Tag Archives: bail-out

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

Who is the New Greece?

New clouds are gathering over the eurozone.

Ireland has turned to the European Commission to seek support for its revised budget-cutting plan. Olli Rehn, the European commissioner for economic and monetary affairs, is going to Dublin to discuss the new Irish budget cuts, amounting to 3.6 percent of GDP. The move aims at convincing the bond investors that are currently reluctant to buy Irish bonds. The word “bailout” hangs in the air.

Portugal plans a 5 percent cut of public sector wages and an increase in value-added tax (VAT) by 2 percentage points to 23 percent. Greece’s austerity plan is not working as planned, as budget revenue has grown below expectations.

On top of this the US has, with its second wave of quantitative easing (QE2), practically cornered the eurozone. QE2 should bring new upward pressure on the euro, further undercutting the competitiveness of eurozone exports.

All this tell us that the eurozone is still in serious trouble. Even if governments in the periphery manage to escape the bailout scenario for now, in the medium turn their position remains quite unsecure. That is why it’s worth reading the somewhat disruptive analysis of Samuel Brittan (free FT subscription required) on the imminent death of the euro. Mr. Brittan says that the current battle to save the euro resembles the unsuccessful struggle from 1961 to 1967 to stave off sterling devaluation. A cycle of rescues and new crises ultimately ends with acceptance of the inevitable.

Now, I have discussed the possible breakup of the euro before. This is a plausible scenario, but luckily not the only scenario. A breakup of the eurozone will deal a huge blow to the integration dynamic, and should be avoided. Hopefully all Member States understand that, but it remains to be seen whether key eurozone Member States act on this understanding.

To Amend or Not to Amend? That is the Question

Today EU leaders will discuss a very important proposal put forward by France and Germany. It’s all about fiscal supervision and bail-outs, and the question is whether an amendment of the Treaties is necessary or not. Germany insists that a credible system of fiscal monitoring needs a credible sanctioning mechanism in order to keep EU Member States’ spending in check. To do that, Germany proposes the introduction of new texts in the Treaties. In exchange Germany would support a permanent bail-out mechanism. But it turns out that many are opposed to this proposal.

A number of media (EUobserver, Euractiv, FT’s brusselsblog) report that a number of Member states are very critical of the proposal. Viviane Reding has called the plans “irresponsible” and has been immediately reprimanded by France’s State Secretary in charge of European affairs, Pierre Lellouche. But that’s another story.

The important debate here is not whether an amendment is achievable in the medium term (it will probably be put to referendum in Ireland and possibly the UK and Denmark). The conceptual shift in the coordination of economic governance is where interests of Member States diverge.

Germany wants to impose strict fiscal discipline on all eurozone members, including the possibility of removing a Member State’s voting rights. But many argue that such budget austerity may not be the solution to the problem. George Soros himself has compared the proposals to the 1930s, where some countries became overly focused on balancing budgets during a depression. Other go further and note that it is Greece, in fact, which is bailing out Germany – in the form of an annual trade deficit that has averaged 5 billion euros, stimulating German jobs but destroying them in Greece. That is why many economists advocate for measures to stimulate demand in trade surplus countries – Germany, Netherlands, Denmark, etc.

Axel Weber, president of the German national bank, disagrees. He says that the proposal of raising wages to support domestic demand and reduce competitiveness neglects that wages are not a political control variable. Moreover, according to him simulation studies show that the effects would be confined almost entirely to the home economy in the form of changes in employment.

So who’s got it right? I’m not sure, and I am (thankfully) not an economist. But the German position will not be easy to defend unless it addresses the concerns about German policies that stimulate the aggregation of a trade surplus.

What Act of the Greek Tragedy?

It looks like the markets don’t really buy the “end of the Greek tragedy”. At the same time the eurozone member Slovakia will only vote on financial aid for Greece after the June national election.

Meanwhile the New Democracy party in Greece (the opposition to the left PASOK government) has obviously decided NOT to support the austerity measures.

So what is going on??? I am not sure.

