The Irish mess (VII), and a spot of Portugal

As far too diffidently implied in this post on Friday, looking out for an Irish bailout over the weekend turned out to be a mug’s game. There was a splendid swirl of authoritative reports about bailout talks and rebuttals by various Irish spokesmen, sampled here. But here we are: no bailout, with the Irish government still staggering gamely on with its tiny majority, planning to present its latest slash ‘n burn budget for a vote, most likely on 7th December. Apocalypse postponed for just a little longer.

The market, the blogosphere, Twitter denizens & journalists all seemed to be working with a rerun of the Greek timeline in mind. But the Irish situation isn’t quite the same.

What few noticed, amid the changing picture on Friday, is that the Seoul volte-face clarification on bond haircuts actually gave Ireland some (possibly transient) extra negotiating leverage. The Seoul statements fends off a bank run, but puts EU politicians, particularly Angela Merkel, on the hook. But the list of impalees gets longer. The EU is keen for Ireland to take a deal, (or is it the Germans who are keen?), the IMF is saying it’s standing by, though it believes Ireland doesn’t need a bailout just yet, and we are reminded that the ECB is funding Irish banks to the tune of EUR130Bn already.

In effect, the Irish government can see that just about every significant international institution that might have a stake on the bailout is pretty much locked in already. Absent a loss of confidence in the ability of all of the above institutions to deliver on their commitments, why would there now be the sort of funding run, in Ireland, that forced European hands in the Greek crisis? And if there were to be such a loss of confidence, it wouldn’t just be Ireland that was in trouble, would it?

The bond market will be able to see all that too, and will no doubt be able to reflect, with some satisfaction, that a couple of weeks worth of surging yields is, once more, easily enough to corral a bunch of European institutions. For the banks, these panics do take on the aspects of one-way bets. That’s Greek debt and Irish debt now de facto underwritten by Eurotaxpayers (with plenty of pain taken by the locals too, of course). Who’s next?

Update: a nice piece that I spotted just after posting, elaborating the above: how it really works, and how Merkel et al walked into it.

Well, national politicians can see the dynamics too. One of the less diplomatically timed weekend utterances was this one, by the Portuguese Foreign Affairs Minister:

A Portuguese government minister openly speculated over the weekend that his country’s economic frailties could lead to its expulsion from the euro zone, underscoring the growing fear in Europe that the continent’s debt woes may force leaders to restructure the currency bloc.

In an interview with the Portuguese weekly Expresso published Saturday, Foreign Affairs Minister Luis Amado said Portugal faces “a scenario of exit from the euro zone” if it fails to tackle its economic challenges.

“There has to be an effort by all political groups, by the institutions, to understand the gravity of the situation we’re facing,” he said.

He may be talking to Portuguese politicians, but European ones, and the markets, can hear just as clearly.

The inner workings of these these big-deficit Eurocountries can be quite different. Portugal has a chunky public debt, and poor private savings, but didn’t have a bank-annihilating RE crash; and for them, unlike Ireland, the Euro interest rate is too high. Portugal’s problem (very roughly – maybe some Portuguese commenters will chime in, most welcome if they do) is how to secure internal agreement to restructure its economy.

Neither the political problem nor the economic one will be solved in the sort of timescales that bond markets think in. So in these times, you’d have to call the Portuguese Foreign Minister’s gambit ‘high risk’; and of course it will attract Euroinstitutional attention too. In due course we will see whether anyone bites and how hard.

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  1. João

    I’m from Portugal and I’d like to help you, but our news organization woke up a few weeks ago and are still catastrophe-hunting.

    So I can’t understand what’s going on because the people from the right say the sky is falling and the government says everything is fine.

    The only things palpable that happened in the last months were the 2011 Budget approval and the approval of a Zero-based budgeting for 2012 and beyond, after a proposal from a leftist party… With the opposition of the the government saying it wouldn’t be effective (?).

  2. Maju

    “He may be talking to Portuguese politicians, but European ones, and the markets, can hear just as clearly”.

