Sunday, 26 June 2011

The Eurozone crisis: in the trenches

Slí Eile: It never ends. One last deflationary-bail-out-shock the markets-slash the deficit push on the plains of Picardie and this will see us home for Christmas and recovery will return and we can get back to normality. Two pieces offer themselves for careful consideration this morning - Colm McCarthy in the Sunday Independent here and Michael Burke writing on Socialist Economic Bulletin here. The writing is on the wall. If domestic deflation is not impressing the angry gods why do we continue to sacrifice our children's future in the name of the modern day gold standard? Martyn Turner said it all in a picture cartoon in the Irish Times earlier this week.


Martin O'Dea said...

It seems to me that policy makers trying to second guess the markets and having market sentiment at the core of their strategic decision making is a simply impossibly counterproductive stance.

The market looks at the economy and the economy's likely future by assessing the decision making processes and motivations. So the market, in other words, looks at the decision making and wonders on what grounds are the decisions being made - when they discover that they are being made based on what they might think of how they are being made - they understandably do not feel like being approving; decicion makers respond by wondering what else they can do to help the markets - and on and on we go.

The horse can not be watching for the punter's reaction.
Strong decisions need to be made by the Irish government (and indeed the European Union) as to where both bodies want to mark a course towards for five years and ten years time etc. Give the markets something to actually review. If this includes reducing market influence and changing the rules to a more sustainable format - after a little hissey fit - the markets will necessarily understand that they must get on with it - that they can only respond to the environment and that they cannot, and should not be asked to, create it - as is happening now

Slí Eile said...

@Martin Agreed. One of the biggest challenges in the coming years is how to build effective international alliances and new institutional arrangements to better manage the movement of capital, regulate markets and introduce an agreed tax on financial transactions. The Tragedy of the Commons has moved to the international market square. If Ireland continues to the stay in the Eurozone (and nobody can be sure what will fall out eventually) then we need to think big, European, beyond Europe as well and identify ways of ensuring sustainable development and a more rational finance system that avoids the mad girations and blackmail inherent in speculation, hedging and agency ratings. Its no way to order a vast financial system that has outgrown the nation state. Creative, courageous thinking is needed and not just 'waiting to see what happens' or hoping that something will turn up for us at the EU level while we keep our heads down and take whatever is thrown our way.

Martin O'Dea said...

Sli, if an Irish politician were to stand up and tell the E.U. what exactly it was Ireland was planning to do - and the E.U. were to speak in unison as to what its inclusive and collective plan was I think we might make some progress.

Surely European bonds, coupled with investment and reform including the types you mention (perhaps even a European wide conference with a title like - Europe towards 2020) that encompasses a lot of positive growth plans and a united European proposal encompassing Eurobonds and financial agreements as well as future market control as suggested already to come in 2013.

This strength in unity and strategy better come soon - as it seems that after fuddling our collective ways through this mess - we will (Europeans) in the coming years go our separate ways (anyone seriously see another European treaty passing anywhere?). The political and security long-term fallout of that (perhaps in a Geo-political system struggling to realign itself in a world changing from the oil-dependent balance in place) really sends shivers up the spine.

Robert Sweeney said...

Michael Burke,

(Can't seem to post on the original website.)

'In addition, Greek banks have accepted deposits in Euros but their key asset would now be in devalued New Drachma so they would immediately be rendered bankrupt.'

By 'key asset' do you mean loans? Would the loan/deposit ratio not remain unchanged if both loans and deposits were converted to drachmas? Also, could the greek banks not temporarily transfer their deposits to some sort of highly liquid eurodollar account in which case when the greek government left the euro, their actual deposits would retain value, but their nominal value from the perspective of the depositors would have fallen?

Michael Burke said...


Try this link

Yes a bank's key asset is its loan book. Banks can't legally redenominate deposits, otherwise no-one would ever make a deposit. The deposits belong to the depositor, not the bank, so they cannot transfer them anywhere. If they could, they would then be insolvent anyway, this being the equivalent a sudden withdrawal of deposits which is the essence of a run on a bank.

Robert Sweeney said...


(that link sent me to the front page of some local Florida newspaper from 1964!)

Correct me if I'm wrong, but only a fraction of deposits sit idly at the bank. Some of them are held at the central bank, but most are invested. If most of these are invested in, say, dollar-denominated assets such as treasuries (or whatever), would the hit from the bank's perspective not be as bad? Furthermore, with the government's capacity to now create money, it could inject capital into the banks?

Michael Burke said...


not sure why link won't work for you as it did for me. Here is the url in full

The banks don't have net assets, that's why the are insolvent and require injections of capital and also need liquidity support. The overwhelming bulk of these are loans to domestic borrowers in €, secured against assets like houses. When the devaluation happens the incomes of the mortgage borrower will also be devalued and so will the house value.

Some portion of the assets held may be in foregn currencies, mitigating the impact of the devalution. But these are a fraction of the total, as central bank data show.

Robert Sweeney said...


That link works now, thanks. Yes, of course, most of their assets are domestic loans - wasn't thinking clearly and wanted to withdraw that comment 20 minutes later.