Wednesday, 8 September 2010

As Stiglitz says ....

"Mr Stiglitz said historical evidence showed that increased state spending helped economies emerge from recession. He added that the example of Ireland showed that austerity leads to declining output, rising unemployment and high bond spreads, instead of renewed investment". You can read the full report of Stiglitz's remarks in today's Daily Telegraph here.


Paul Hunt said...

It would be nice if Prof. Stiglitz had produced evidence for his assertion that how Ireland manages its fiscal deficits or deals with bank debt "doesn't have global or European significance".

While we don't know precisely who owns the senior bonds in Irish banks - in particular Anglo and INBS - it would be extremely unwise and dangerous to asssume (as some on on this board seem to think) that they are now being held by vulture funds who deserve to be taken to the cleaners.

I remain convinced that the principal reason the Irish Government and the institutional EU is not willing to countenance serious haircuts for these bondholders is that many are not very robust banks and the funds of the savings of millions of workers in the core EZ countries. Indeed the infamous blanket guarantee was a panic measure to prevent these bondholders taking flight and demanding full redemption immediately.

Rory O'Farrell said...

"bondholders taking flight and demanding full redemption immediately"

How could they have done that?

Also the EU has no power to stop us giving haircuts.

Paul Hunt said...

As Governer Honohan pointed out in his previous incarnation, this aspect of the guarantee was unnecessary as they wouldn't take flight, but it did provide some necessary reassurance that they weren't going to be hosed immediately if everything were to go pear-shaped. But that would seem to suggest that many of the original senior bondholders are still on board.

And I would be very careful to distinguish between powers that derive formally from the EU Treaties and the constraints on behaviour that the institutional EU is able to impose as it deals with this crisis. If you think Ireland can impose haircuts unilaterally without serious consequences, that's fine; but you won't find many takers in the policy or political process. And it's not because of a desire to put Irish citizens on the rack.

It's simply a cruel fact of life that serious misgovernment has allowed the markets to use Ireland as a battering ram to force the EU to be definitive on what it proposes to do about the sovereign and bank debt issues in the PIGS (oops, sorry, the GIPS).

Anonymous said...


If it's true that many bond holders are themselves vulnerable banks from elsewhere in Europe, doesn't that bring us back to a question that keeps bugging me: if Anglo was crazy to lend ever greater amounts to developers, weren't other banks crazy to continue lending to Anglo? Isn't their guilt every bit as great? Did regulation (EU-wide) not fail there just as much as it failed in ireland.

Could it be that we are paying for Anglo in order to save the French and German citizens the pain of paining for their own reckless bank practises.

I have read a few times that our boom was based on spending the savings of the more sober-minded Europeans. But if that is the case, weren't the sober-minded being just a little bit reckless when they lent money into an unsustainable situation. And shouldn't they face the consequences of that, just as we must do - whatever our personal level of culpability?

Paul Hunt said...


"Could it be that we are paying for Anglo in order to save the French and German citizens the pain of paining for their own reckless bank practises?"

I couldn't agree more and it's not just bank practices; it's also the behaviour of managers of the savings of countless workers in these countries. There is a fundamental democratic deficit at the heart of the EU - as there is in member-states. The Commission proposes, the Parliament moiders, the Council haggles before agreeing a fudge and national governments use their executive dominance over their parliaments to ram through this fudge.

The German economic motor is ticking over nicely again and its starting to pull neighbouring core countries out of recession, but it's keeping a tight grip on the fiscal situation, some toxic bank debt has only been parked and it looks like the French will have to suffer some pain to ensure longer-term fiscal viability. There is no way the governments in these countries will countenance imposing any more pain on their citizens to bail out, what are commonly viewed as, the profligate PIGS. It would encourage their citizens to raise the question you're raising: you told us proper rules were in place when we gave up our own currencies and adopted the Euro and we trusted you; so why did you allow our banks and pension fund companies to make such stupid investments?

This is the question these governments want to avoid at all costs. The ECB will keep allowing the Irish banks to keep repoing and rolling over promissory notes and NAMA bonds presented by the Irish banks that keep the system afloat, but that, it seems, is as far as it will go. We're on our own on this one, I'm afraid, even if Rory O'F (and probably some others here)thinks we can get out the scissors and start haircutting with gay abandon.