No formal announcement yet, but some presumably well-sourced rumours about the size of the Irish bailout (EUR 85Bn), and the rate (7%, via the redoubtable Twitterer on all matters Irish @LorcanRK).
While we await the budget statement, there are reasons to suspect, or hope, that the bailout, like Godot, will never come, because it’s failing already.
From a Eurozone perspective, it’s not warded off the dreaded “contagion”. Yesterday, Irish and Portuguese 10-year yields went up again. Mohammed El-Erian’s invocation of a bank run in Ireland (see the Guardian link above) won’t have helped much; nor will today’s Portuguese General Strike. Even more worryingly, Spanish 10-year yields approached their May crisis highs, and their spreads against German bonds hit new highs. So much for the policy justification. There just might be an underlying credibility issue; never mind AIB and Anglo, now to be nationalised, what of the other 80+ banks that also “passed” the European “stress tests”?
From an economic perspective, the bailout is another manifestation of the liquidity/solvency confusion that we saw again and again during the 2007-9 crisis. See Krugman for a quick reminder of why this goes nowhere. What on earth is the point of completely surrendering control of Irish economic policy to Eurocrats, and clobbering the country with another round of spending cuts, if “nowhere” is the destination anyway?
But even ignoring the solvency/liquidity question, or the supposed anti-contagion rationale, the bailout just doesn’t appear to be up to the job. In a previous post, I alluded to the curious mechanism by which the full horror of these debt situations is only slowly acknowledged. Oddly, the people furthest ahead of the game were actually the Irish authorities. Back in Q1 2009, they knew it could turn out like this, with ever-increasing figures for the size of the losses (WSJ):
On March 6, 2009, Mr. Lenihan met with advisers to bat around remedies. None sounded promising. He turned to Peter Bacon, an economist he’d hired a week earlier, who shocked the crowded room with a figure far bigger than the few billion Ireland had spent. The banks made more than €150 billion of potentially toxic property and land loans, he said. “That’s the extent of your problem.”
Mr. Bacon suggested the government buy loans from the banks at discounted prices, effectively handing them cash and easing doubts about their viability. By insisting on steep discounts, Ireland would be less likely to lose money on the purchases. On the flip side, bargain prices would trigger losses at the banks—which the government would probably have to patch with more capital. The taxpayer would foot the bill either way, but at least Ireland would understand how big it was.
The approach “has the merit of certainty and clarity,” Mr. Bacon argued. But, he added, it would only work if “the projection of the extent of impairment is accurate in the first place.”
Evidently, after the revenue hit of a recession and contractionary economic policy, the deficit problem’s grown even bigger in the intervening two years. So how big does the bailout need to be, if you think a bailout will help? There are at last some competing estimates.
Namawinelake, who’s been following the toxic loan mess for a long time, very carefully, takes up Brian Lenihan’s abject shoulder-shrug of a challenge and produces the horror estimate of around EUR200Bn-EUR250Bn. His commenters disagree about how to count it, but that’s the ballpark. @LorcanRK’s best estimate is that the EUR85Bn actually pencilled in would last about a year. Then the Irish would would be back to the current scenario – broke – with another year of austerity behind them. How much sense does that make?
But that’s not the end of it either. Last night, an even more horrific estimate – EUR340Bn – was broadcast on the perfectly respectable, widely viewed Irish current events programme, Vincent Browne. You can get a sense of the stunned reaction to it here.
Interesting timing. Sounds as if there might be a bit of politics going on over there. Encourage a couple more coalition TDs ( members of parliament) to defect, take the Government down before the budget is signed off, reject the bailout, that sort of thing?
Maybe; that would get seriously messy. But (h/t @Steve_Randy_Waldman, had no idea he read the Speccie, but he is a surprising fellow) , if Iceland is any kind of example (which is a stretch, if I’m honest), turning down the bailout might make sense to the Irish and their parliament. All it takes is a TD with some resolve, or some vocal constituents, and we are off in a whole new direction; a sharp lesson in democratic pushback; overdue worldwide, IMO.
That would be some end game.