    I don’t mean that Portugal has no problems but when a minister speaks that way to local politicians (and by extension citizens, who are likely opposed to any budget cuts besides the military, corporate subsidies and politicians’ own salaries) he is actually trying to scare them in order to rally them around the budget cuts imposed by Brussels. He’s trying to save himself and his party by implying that, unless they agree to do what Brussels and the IMF command, everybody will be in trouble.

    So it’s not really a message that means anything except for a domestic public and for these means: “fear Brussels!” and nothing else.

    The issue is that there is increasing opposition everywhere to Brussels-dictated draconian budgetary cuts, so they have to rally the people and politicians with this kind of messages: these measures are bad but the alternative is much worse (or maybe not: the euro currency is actually becoming a liability as it is for so many countries that being kicked out of the Eurozone may end up being a blessing rather than a curse).

  3. Timothy

    Once again, the central insists on putting to costs and losses of the banks to the taxpayer. Just look at what Constancio, the VP of the ECB just said on Bloomberg? It has come to the point where there is no more capacity for the taxpayer to bear the losses of these reckless financial institutions and ECB, central bank though it may be,should understand the jeopardy it puts the various members of the EU in when it insists it does.

    Let the investors in the banks pay the price of this recklessness. They took the risk when they invested, and they should pay the price for their mistakes.

  4. Jim Haygood

    With Ireland in hock to the tune of 80 percent of its GDP to the ECB alone, it’s easy to understand why other European nations are pushing for a formal bailout.

    If the ECB were a regular commercial bank rather than a sovereign institution, presumably it would be insolvent now.

    As the IMF has admitted in the past (in a paper about Zimbabwe), insolvency is not necessarily a show-stopper for an emitter of fiat currency, since its liabilities (bank notes) are irredeemable.

    So, what the hey, let’s party. The bar opens at 6 a.m. here on the sun deck of the Titanic.

    * pops another Guinness for breakfast *

  5. F. Beard

    As the IMF has admitted in the past (in a paper about Zimbabwe), insolvency is not necessarily a show-stopper for an emitter of fiat currency, since its liabilities (bank notes) are irredeemable. Jim Haygood

    Ouch! That must have hurt the IMF to admit that. Actually, government money is backed by its taxing authority which is a huge “asset”.

    Also, isn’t it absurd for a sovereign nation to rent its money supply?

  6. José

    Well, I’m also from Portugal and I think that the basis of the problem for the four PIIGS lies in membership in the euro.

    In the case of Portugal, participation in the common currency led us from a position of practically no net foreign debt and no current account deficits (mid 1990s)to the present situation – a net foreign debt of over 100% of GDP, increasing every year, via persistent current account deficits, to the tune of 5 to 10% of GDP.

    This situation is clearly unsustainable. The country is presently at the mercy of foreign creditors, who are now demanding – rationally, from their point of view – crushing interest rates in return for continuing to finance the external deficit. In order to satisfy them, the Government has been forced to aplly crippling austerity measures that are already killing an incipient recovery from the 2008-2009 recession.

    The same description more or less applies to the other three PIIGS. Their main problem is the existence of a huge external imbalance. Bank debt worries, accounting creativity etc may worsen the situation even more (see Ireland, Greece) but this should not lead us to lose our concentration away from the origin of the problem: foreign imbalances, themselves a result of the common currency’s economic straitjacket.

    I think the Portuguese Foreign Minister had at least the merit of pronouncing the taboo word – the possibility of exit from the euro.

    Perhaps inadvertently, he was pointing toward the only possible way out for the four “southern” countries and Europe in general.

    No real solution is possible under the framework of the common currency – we shall simply keep watching the relentless imposition of never ending austerity programmes that will slowly kill the economies of the PIIGS. And the rest of Europe will itself face some very nasty consequences from the destruction of the economies and societies of the southern fringe of the continent.

    The example to follow is, alas, the Argentinian case of the early 2000s. The four countries should of course learn from Argentina’s mistakes when she dropped the currency board and try to negotiate a comparatively better outcome for themselves, but the solution will nevertheless be a (hopefully better) variation of this case.

