Worrying times for the euro
April 25, 2012
These are very worrying times for the euro zone. The ECB’s LTRO (long-term refinancing operation) in November and February, which made available €1trn in 1% funding to more than 800 European banks over a three-year timeframe, brought a temporary respite to the woes besetting the region. But the past few weeks have seen an escalation in the crisis. If there is a natural evolution to this crisis – then it has reached the stage of political legitimacy.
Referendum conundrum
February 01, 2012
Twenty five EU leaders have negotiated a fiscal compact through an inter-governmental agreement in an effort to halt the deepening banking and debt crisis sweeping the region.
A game of brinkmanship
January 23, 2012
With the ECB remaining staunchly opposed to Eurobonds and the German government determined to get a fiscal compact written into member state's constitutions, who will blink first at the next EU summit?
Trick or treaty
December 14, 2011
The latest EU summit came and went without convincing anybody that there is enough on the table to solve the debt/financial crisis sweeping the region. That is not too say that what was proposed isn’t a step in the right direct.
The moment of truth
December 06, 2011
French president Nicolas Sarkozy and German Chancellor Angela Merkel announced at a joint press conference in Paris on December 5 that they are seeking EU treaty change to address the euro zone sovereign debt crisis. The two main proposals that would be included in a new treaty are automatic sanctions in the event a member state’s budget deficit exceeds 3% of GDP. Moreover, each euro zone member state will have to agree to maintaining a balanced budget under new treaty protocols.
What now for the euro? - Editor's Blog
November 11, 2011
If there was any doubt in the past that treaty change is needed if the euro zone is to survive, the spike in Italian bond yields above the critical 7% mark represents the Rubicon from which there is no return. Italian yields may have crept back down into the relative safety of sub 7% in recent trading, but the markets have made a huge statement. The third largest economy in the euro zone and at €1.8trn, the third largest debt market in the world, Italy is now in play. How long can it be before France is confronted with a soaring cost of funding that may escalate into something much worse?
Euro or bust
November 02, 2011
To say this is make or break time for the euro is an understatement. The proposals for a Greek referendum have ratcheted up the political pressure ahead of a G20 Summit scheduled to begin in Cannes tomorrow. One month ago, this G20 Summit was being billed as the meeting that would give its imprimatur to crisis resolution measures needed to finally end the uncertainty over the single currency.
The Biggest Challenge Yet
August 09, 2011
The only thing that can be said with any certainty is that there will be a resolution to the euro crisis in the not too distant future. The markets have lost patience with ad hoc and incoherent approach taken by European leaders to this crisis. It now seems clear that the markets are looking for ...
Too big to bail
July 13, 2011
The decision by the credit ratings agency Moodys to downgrade Irish sovereign debt to junk status was perhaps inevitable. The markets have taken the view that the economy is carrying too much debt. There will have to be some sort of a restructuring which will include private sector creditors.
The Irish government and European Commission have both denounced the move by Moodys. In a week of unprecedented turmoil across the region, the downgrade adds to the list of woes besetting the euro zone.
Overall, it makes very little difference whether Ireland is considered junk status. The chances of this country returning to the markets by 2013 were minimal.
With the risk of contagion now looming for Spain and more importantly Italy, the EU will have to act quickly to convince the markets that it can draw a line under the crisis. Its record so far has been underwhelming. Crisis containment has been done on a piecemeal and ad hoc fashion. Crucially, there has been a misdiagnosis of the problem.
The German finance minister Wolfgang Schauble insists that what is happening is not a crisis of the euro – rather it is a loss of competitiveness among the periphery countries. Once this has been resolved then the region will quickly be on its way to recovery.
It is obvious to everyone – even those peddling this line – that the real cause of the debt crisis is massive structural imbalances. During the naughties credit flowed through the euro zone as if it were a single country. This caused massive bubbles to form in the periphery economies.
When the music stopped and the crisis took hold, there was no appropriate region wide response. Individual member states were forced to recognise losses that would eventually lead to state insolvency in the cases of Ireland, Greece and Portugal.
If the euro zone is to survive in the longer term, then there has to be a comprehensive solution to this problem. The creation of a European bank regulator and a systemic risk board are steps in the right direction, but much more needs to be done.
Furthermore, it is not possible for the euro zone to muddle through in its current form. A currency union among heterogeneous economies is impossible without some sort of a fiscal and political union.