Martin Wolf says that it is hard to believe that Greece can avoid debt restructuring. He also notes that several eurozone Member States have unsustainable fiscal deficits and rapidly rising debt ratios. Wolfgang Münchau says that the bilateral loans will have the so-called junior status, meaning that they will be repaid only after the repayment of existing Greek government bonds. He believes that this represents a real financial transfer from eurozone members (and particularly Germany) to Greece. He calls this „an absolute scandal“ and believes that the Bundestag could block a junior loan agreement.

This may mean a contagion, especially if the Greek situation is not resolved quickly. Spanish Prime Minister Zapatero has denied rumours that he’s preparing an aid package for Spain.

There is too much information being withheld, I think.

The Greek Bailout: the Details

The Greek bailout is here, and we have the details:

The financial package makes available € 110 billion to help Greece meet its financing needs, with euro area Member States ready to contribute for their part € 80 billion, and the rest provided by the IMF. The first disbursements will be made available before the payment obligations of the Greek government fall due on 19 May.

Euro area financial support will be provided under strong policy conditionality, on the basis of a programme which has been negotiated with the Greek authorities by the Commission and the IMF, in liaison with the ECB.

The programme will include the following measures:

  • Greece is subject to a check by IMF/EU each quarter;
  • 5pc point reduction in fiscal deficit in 2010;
  • Goal is to drive deficit down to 3% of GDP by end-2014;
  • Debt-to-GDP ratio is forecast to grow from 115% to 140% (but these are the Maastricht numbers. Add some 10pc point to get the total debt);
  • Individual measures include, another increase in VAT from 21 to 23% (plus increase for smaller VAT rates), 10% increase in excise taxes on fuel, cigarettes and drinks, a windfall tax, a property tax, near abolition of 13 and 14th month pay in the public sector, cut of Christmas and Easter bonuses, cuts in pensions, reducing early retirement.

The shortcomings of the plan according to Eurointelligence:

  • No public sector layoffs, or change of status of public sector job;
  • No complete removal of 13/14th month salary in public sector;
  • No removal of 13/14th month salary in private sector, meaning more unemployment;
  • No immediate privatisation of state companies;
  • No change to rule that caps dismissals to 4% of workforce, and no change to firing costs;
  • No anti tax-evasion mechanism.

I would also recommend reading an interview with one of my favourite philosophers, Jürgen Habermas, on the Greek bailout, the institutional challenges, and the German intransigence.

Greece Formally Asks for Help

Greece has formally asked for financial assistance under the EU-IMF joint financial package.

The Greek finance minister, George Papaconstantinou, has sent a letter to Eurogroup President Jean-Claude Juncker, EU economy commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet, requesting the activation of the support mechanism.

The request for aid must first be approved by the ECB and the European Commission. Then it must be approved unilaterally by all eurozone Member States.

Is Greece Really Getting a Bail-Out?

We now have the solemn statement by the heads of state and government of the euro area. It says that as part of a package involving substantial International Monetary Fund financing and a majority of European financing, Euro area member states, are ready to contribute to coordinated bilateral loans. Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank.

Now the real question – is this really a bail-out for Greece? Not easy to say. Alan Beattie says that the IMF will be in real difficulty with Greece, since the only real instrument available is fiscal policy (since the ECB handles the monetary policy for Greece). We already know that Greece is experiencing extreme difficulties with its own population over fiscal austerity measures. So how far can the Greek government go to convince the IMF that it’s on a sustainable path?

On another level, some commentators are wondering about the new positioning of Germany in the EU. This is a very important topic indeed. George Irvin talks about “Merkel’s madness” in refusing to face the consequences of financial contagion. Philip Stephens asks the fundamental question – what sort of Germany is developing in these tumultuous times?

The internal solidarity of the European Union is not a boundless concept. From a purely legal perspective Mrs. Merkel is very much on the right track, provided that Germany was strictly pursuing the objectives of the Stability and Growth Pact. However, Germany itself breached the pact and knowingly let other countries to breach it. This important fact should be reminded to the German government.

I would definitely not want to see a further drift away from the political cohesion of this Union.