    An orderly debt restructuring (read: reduction) for the foreign liabilities of the PIIGS and a negotiated exit from the euro are the two steps that will solve the present crisis. The sooner Europe faces this unpleasant reality the better.

    1. DownSouth

      Actually, I thought what happened in Argenina was a fairly good outcome. It was at least a fairly good outcome for Argentina’s rank and file, maybe not for its economic overlords.

      When Argentina’s President De la Rua and his neoliberal guru Domingo Cavallo were forced to flee Argentina in a hellicopter in the wee hours of the morning, it sent a message to the IMF that there is some limit to the amount of pain it can inflict on a population. Argentina was only in default for 9 hours. But when it signed a new agreement with the IMF I think an excellent case can be made that it was on better terms for Argentina’s rank and file than what De la Rua and Cavallo would have agreed to.

      If one wants to look at really bad outcomes, one has to look no farther than how the economic crisis in Mexico in 1994 played out. There was no popular uprising. The neoliberals stayed firmly in charge. And the Mexican people took the bullet to the head.

      1. DownSouth

        Maybe I should be a lttle bit more specific. Argentina was only in default with the IMF and other international financial organizations for roughtly 9 hours. It did default on private foreign debt, which was later settled at a substantial discount.

        1. wunsacon


          Basic question here: if a country defaults, can its private foreign creditors pursue that country’s assets around the globe? (I figure “yes”. Otherwise, why would any country settle instead of just saying “sorry, thanks for coming”?)

          1. Maju

            Surely yes. That’s what happened to the newborn USSR when it declared the Tsarist debt forfeit. Not that the new leaders in Moscow cared much about that, as they knew the power laid on the country and the workers, not in random assets only. When, an inverse situation, the USSR brought a lot of East German industry to Russia after WWII, it was mostly laid waste unused because the Soviets lacked qualified personnel to make it work. In the end it’s people who matters, people and natural resources (two key components often disdained in Capitalist accountancy).

            So the allies invaded parts of Russia trying to make it pay “its” debt. But the Soviets kicked their butts. I don’t think outright imperialist intervention like that is now easy to muster but there are some risks and uncertainties to default, besides the temporary loss of financial credibility, including a possible attack by an angry creditor.

          2. DownSouth


            This report might help shine some light on your inquiry.

            Argentina and some “holdout” creditors are still wrangling over the defaulted private debt. In 2005, after prolonged, contentious, and unsuccessful attempts to find a mutually acceptable solution with its creditors, Argentina abandoned the negotiation process and made a one-time unilateral offer on terms highly unfavorable to the creditors. Although 76% of creditors accepted the offer, a diverse group of “holdouts” opted instead for litigation in hopes of achieving a better settlement in the future. On April 30, 2010, Argentina announced a new $18.3 billion offer to exchange new bonds and cash for $36.2 billion in defaulted bonds held by the “holdouts.” Taking into consideration all aspects of the offer, financial analysts valued the new discount bonds at 48-51 cents on the dollar, compared to 60 cents for the 2005 exchange.

            The bottom line: It looks to me like the creditors have very little leverage.

            That’s why a good neoliberal regime seems to be a hollow tiger without being coupled at the hip with a robust neocon regime, ready and willing to send in the Marines (or the CIA, FBI or other special ops) in case of non-payment.

            Keep in mind what was going on globally when Argentina defaulted. That was in 2002, right after 9/11, and Bush was trying to garner international support to invade Iraq. So the timing of Argentina’s financial crisis may have worked to Argentina’s benefit, allowing it to tell its creditors to take a hike with little fear of military or covert CIA, FBI or other special ops intervention. It was not a good time for the U.S. to start up the Dirty Wars again. The Dirty Wars were state conducted terrorism upon the Argentine people carried out by Argentina’s political and financial overlords. They were sponsored by the U.S. Government from 1976 to 1983, the same time that neoliberalism was first imposed upon the Argentine people.