The euro zone is moving in that direction. The European Financial Stability Facility (EFSF) and its successor the European Stability Mechanism are a form of a euro bond. But a full blown euro bond is needed to convince the markets that the project will not unravel in the medium to long term. This means some central agency that can issue debt on behalf of member states.
This is where the politics will get interesting. What would be the quid pro quo for a fiscal union? How much autonomy would member states have to cede? In Ireland it would require a referendum. What are the chances of that succeeding in the current climate of hostility towards the EU? What would happen if a referendum was rejected?
Britain has always had a semi-detached relationship with the EU. It is implacably opposed to any moves towards federalism. If fiscal and political integration is necessary for the survival of the single currency, then what would it mean for Britain? More importantly, what would that mean for Ireland? There is still a big economic dependency on the UK.
The government will face some very difficult decisions in the not too distant future. The most important of these is whether the economy would be better off in or out of the euro. For example is it possible to bridge the primary deficit without a currency devaluation?
Would the immediate benefits of leaving the euro be outweighed by the economic and political repercussions? After all, there would still have to be a debt default outside the euro. What would be the implications for a small open economy dependent on foreign direct investment and whose main selling point was as an access point for the single market?
There are a lot of questions. But it looks as if the answers could become much more apparent than what would have been expected even a week ago.
Unilateral default canard
May 10, 2011
Morgan Kelly’s piece in the Irish Times on Saturday 7 May certainly added a frisson to the national debate about the level of debt and what to do with it. The UCD economist recommended that the government walk away from the EU/ECB/IMF orchestrated bailout. In order to do so, Kelly says that the Government would have to close the fiscal deficit this year. There are many merits to Kelly’s article. He leaves the reader in no doubt about the scale of the challenge facing the economy.
But there are also down many flaws in the piece. It is incumbent upon Kelly to specify where he got the information alleging US Treasury Secretary Timothy Geithner torpedoed the joint IMF/Irish Government plans to apply haircuts to senior bondholders of Irish banks.
He outlines a sequence of events in the article that depict Central Bank Patrick Honohan as a deeply compromised protagonist in a shadowy subplot orchestrated by the ECB to make Ireland an example to the rest of the euro zone. In fact, to the point where Honohan undermines the then Minister for Finance Brian Lenihan’s attempts to get the best deal for this country by siding with his ultimate paymasters in Frankfurt.
Yet, there is no evidence to back this up. An article of this nature was always going to cause a furore and consequently should not be allowed in the public domain unless the author can stand over every single fact contained therein.
The other substantive points in the article are that Ireland is facing bankruptcy. Something has to be done soon. The most effective means of unburdening the economy from this debt overhang is to walk away from the bailout package. Crucially that would mean taking €19bn out of the economy this year to balance the books. There is no doubt that there is a strong economic rationale to the argument. Unfortunately society is not shaped exclusively by the dictats of economics. A convulsion of this size to an economy already reeling from three years of shock therapy would have massive social consequences.
The economist David McWilliams went on the RTE Radio One Pat Kenny Show May 9 to put forward his views on easing Ireland’s debt burden. Leave the euro and re-instate the punt at par value with the single currency. The punt nua would immediately drop in value which would increase exports and take great swathes out of the overall national debt. Again, a well presented economic theory that would probably work nicely in a test laboratory, but would face possibly insurmountable logistical and legal hurdles in the real world.
There is a danger that there could be a populist backlash against the EU and its institutions based on the current economic plight in this country. There are very legitimate reasons for bearing grievances against Brussels. Or more importantly, the two biggest members of the euro zone. France and Germany are using Ireland’s economic plight as a way of placating domestic electorates increasingly anxious about the crisis enveloping the periphery.
The German and French governments are implacably opposed to any sort of haircuts being applied to senior bondholders of Irish banks. That is because many of these bondholders are German and French banks. Such a move could trigger another run on the banks and have a very destabilizing effect across the region.
And this gets at the nub of the problem. There exists a banking crisis in the core European economies, particularly Germany, just as much as there is a banking crisis on the periphery. But the difference is that the Germans are looking to ‘kick the can down the road’. It wants to recapitalise its banks over the next few years and then sometime post 2013 recognise the losses sitting on its banks’ balance sheets. The periphery countries cannot afford that luxury. Something may have to be done sooner than then.
In the meantime the Germans are taking the view that Ireland will have to muddle through. Moreover, in return for easing the terms of the bailout agreement, the German government is looking for concessions on Ireland’s corporate tax rate. Again an appalling case of double standards.
