as it prevents money hoarding and compels wealth to be invested productively and profitably. In short it prevents depressions. Quantitative easing involves the Central Bank printing money, and then using this new cash to purchase government debts. The new liquidity released into the system creates a stimulus and prevents deflation. In a highly leveraged economy (such as Ireland), deflation is the path to disaster.
Nonetheless, at present in the Eurozone, inflation is running at over 2%, so deflation is not a problem except in certain localities. This does not bode well for the consequences of QE.
However, this will not last for long as forced austerity is probably going to descend on the continent once national budgets are agreed in December. Inflation will likely tick downwards as austerity bites, and perhaps then Quantitative Easing can be used to ease the money supply and relieve the debts of Greece. Finally, it must be made clear that this is a once off, and we must convince markets, funds etc. that the next time there is a sovereign crisis in Europe, they will have to eat their losses. A first step towards this would be to prevent financial institutions from using sovereign bonds as Tier 1 capital. Increasing their risk exposure to these assets should concentrate minds.
However, that is not an end to it -Quantitative Easing poses particular problems in the Eurozone. As it is a common currency, all holders of Euros across the Eurozone will lose wealth as the supply of money expands, while all indebted persons will benefit from the reduction in the value of their debts, and the proceeds from this money printing will be used to relieve the national debts of just a handful of highly indebted countries (or probably only Greece). This is undoubtedly unfair. It rewards personal and national bad behaviour and could be seen to give encouragement to the profligate.
However, unlike the other solutions currently being discussed -it will work. It is not a red herring, it is a real solution, and therefore, for all its lack of appeal, I support this approach. Combined with a coordinated austerity drive to balance Eurozone budgets, Quantitative Easing will increase the money supply, relieve the debt burden of Greece cause only modest, controllable inflation and save the Euro.
Thursday, November 24, 2011
Average debt of Irish worker
Loans to Irish residents outstanding (Sept 2011) 253bn
National debt (sept 2011) 163bn
Total 420bn in debt nationally.
1.8 million workers.
Therefore, the average Irish worker is supporting debts of 233,000 Euros. Around a quarter of a million euros each.
Bummer
National debt (sept 2011) 163bn
Total 420bn in debt nationally.
1.8 million workers.
Therefore, the average Irish worker is supporting debts of 233,000 Euros. Around a quarter of a million euros each.
Bummer
Sean Quinn -from hero to zero
Sean Quinn is rapidly consuming his stock of goodwill in this country. Yes, he may have kept his business interests near to home, but all this carry on with IBRC is unacceptable: claiming to have only €12K in the bank; filing for bankruptcy in the North; transferring assets out of his name. Who does he think he is? I've come to the conclusion that for all the plaudits he has won over the years -he's only a bum behind it all. Another of those puffed up assholes that seem to rule the roost everywhere in this country.
Wednesday, November 23, 2011
Letter to Ajai Chopra
Dear Mr. Chopra,
I am writing to you about the Irish Government's intention to present a draft programme of asset disposals to the IMF, the ECB and the European Commission. Specifically, I am writing to you about the regulatory steps required for the sale of the ESB (the publicly owned electricity provider).
At present, the electricity grid in Ireland belongs to the ESB, however its operation is contracted to another publicly owned company -Eirgrid.
The Government's intention is to sell a stake in the ESB without first seperating the grid from it. I believe this is a serious mistake for 2 reasons: it will undermine the good governance of an already competitive electricity market; and it will undermine any chance of the State receiving fair value for the asset.
The arguments for decoupling grids from electricity providers are well rehearsed across many jurisdictions and I will not go into them needlessly here. Sufficeth to say, it gives the largest player in the market power over their competitors.
However, in Ireland's case, selling a bundled asset could be uniquely harmful, as the right to operate the grid is not vested with the same company that owns it. Therefore, I believe by selling a stake in the ESB, we are expecting investors to pay full price for their share in the grid, without allowing them the chance to operate it (as Eirgrid has the mandate to operate it). Clearly this is pie-in-the-sky, as no investor will want to pay full value for an asset they will not be allowed to operate. We are dooming the Irish State to accept a vlaue below the true value of the asset if we sell the grid in this manner.
