The Irish Mess (VI)

Yesterday evening the yield on the Irish 10-year was up near 9%; Merkel reaffirmed her tough line on bond haircuts:

Speaking in Seoul, where she is attending the G20 summit, Dr Merkel acknowledged her demands have upset the markets but insisted it was unfair for taxpayers to be saddled alone with the cost of sovereign rescues. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr Merkel said.

“We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

And Christine Lagarde waded in too, despite hints of nascent contagion to Portugal and Spain.

French Finance Minister Christine Lagarde said yesterday that investors must share in the cost of safeguarding sovereign debt. German bunds advanced on demand for the safest assets, while Portuguese debt recovered from earlier losses. Italian bonds fell.

“Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for so-called peripheral nations’ debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.”

It was going to be all eyes on Ireland and the Euroauthorities today, with bets being taken that the weekend was going to be a busy one in Dublin, Berlin, Paris, etc.

But lo, this morning the Irish 10 year yields 48bps less, the Portuguese one is a wee bit firmer, the Spanish one only a wee bit softer. This clarificatory communique from Seoul might have something to do with it:

(Reuters) – EU leaders sought on Friday to reassure bondholders unnerved by Ireland’s fiscal problems they would not be forced to take a writedown, but Ireland’s Prime Minister said recent French and German comments had aggravated the problem.

A statement by France, Germany, Italy, Spain and Britain was issued at the Group of 20 summit in Seoul after spreads on Irish 10-year government bonds over German bunds surged to a record high, hitting the debt of Portugal and Spain and the euro.

“Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any program under current instruments,” the statement said.

So – no haircuts for Irish bondholders then, when it comes to a bailout.

Give me chastity and continence, but not yet, said Saint Augustine. Chancellor Merkel’s concern for her taxpayers seems to be of the same postponable kind.

I could easily be very wrong about this, but I think these latest developments mean that for the moment, Irish and European politicians are back in the driving seat. Back to the usual milestones for Ireland – vote on the Irish budget, Q2 11 funding. Electoral pushback in Germany or Ireland might change the picture again.

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    1. Richard Smith Post author

      Mmm, I’d seen various bailout rumours before I posted, so I’m not at all sure of myself. With the contagion possibilities, it’s certainly risky for the EU to let this drag on for another six months; but the politics are horribly complex: who gets a share of the shafting?

      Cui bono: DownSouth, below, puts it in a nutshell.

  1. F. Beard

    It’s time to tell the bond holders to take a hike except Ireland can’t since it sold its birthright, its money creation right, for a mess of pottage, the Euro.

    Who the heck are the bond holders that they can hold the money supply of a nation hostage? And why should citizens be taxed to rent their government money supply when it can be created debt and interest free by their sovereign governments?

  2. DownSouth

    Richard Smith said: Chancellor Merkel’s concern for her taxpayers seems to be of the same postponable kind.


    I could easily be very wrong about this, but I think these latest developments mean that for the moment, Irish and European politicians are back in the driving seat. Back to the usual milestones for Ireland – vote on the Irish budget, Q2 11 funding. Electoral pushback in Germany or Ireland might change the picture again.

    It appears there are only two types of politicians left in Europe. There are those like Merkel, who insist on making the banks whole by fucking over Germany’s little people with bank bailouts. And then there are those like Brian Lenihan, Ireland’s Finance Minister, who insist on making the banks whole by fucking over Ireland’s little people with austerity.

    The important point to keep in mind here, despite all the nationalistic chest thumping, is that Germany’s Merkel and Ireland’s Lenihan are on the same team, and that is the bankster’s team. Bailouts and austerity are but twins wearing different hats, two sides of the same coin.

  3. Sid

    Merkel is stalling for time and hoping the problem will go away. Maybe a strongly worded G20 statement will do the trick; after all, the Irish government has enough cash to tide it over for now.

    On the one hand, the average frustrated German taxpayer is livid at the prospect of more bailouts for the EU periphery. While the greatest fury is reserved for the Greeks (because they lied), Germans are none too thrilled about bailing out Ireland either, especially after the Irish lectured the rest of Europe on becoming more financialized, and then jumped the queue in guaranteeing their banks (thus weakening every one else) two years ago.

    At the same time, the average frustrated German saver has a lot of his money tied up in (average, frustrated) German banks, not to mention (average and frustrated) insurance companies and private pension plans (guess what kind) that have a lot of their assets tied up in periphery debt securities of various dubious sorts. Many of these banks and institutions are not too robustly capitalized, no matter what the stress-test sez.

    It doesn’t help that “average frustrated German taxpayer” is a constituency pretty much identical to “average frustrated German taxpayer.”