    2. Maju

      I am of the opinion that the problem is not as much the euro but the lack of political (and not merely economic in the narrowest sense) governance of the euro and the ECB. In the USA there are many states with more severe problems than Portugal or even Greece, yet this causes no big problem, as the Fed prints money accordingly (it causes some inflation but deflation would be worse) and the central government backs its member states.

      And I don’t think voluntary exit from the euro is any desirable solution. I think that if Germany wants to move out of the euro, let them do it, then print more euros, so EU global competitiveness increases with a weaker currency. The problem is that Germany (and its satellites) want everything: sustained demand for German junk from Mediterranean countries but also budget austerity. Let’s be clear: we cannot buy volksvagens if we have no money and turning off the plug in the middle of the deepest recession in the history of Capitalism is the worst idea ever: it amounts to self-sabotage, to throwing rocks to one’s own ceiling. It’s a zillion times better to have some mild inflation and increase global competitivity for all EU (and not just Germany) that way.

      If Germany wants to get out of the Eurozone and the EU, it’s their problem. There’s no effective way they can force a state not to use the euro, even if outside the Eurozone and EU. If Kosovo uses it (and Serbia used the Deutsche Mark in the Yugoslavian Wars’ context) who can impede Portugal, Greece or whatever from using euros forever. They may not be able to mint them… but that’s another problem.

      So yeah, Germany get ready to get out of the Eurozone and let’s see who buys your cars and other junk. Maybe China?

    3. Sid

      Regardless of any economic case for Euro membership for Portugal, Portugal will not leave the Euro, whatever the price, at least not until the memories of the 1974 Carnation Revolution generation die out.

      Again: this has nothing to do with Euros and cents.

      For Portgual, Euro membership is a sign that the Bad Old Days of the Estado Novo and the troubled years that followed are behind her.

      Speaking of: do any of our illustrious Portuguese member have a good history of the Ultramarine Wars? In English, Russian or Polish.

  7. Psychoanalystus


    I would like to humbly point out that with this Irish Mess VII you already have surpassed by one the number of Rocky movies. I really feel you should stop…lol


  8. Tortoise

    “But the Irish situation isn’t quite the same (to the Greek).” I think that the only thing that is clearly common between the Greek and the Irish crisis is that the people of Greece and Ireland lived beyond their means for at least 10 years — perhaps 20. Now they follow the “usual” steps of a crisis but in a different order.

    As for Luis Amado, he dared mention the elephant in the room which is … rude. The fact is that if you have given up control of your monetary affairs, and you are a small country, you better behave yourself and do not succumb to the temptation of over-borrowing. If you do, you are in trouble: Sinners like you will not easily find redemption.

  9. Wolf in the WIlds

    One wonders what the Irish and eventually the Spanish would do? Does the government succumb to Euro pressure and let the tax payers bail out Irish banks’ bond holders, or do they stand firm and say enough is enough, let the risk takers take the losses? As insolvency overwhelms the Irish banking system, no amount of liquidity can stave of default/restructuring. Its a matter of who bears the costs. So far, the world has been making taxpayers pay for the promiscuity of the bankers. I do believe we are at the juncture where sovereign ability to save the banks is completely exhausted. The governments of the world should put the citizens first. TO do so, they have to let the stakeholders in the banks, be in shareholder or debtholder, pay the price for their wrong investment. Nationalisation/receivership will allow the country to continue to have liquidity for its businesses while the bad debts are written off and the costs put to the stakeholders. Subsequent restructuring and regulation will result in a stronger banking sector. And the government can devote its resources to increasing employment and fostering the economy. Making the taxpayer pay will not turn the economy around. ALl it achieves is a transfer of wealth from the state to bank stakeholders.

    That should never happen.

  10. Peter Carvapai

    If Germany wants to move out of the euro, watch out because that means that their interests are moving towards Russia, a country offering surplus labour, plenty of raw materials and an obsolete industrial base needing modernization, read German products and technology.

    Therefore the idea that if Germany is kicked out from the Euro-zone ( I have seen some Portuguese people nurturing such idea) all current difficulties besieging the members of the Club-Med will be solved may not turn out to be true.

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