Perhaps the biggest puzzle of Ireland’s 2+ years of economic crisis is the lack of progress on restructuring the banking sector, and in particular the reluctance to follow through on the implications of having guaranteed the liabilities of insolvent financial institutions. As with many of Ireland’s problems, there is no single explanation so in this post we focus on just one — a mindset in the Irish government that springs from the legal background of several of the principals in it.
DSK on QE2
IMF Managing Director Dominique Strauss-Kahn gave an interesting interview to Stern magazine. The transcript on the IMF website seems more comprehensive than the story based on the interview in Stern.  DSK covered a lot of ground but his comments on the US Fed quantitative easing were especially interesting. In addition to offering the standard pro-QE2 position that what’s good for the US economy is good for the world, he had this exchange —
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Question for Eurozone finance ministers
Today in the lower house of the Irish parliament, Minister for Finance Brian Lenihan repeated a statement that he made on Irish radio yesterday concerning European endorsement of the Irish government’s policies in relation to the banking crisis. Specifically, he told the house —
The fact is that every finance minister in Europe [Eurozone] indicated the other evening that the [blanket bank liability]Â guarantee was the correct policy at the time [September 2008].
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The basis is this paragraph from the Eurogroup statement following their Monday meeeting
We welcome the measures taken to date by Ireland to deal with issues in its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to support the Irish banking sector at a time of great dislocation. However, market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate.
Since this statement is like all such statements written to be vague enough to encompass what all the parties want it to mean, it’s worth being more specific. So: do the finance ministers support a policy of open-ended liability guarantees to insolvent banks regardless of their size? Because that’s what Ireland did in 2008. And the minister is now using the claimed endorsement of his European colleagues as a basis for being angry at the opposition for even having forced a vote on the extension of the revamped guarantee yesterday.
One from the files
With so much new reading material being generated on the evolving Ireland situation, we’d like to recommend that you go back just over 6 months to this really excellent and prescient opinion piece in the FT  from David Bowers, global strategist at Absolute Strategy Research. We want to be nice to the FT and not cut and paste from the articles as they request, but focus in particular on the idea that we are headed for a world of increased official capital flows, with political conditions attached. With Klaus Regling, CEO of the European Financial Stability Facility, telling us just now that he’s been shopping the EFSF fund-raising to sovereign wealth funds and central banks, we could be getting into a world of Asian/petrodollar flows, via Brussels, Washington, and Frankfurt, to the European periphery.
Ireland: The importance of the right question
It’s worth noting a major difference in the narrative regarding Ireland’s crisis that is being told inside and outside the country. Consider for example the recent speech of the European Commissioner for Economic and Monetary Affairs, Olli Rehn, in Dublin —
In the case of Ireland in particular, we need to recall that sovereign debt has not been at the origin of the crisis. Rather, private debt has become public debt. The financial sector has misallocated resources in the economy and then stopped working. It needs reform.
Similarly, the Wall Street Journal — for whom Ireland was always a low-tax favourite, is anxious to distinguish Ireland from Greece —
Ireland, by contrast, went into the crisis with a budget surplus, a debt-to-GDP ratio of some 27% and a strong record of recent growth that has left it one of the richest countries in the world. Ireland does have a serious problem with its banks, which are the source of its current and recent woes. A property boom and bust have left Ireland’s biggest lenders with billions in bad loans on their books.
At home though, the people are being told that that budget gap between ongoing expenditures and revenues is the key to the problem.
Ireland’s 77 year political cycle
“The British Government can rest assured that any just and lawful claims of Great Britain, or of any creditor of the Irish Free State, will be scrupulously honoured by its Government.”
That’s Eamon DeValera, writing as Irish Minister for External Affairs to the British Dominion Affairs Office in 1932. DeValera was also leader of the recently elected Fianna Fail government, the party having completed its transition from a “slightly constitutional party” to being in power. So let’s look at the ironies presented by the above statement in Ireland’s current context.
Spain’s Troubling Unemployment Statistics
Spain’s statistics office continue to issue worryingly confusing press releases. The latest example is one published in connection with the quarterly labour force survey which came out last Friday.
Now the data the INE assemble in their report is very interesting, and as many observe, the complete survey gives far more reliable data about the state of the labour market than the monthly labour office signings do.
