Tag Archives: Krise

Aus Brad De Longs Blog

Niamh Hardiman:

How Ireland got burned: Ireland’s recent €85bn bail-out package negotiated with the IMF and the EU is discussed in terms that verge on the apocalyptic. The rescue was supposed to serve as a break against the wildfire of market bondholder panic. And yet the upward trend in Portuguese bond rates has scarcely been slowed…. Spain is now where the line in the sand must be drawn. But we have heard this before. If Spain is vulnerable, why not Italy; and if Italy, why not Belgium, perhaps even France. Little wonder that the imagery of contagion, of financial plague, is brought into play.

The suddenness of the Irish deal has taken public opinion by surprise, causing shock that we have been plunged into this regime of austerity, and a smouldering anger about the terms on which the deal has been done. The terms of the bail-out will transfer all the hardships onto the taxpayers and citizens: reactions include the views that we have been held to ransom, we cannot afford this rescue package, it is a bad deal for Ireland.

Ireland’s fiscal crisis is largely caused by the collapse of the house price bubble and over-reliance on revenues from construction-related activities. This is bad enough, but by itself it would be difficult but manageable. The millstone around the neck of the Irish people is the vast scale of the crisis in the banking sector… reckless lending for property development and an inadequate regulatory regime…. When financial meltdown was imminent in September 2008, the government undertook to guarantee all of the banks’ losses, bondholders as well as depositors…. The true picture of what is entailed has been slow to emerge…. National Asset Management Agency (NAMA)…. The total cost of Nama-type loan loss is now estimated at €66 billion. This is, in effect, half of [annual] GNP…. Mortgage and personal loan losses… may amount to an additional €25 billion….

Ireland is now committed to an IMF-EU rescue package worth €85bn over the coming years, to fund both government spending and to support the costs of sorting out the crisis in the banks. It all happened very quickly, and indeed one government minister said they were bounced into it… interest rate… 5.87%… fiscal contraction… €15bn… National Pension Reserve Fund… to be used as part of the bail-out package… the banks’ bondholders are not to be required to bear any losses….

How did it come to this? And given the size of the intervention, why have the bond markets not been assuaged? Ireland was meant to be the firebreak in asserting the primacy of political commitment to the Euro over market irrationality. But this did not work. Instead Ireland got burned….

The European fire-fighters seem to be at least one step behind the game on both of these issues…. Harsh and even punitive fiscal measures to address what are really financial and not fiscal crises will further depress growth in the European periphery. The only realistic prospect for generating new growth in the Eurozone is if Germany were to engage in demand-enhancing measures, not the fiscal contraction to which is now seems committed…