In any currency union, capital flows in the direction of the core countries. Periphery countries need as many levers as possible to attract capital, such as Ireland’s low corporate tax rate. Germany has the biggest domestic consumer market in the region, yet it pursues a low growth export oriented model. It seems to have nothing but contempt for a single European market in goods and services. Its main focus is on budgetary constraint and increasing competitiveness. These policies are widening tensions with the periphery countries.
And this gets back to the multi-billion euro question: what can Ireland do next? The question of whether it can get through the next number of years without restructuring its debt is perhaps a theoretical one. The size of the debt overhang means that if there isn’t some sort of restructuring, then the economy will be kept close to recessionary levels for the foreseeable future.
But if there is a restructuring, it cannot happen on a unilateral basis. It has to be done within a European context. A reduction in the interest rate should be an immediate priority for this government. It needs as much breathing space as possible to get the fiscal deficit under control. Then it should pursue a strategy of debt management. This should include looking at ways of extending the maturities on sovereign debt and taking chunks out of the senior bank debt owed by Irish banks.
Adopting an antagonistic approach to all institutions of the EU may strike a populist chord in Ireland, but what is it ultimately going to achieve?
Is this ground zero?
February 28, 2011
A new Government is now in situ. Does this represent a genuine new departure or a variation of the same inept form of government that has brought this country to its knees?
The short and perhaps glib answer is that only time will tell. Removing Fianna Fail from office is a good start. ...
Honohan on banking crisis
January 07, 2011
by John Walsh
Central Bank Governor Patrick Honohan addressed the Institute of European Affairs in the Gresham Hotel on Jan 7th. The title of his speech was ‘Restoring credit to the Irish economy.’
Implications of bailout
November 18, 2010
Bailout conundrum
November 15, 2010
The volatility on Irish government bond spreads suggest that an endgame is in sight. The markets do not believe that the Government can contain the banking crisis. The fear is that there is another wave of losses that have yet to be revealed, which would lead to a Japanese style lost decade courtesy of a zombie banking system.
The comment made by Angela Merkel that bondholders will have to share the burden of fiscal readjustment spread panic throughout the market. The view was that bondholders were being lined up for haircuts as the eurozone periphery countries were moving closer to a fiscal crisis.
Ireland’s banking crisis means that it is firmly in the line of fire among investors. There has been intense speculation over the past few days that the Government has been in negotiations with Brussels about tapping the European Financial Stability Facility.
There is certainly enough pressure coming from Europe to make a bailout application. While the Commission and the core eurozone member states accept that Ireland is fully funded until mid-2011, the concern is that the turbulence spreading through the bond markets could escalate and trigger a funding crisis in Spain or possibly Italy.
In that event, the euro zone would be sent into a tailspin from which it would be hard to recover.
The Government is naturally reluctant to cede control of the national coffers. This magazine had a conversation with influential Financial Times Columnist Wolfgang Munchau last March. He argued that if Ireland had to get a bail out, then the 12.5% corporate tax rate would have to be offered up as a quid pro quo.
If that were to happen, then it would be very damaging for this country. In any currency union, capital flows always move towards the core. Ireland needs as many levers as possible to attract capital inflows. If it lost the 12.5% tax rate, then there would be a loss of investment, which would lead to job cuts and a lower overall tax take, which could easily spark a vicious downward spiral.
In that case it would be better to go to the IMF. But what would that mean for the legitimacy of the euro zone?
One possible solution would be to sort out the banking system using the Financial Stability Facility.
There are a number of large international banks holding large volumes of Irish sovereign debt. If it was put to these banks that there is no room for further fiscal adjustment to rein in the deficit and that the debt mountain would have to be restructured, then it could prompt a mass takeover of the domestic banking system.
Instead of having to shoulder the losses caused by bond haircuts, these international banks would be encouraged to take over domestic financial institutions. The ESFC would then underwrite the process by becoming a liquidity backstop.
The foreign owned banks would immediately set about recognising losses sitting on the balance sheets of the domestic banks. They would in turn lend into the Irish corporate sector at market rates. As it stands, the recovery hinges on Irish banks transmitting credit to the domestic economy. That would mean commercial rates of double digits, which would weigh heavily on any incipient corporate recovery.
Whatever happens, one thing is for sure, it is likely to be played out in the near term.
Make bondholders pay
October 22, 2010
(this is an extract from a longer interview that will appear in the next issue of Business & Finance magazine)
Beginning of the end?