    Soak German taxpayers rescuing Ireland and the savers and institutions get the benefit of the bailout/soak the bondholders and the taxpayers may still get Der Schaft when they have to bail out their own banks, insurers, etc./Bail out noone and the savers still get to Bend Over and Think of The Fatherland.

    At least by bailing out the EU periphery, Merkel can try to sell it to the soakees using the good old-fashioned “Deutsche Treue/Welsche Tuecke” (roughly translated: “German honesty/foreign treachery”) meme.

    Forcing (German) taxpayers to bail out (German) institutions or lettering them go bust makes those institutions look like idiots, not innocent victims. Germans are nothing if not trusting in their institutions.

    1. DownSouth


      So what are you saying, that Germany followed in the footsteps of right-wingers in the United States in their blitzkrieg towards an “ownership society”? Well it appears blitzkrieg has its limitations, and the right’s flank is now exposed.

      Jacob S. Hacker explains the long-range planning of U.S. conservatives here:

      To be sure, not all the advocates of 401(k)s and IRAs had grand policy visions in mind. Tax-free accounts, after all, represented a big tax break especially valuable to the well off—-and, hence, especially attractive to antitax conservatives, whatever the long-term effects. Yet the potential political benefits of the 401(k) and IRA revolution were far from the minds of leading advocates. As early as 1983, Stuart Butler—-the Waldo of conservative policy movement we met earlier—-had co-authored a strategy memo in which he called for expanding tax-free private accounts into “a small-scale private Social Security system,” while mobilizing “banks, insurance companies, and other institutions that will gain from providing such plans to the public.” In the first Bush administration, officials described the expansion of 401(k)s as a strategy of “empowerment” that “would create a framework within which individuals are free to do the best they can do for themselves.” By the time the second President Bush was campaigning for Social Security privatization in 2005, he was speaking of a “401(k) culture”—-a culture that, not coincidentally, was wholly in keeping with his vision of a conservative ownership society. Asked why conservatives should support 401(k)s, a Heritage Foundation economist said simply, “When citizens have a vested interest in the economy and own more property (or investment assets), the more…politically conservative your society will be.

      In the eyes of Wall Street and Washington, section 401(k) was the harbinger of a joyous new era. Unfortunately, it would be the first era since Social Security’s creation when, instead of expanding, retirement security began to slip away.
      –Jacob S. Hacker, The Great Risk Shift

    2. DownSouth


      You zero in on another fault in my thinking. Perhaps my thinking is too heavy handed in its belief that nationalism always works to the benefit of the ruling elite.

      In the present case, you say “the average frustrated German taxpayer is livid at the prospect of more bailouts for the EU periphery.” Of course the German elite don’t give a rat’s ass about the periphery. Who they really want to bail out are the banksters. But if these nationalistic feelings of Germans prevent the periphery from being bailed out, the bottom line is that the banksters don’t get bailed out. In this case, therefore, is nationalism working against the interests of the banksters?

      The typical neoliberal-neocon (neo-imperialist) scheme is this:

      1) Dupe a country into debt that it cannot possibly repay
      2) Country defaults
      3) Sable rattle or invade/occupy country militarily (here’s where the flags wave and the marine band plays) and make it pay, either through austerity, selling off the country’s publicly held assets or installing permanent toll booths (rent seeking operations) upon the subject population, or a combination of all three.

      This is exactly what Clinton, working hand in glove with Mexico’s plutocrats, did to Mexico when he bailed out Mexico in 1994. (U.S. Treasury Secretary Robert Rubin, former Co-Chairman of Goldman Sachs, used a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key holder in.)

      So it will be interesting to see if German, Irish and Greek plutocrats can bring Ireland and Greece under their heel, like U.S. and Mexican plutocrats brought Mexico under their heel.

      1. DownSouth

        And I would also argue that what went down in 1994, although it may not be the proximate cause, is certainly the ultimate cause of the bloodbath that Mexico is currently experiencing.

        1. Jimbo

          DownSouth, I would argue that Mexico’s current turmoil is due to the 2006 presidential election, which the center-left continues to believe was stolen. Had he not acceded to power under the cloud of illegitimacy, Calderon would not have picked a fight against the Narcos. Perhaps Calderon should arrive at some sort of “arrangement” with them, the same way Bush did in Iraq, and President Obama is attempting in Afghanistan.

      2. Sid

        I don’t think Merkel et al are really eager to bail out anyone.

        They simply hope that if they issue a sufficiently strongly worded statement, maybe offer some token gestures, the bond markets will decide that the EU periphery is adequately backstopped and go off to pester someone else.

        I don’t think this is a conspiracy. Rather, I see it as more akin to something from game theory or a traffic jam, where everyone played his role perfectly and consequently everyone was backed into a corner.