But the way they present the data isn’t interesting, in fact its downright misleading. In particular they chose not to seasonally adjust the data – which in a seasonally driven economy like the Spanish one with significant ups and downs in tourist activity doesn’t make much sense – and this omission is not only lazy, it is negligent. As I say, it is misleading, in the same way the information on VAT returns and deficit reduction progress issued by the Ministerio de EconomÃa y Hacienda is misleading (they do not, for example, clarifying the changed VAT refunds procedure), or in the same way the notarial contracts data gives a completely topsy turvy view of movements in Spanish house prices. At best such data gives completely meaningless information, and at worst it leads reporters who cover the Spanish economy hopelessly astray. Continue reading
What Goes Up……….
Spain’s troubled banking sector is back in the news again. Despite the apparently succesful stress tests carried out over the summer problems persist, and don’t seem likely to go away soon. Foremost among these is the steady rise in problem loans which have now risen to an all-time high, potentially endangering the credit rating of the country’s financial institutions, according to a recent report from the credit ratings agency Moody’s. Continue reading
paranoia is total awareness
A quick Woerth/Bettencourt note. The prosecutor-general for Versailles has intervened in the complex dispute between jurisdictions in the case, in which the prosecutor for Nanterre, Philippe Courroye, an old political chum of Nicolas Sarkozy’s, has been trying to prevent the case being sent to an investigating judge. As the Versailles prosecutor is Courroye’s official superior, they’re in a position to simply order the whole mess shifted out of his responsibility, which would trigger a judicial inquiry.
Meanwhile, just to add an extra something to the general atmosphere of paranoia and zizanie, journalists’ laptops keep disappearing, in a string of burglaries at Le Point, Le Monde, and Mediapart. There’s an interview with one of the journalists here, who turns out to be the same one who was being illegally wiretapped.
He says he doesn’t want to “wallow in paranoia”, but frankly, who’d pass up an opportunity like this?
…In Fact, It Has Never Been Tried
Everyone’s het up about Angela Merkel’s speech in which she said that multiculturalism had failed in Germany. Here’s the King’s College London War Studies blog, for example, being overheated. Here’s respected correspondent Tom Ricks being even more overheated.
There is one problem with this whole festival of Terribly Serious People stroking their beards about The Problems Of Integration. It is this: Multiculturalism is not German policy and never has been. It is true that Germany doesn’t have a policy of deliberate official racism. But the word “multiculturalism” doesn’t mean very much if you define it as the absence of apartheid, in much the same way that “peace” isn’t just the absence of war.
In fact, official Germany pretended for years that there were no immigrants in Germany, which is about as far from multiculturalism as you can get while remaining a liberal democracy. And it’s not as if it was hard for journalists and others to find this out:
“We kidded ourselves for a while that they wouldn’t stay, but that’s not the reality,” she told members of the youth group of her Christian Democratic Union party, referring to the influx of workers, known as guest workers, who helped fuel the country’s postwar economic boom. “Of course the tendency had been to say, ‘let’s adopt the multicultural concept and live happily side by side, and be happy to be living with each other’. But this concept has failed, and failed utterly,” she said.
Yes, she referred to it two sentences before the bit everyone freaked out about.
Of course, you could go on to ask in what way this concept has failed utterly – Germany had not, when I last checked, descended into race war – but that would be to lend the whole affair a dignity it does not deserve. Banging on about “christliche Leitkultur” is an utterly routine and tedious habit of right-wing German politicians. It’s depressing that Angela Merkel of all people should descend to this, but it’s of a piece with the generally crappy performance of the CDU-FDP government – her version of the special tax break for hoteliers.
Veteran journalist Michael Spreng‘s excellent blog has reasons why this has come up just now – basically, the coalition has lost its way and there is trouble in the ranks. Important people in the CDU (and even more so in the CSU) have become keen on the idea of Karl Theodor zu Guttenberg, the aristocratic defence minister, as an alternative chancellor. You have to remember that large chunks of the party, and especially the Bavarians, have never been reconciled with Merkel to begin with – she has usually been significantly more liberal, more northern, more Protestant, and more female than the party.
So this should really be considered a bit of cynical fan service, intended to queer the rivals’ pitch. Now can you all calm down?