September 30, 2010
Is this the beginning of the end? The long drawn out saga over the cost of Anglo Irish Bank could be finally coming to an end. The Government has hedged its bets by disclosing two figures: a loss of €29.3bn based on current assumptions and a loss of €34bn based on a worse case scenario....
Beginning of the end?
September 30, 2010
Is this the beginning of the end? The long drawn out saga over the cost of Anglo Irish Bank could be finally coming to an end. The Government has hedged its bets by disclosing two figures: a loss of €29.3bn based on current assumptions and a loss of €34bn based on a worse case scenario....
German double standards on corporate tax
September 28, 2010
German MEPs are demanding that Ireland double its corporate tax rate to 25% in the event this country has to tap the European Financial Stability Facility. The MEPs made their representation to Jean Claude Trichet, president of the European Central Bank. The latter did not make any official comme...
Could Anglo cost us the 12.5 percent tax rate?
September 09, 2010
It may seem like a bit of a leap, but could Anglo Irish Bank undermine Ireland’s ability to set its own corporate tax rate? It emerged today that the EU Commission is to look at introducing a Common Consolidated Corporate Tax Base (CCCTB) next year, on the recommendation of former Commissio...
The Anglo conundrum
August 31, 2010
There are obviously a growing clamour of calls to close down Anglo Irish Bank in view of the record losses posted for the first half of this year. The ratings agency S&P downgraded this country on the basis that there was still far too much uncertainty hanging over the final bill for rescuing the banking system. It would make sense to close down Anglo as soon as possible in order to stem the flow of taxpayers money into what is now looking like a huge black hole.
AIB Faces Problems Selling BZ WBK
August 19, 2010
The following story has appeared on the Polish News Bulletin, detailing the problems AIB faces selling its asset in that country, BZ WBK:
Polish bad news for AIB?
August 16, 2010
According to reports in Polish newswires over the weekend, the Polish Financial Supervision Authority might be about to derail AIB’s efforts to make a quick sale of its 70.5% holding in Bank Zachodni WBK to the highest bidder. The newswire story speculates that the Polish financial regulator could delay the sale of BZ WBK to a non-Polish bank for up to two years in an effort to keep the unit under Polish ownership. The move is seen as attempt to maintain stability in the Polish banking sector on the back of concerns that Banco Santander, the main non-Polish bidder for the AIB subsidiary, is too heavily exposed to the troubled Spanish economy and consequently could pose a risk to the Polish financial sector if it were to take over one of the country’s main banks.
Boyle's Moody's blues
July 19, 2010
The news that the credit ratings agency Moody’s has downgraded Irish debt from Aa1 to Aa2 was to be expected. After all, if the cost of bailing out the banks is included then the size of the budget deficit is the biggest in the euro zone. The NTMA says that the move will not add to the cost of Ir...
All stressed out
July 14, 2010
At the moment the focus is on the results of European wide bank stress tests. Whether 91 of the most vulnerable financial institutions across the region are fit for purpose will become known by Friday. The market reaction to the results of this survey will be crucial. If the stress tests are deem...
Roadmap for a successful Europe
June 30, 2010
The European Commission today issued a press release called ‘Europe Means Business’. The timing of the release is an obvious attempt to allay market fears that the EU is heading into a sovereign debt/banking crisis, which would in turn precipitate a double dip recession.
Read moreCulture of accountability?
June 15, 2010
Last week could have been a watershed in Irish political life. Two reports were released that examined the causes of the banking meltdown and the attendant regulatory malfunctions. These reports were commissioned by the Government to look into the role senior members of this government, and in particular the Taoiseach, played in stoking the boom-bust cycle. That both of these reports were free of political interference is possibly a first in the history of the State.
Read moreEurope needs to be saved from itself
June 15, 2010
Reports that bite
June 09, 2010
The contents of the two reports released today into the banking crisis have been well trailed but still pack a huge punch. The main highlights of both reports can be found on B&F’s homepage. The first thing that has to be said is that both of these reports say in no uncertain terms what needs...
Save the euro!!!
May 31, 2010
The world economy is recovering more robustly than anybody imagined it would this time last year. That doesn’t mean that it is plain sailing from here. Following a banking crisis of the magnitude seen over the past few years, it was inevitable that there would be aftershocks. Moreover, in view of...