        Prisoner’s dilemma, perhaps.

  4. pierre

    Merkel and Sarkozy are just buying time. They need the EMF to kick start with the “money quote” chapter 9 clause that will enable Germany, France to act as bankruptcy judges for PIIGS. That is an easier sell to the electorate: i.e., “we need to pay, but we will dictate the terms and decide their fiscal budgets and take over their economy, for the time being, for their own good”.

  5. sean

    I think Downsouth is spot on.

    The latest pronuncement from Merkel at G20 is being spun here by Irish politicians as ‘our european partners coming to our aid’.

    Ha ha…

    Merkels statement references 2013 when bond holders become responsible for their own investments.
    2013 is when the next general election in Germany is scheduled.

    Bottom line is Irish people will be drained of every last drop of their blood to pay off German bankers via their socialised loans to Irish banks.No sane investor will now purchase Irish bonds beyond 2013 .

    The stability fund will be used to pay back the german banks of outstanding bank bonds that have been nationalised as Irish sovereign debt.

    Whats funny and pathetic all at once is the airwaves are bellowing out the pronouncements from the G20 summit of various G20 countries stating they have a ‘solution for Ireland’. What was missing?.There was no Irish input,no Irish politician was even present out there.
    This is public proof of the capitulation of Irish sovereignty to foreign entities and banks.

    1. DownSouth

      There is no doubt that the Irish man on the street is being set up to be fucked over by his own plutocrats working hand in glove with German plutocrats. Your situation is déjà vu of what happened in Mexico in 1994. Here’s Carlos Fuentes talking about what happened to Mexico. Does it sound familiar?

      Even taking into account the executive branch’s lack of controls, its internal agenda, the tradition of secrecy, and the deluded complicity of Washington, a bitter doubt remains in Mexico. If the devaluation of the peso was not done in time, why was it also done so badly? What happened to the technicians, the economists, the boys at the blackboard? Why did they not negotiate with the U.S. government before the devaluation, so that credit could be obtained at less risk to our national sovereignty? Why was it all done so ineptly?


      The draconian self-discipline imposed by the Zedillo administration, though temporary, is, by the president’s own admission, cruel: steep increases in the prices of gasoline and transportation, a 50 percent increase in value-added taxes, cuts in government spending and almost total credit restriction. These are coupled with a 2 percent fall in the GNP, 750,000 people out of work, 42 percent inflation, and only 10 percent in wage increases.
      –Carlos Fuentes, A New Time for Mexico

      In 1997, Mexico repaid, ahead of schedule, all US Treasury loans.

      But the devastation wreaked upon Mexico went way beyond that described above by Carlos Fuentes. The publicly owned telephone monopoly was sold to a conglomerate of Mexican plutocrats and U.S. corporations, including the telecom giant SBC. The nation’s doors were flung open to a horde of greedy foreign bankers. The country had and still has no regulatory infrastructure in place, so a laissez-faire Shangri la ensued for which the Mexican people still pay, and pay dearly. Today, even though Mexico’s telephone market is ostensibly open to competition, its rates are among the highest in the world. And if one thinks U.S. banks abuse their customers with excessive charges, she should get a whiff of some of
      the charges Mexican banks charge.

  6. RueTheDay

    The EU hoped that merely promising the 750 Billion Euro rescue package would fix the problem. It did, temporarily. The issue is that their intent was to never actually have to use it, merely promise it. At some point, there will be a showdown and the market is going to test whether or not they will actually use it. Until that happens, we’ll be locked into a continuous ebb and flow of mini European crises.

  7. sean

    Good point ruetheday.

    The euro currency is backstopped by intergovernment transfers,it has no taxing authority.
    So who would buy euro bonds issued to cover the EFSF if its repayments are dependent on cash flows from insolvent countries(Ireland has already borrowed and lent over a billion euros to Greece via the ESFS; a case of paupers issuing promisorry notes to paupers.)

    Those governments who determine amongst themselves how much of their own citizens money to commit would likely fail in each eurozone country if these decisions were put to referenda.Essentially ,as this crisis progresses each decision taken gets further and further away from democratic roots.This in my view is increasing instability in the enire EU.

    The introduction of the euro was predicated on the passing of the Maastricht treaty .EU treaties are layered one on top of the other and each one is dependent on the previous ones ,they are not stand alone treaties.
    If the euro fails ,the Maastricht treaaty fails and consequently the NICE and Lisbon treaties logically also fail.
    Therefore the 10 accession states who joined in 2004 will ,in my opinion ,no longer be members of the EU.

    This is what gives me heart ,at least,the prospect of the collapse of the eurozone and the disintegration of the EU.

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