If the sale of the grid is indeed crucial, then I suggest ownership of it be transferred to Eirgrid and a stake in this company be sold as well. At least in this way, a sensible, attractive package can be presented to potential investors and they will be buying both the asset and the right to operate it. This seems to be the only way to safeguard the value of the asset in any sale.
Finally, I want to bring your attention to some surprising correspondence I have had from some politicians in Ireland in regard to this matter. After writing to many politicians to alert them to what I believe is a dramatic mistake that will undermine the functioning of the electricity market in this country, one responded to me to say that the objective of selling the ESB bundled with the grid is specifically to create a dysfunctional system. I will not name him, but he explained that by leaving the grid bundled, this will make it impracticable for future governments to sell the remainder of the ESB and will instead create a regulatory incentive to renationalise the asset. He expressed satisfaction that this approach would achieve our programme targets, but encourage a policy reversal at a future time.
Personally, I have no distinct preference for public or private ownership, but it seems clear to me that if we are to part-privatise the ESB we should make an honest attempt to create a functioning post-privatisation electricity market. Instead, it seems the intention is to sabotage the privatisation process to bind the hands of future governments -for crude ideological reasons. Instead of being the transformational event envisaged under the programme, the intention is to technically comply, but in a manner that ensures a reversal at a later date.
I urge you to examine this proposal extremely carefully when it is presented to you. I recommend you seek the seperation of the Grid from the ESB, to either remain in State ownership, or else to be transferred to Eirgrid and that company be part-privatised also. The current proposal is ham-fisted, seemingly intentionally.
I am writing to you about the Irish Government's intention to present a draft programme of asset disposals to the IMF, the ECB and the European Commission. Specifically, I am writing to you about the regulatory steps required for the sale of the ESB (the publicly owned electricity provider).
At present, the electricity grid in Ireland belongs to the ESB, however its operation is contracted to another publicly owned company -Eirgrid.
The Government's intention is to sell a stake in the ESB without first seperating the grid from it. I believe this is a serious mistake for 2 reasons: it will undermine the good governance of an already competitive electricity market; and it will undermine any chance of the State receiving fair value for the asset.
The arguments for decoupling grids from electricity providers are well rehearsed across many jurisdictions and I will not go into them needlessly here. Sufficeth to say, it gives the largest player in the market power over their competitors.
However, in Ireland's case, selling a bundled asset could be uniquely harmful, as the right to operate the grid is not vested with the same company that owns it. Therefore, I believe by selling a stake in the ESB, we are expecting investors to pay full price for their share in the grid, without allowing them the chance to operate it (as Eirgrid has the mandate to operate it). Clearly this is pie-in-the-sky, as no investor will want to pay full value for an asset they will not be allowed to operate. We are dooming the Irish State to accept a vlaue below the true value of the asset if we sell the grid in this manner.
If the sale of the grid is indeed crucial, then I suggest ownership of it be transferred to Eirgrid and a stake in this company be sold as well. At least in this way, a sensible, attractive package can be presented to potential investors and they will be buying both the asset and the right to operate it. This seems to be the only way to safeguard the value of the asset in any sale.
Finally, I want to bring your attention to some surprising correspondence I have had from some politicians in Ireland in regard to this matter. After writing to many politicians to alert them to what I believe is a dramatic mistake that will undermine the functioning of the electricity market in this country, one responded to me to say that the objective of selling the ESB bundled with the grid is specifically to create a dysfunctional system. I will not name him, but he explained that by leaving the grid bundled, this will make it impracticable for future governments to sell the remainder of the ESB and will instead create a regulatory incentive to renationalise the asset. He expressed satisfaction that this approach would achieve our programme targets, but encourage a policy reversal at a future time.
Personally, I have no distinct preference for public or private ownership, but it seems clear to me that if we are to part-privatise the ESB we should make an honest attempt to create a functioning post-privatisation electricity market. Instead, it seems the intention is to sabotage the privatisation process to bind the hands of future governments -for crude ideological reasons. Instead of being the transformational event envisaged under the programme, the intention is to technically comply, but in a manner that ensures a reversal at a later date.
I urge you to examine this proposal extremely carefully when it is presented to you. I recommend you seek the seperation of the Grid from the ESB, to either remain in State ownership, or else to be transferred to Eirgrid and that company be part-privatised also. The current proposal is ham-fisted, seemingly intentionally.
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