NTMA impresses in London
April 29, 2010
John Corrigan, head of the National Treasury Management Agency, gave a presentation to a high level group of bond investors, brokers and bankers in London on April 27th. According to a source who was in attendance, Corrigan’s presentation was very well received. The slide on wage unit costs (see attachment, slide 9) went a considerable way to convincing potential investors that the economy is moving in the right direction. Competitiveness had been badly undermined by the excessive growth in credit during the years 2002-2007, which fuelled a speculative property bubble.
Read moreMoment of truth
March 30, 2010
It all comes down to today. The Government has to come out with a fully credible plan on how it is going to deal with the banking system and how it is going to fund the capitalisation requirements stipulated by the Central Bank Financial Services Authority.
There are two sharply dive...
The life of Brians
March 29, 2010
Is this Government fit for purpose? The past week shows that there is both a yes and no answer to this question. The cabinet reshuffle was a political own goal. Many of the ministers that comprised the front bench looked jaded and bereft of ideas. In view of the par...
Irish corporate governance standards
February 02, 2010
TG4 ran a repeat on January 31st of the excellent Scannal programme covering the collapse of Patrick Gallagher’s property empire in the 1980s. There were interviews with key players who witnessed first hand Gallagher’s spectacular ascent as well as subsequent crash.
EMPG's restructuring has wider implications
January 13, 2010
Houghton Mifflin is apparently the latest casualty of the credit crisis. Fine Gael TD George Lee was first out of the blocks with the news that Barry O’Callaghan’s EMPG, Houghton Mifflin’s parent company, was in financial trouble and that it was in restructuring talks. B&F has heard reports that the breach of covenant stems from not meeting the figures agreed in the business plan hammered out in the last restructuring process. Nevertheless, the failure to meet these figures has allowed EMPG’s banks to do a further round of restructuring, which has wiped out the existing equity of many Irish shareholders, which were in turn mostly funded by Anglo Irish Bank. It is not clear yet whether Barry O’Callaghan will remain on as CEO or whether the planned investment in a new facility in Dublin which was to create 450 jobs will be compromised by the latest move.
Budget 2010 – the upshot
December 10, 2009
The Minister for Finance Brian Lenihan delivered the most severe budget in the history of the State on December 9th. If this budget passes through the Dail and doesn’t end up with thousands of public sector workers taking to the streets, then it will be a unique achievement for a western democracy. Imagine any other country trying to take this much money out of an economy in a single act of parliament?
Reasons to be wary
December 01, 2009
Below is an article by Wolfgang Munchau in yesterday’s Financial Times. Even if he can be accused of being in the alarmist camp at times, he has certainly hit the nail on the head with this one.
Yet, it is no exaggeration to say that if decisive action is not taken on December 9th, budget day, then Munchau could easily be writing a similar article about Ireland in the not too distant future. The Government has shown initiative so far in terms signalling tax increases and spending cuts that would restore some stability to the national coffers.
A defining Budget
November 26, 2009
It seems every decision or election or referendum these days is the most important in the history of the State. Perhaps, there is merit to a number of these claims but it is hard to imagine anything being more important than the forthcoming Budget. It has the potential to change the contours of...
Lenihan fails to impress in Europe
November 17, 2009
The Minister of Finance Brian Lenihan was ranked second last in the 2008 FT rankings of EU finance ministers. It looked as if he couldn't do any worse this year, but he did. He came last in the 2009 rankings. But is this a fair assessment? The answer is no. It is true to say that he got off to a shaky start, but he has become much more impressive over time. But then again he took the reins when the country was entering its worst fiscal and banking crises since the inception of the state. Bearing in mind Lenihan's background is in law and his achievements are all the more impressive. Nama, the would-be solution to the banking crisis, has its critics and rightly so. There was never going to be a straightforward solution to a crisis of this magnitude. So far it has the backing of the appropriate international organisations, including and most importantly the ECB. It was set up to bail out the banking system and get it lending again. To this end it can work.
Welcome to the Editor's Blog
November 05, 2009
Welcome to the first editor's blog of our new web service. It is a new departure for Business & Finance Magazine. For 45 years, the magazine has relied on the written and published word exclusively. But the media landscape is changing and so are we! The new service means that B&F will now become fully interactive. The credit crisis clearly underlined the need for having the right information available in a number of different formats. Through our live news service and blogs from our highly respected commentary team combined with other services, we aim to provide comprehensive and up-to-the-minute coverage of Irish business and economic news for a domestic and international audience. Of course we welcome your comments most of all. The main objective of the site is to provide a forum for businesspeople to share their views on the key challenges facing the economy.