The EU's new line in the sand is across Ireland.

[randomness]

After considerable arm twisting, Ireland's government has caved in to the EU and will be "requesting" what is essentially a credit line of up to a hundred billion euros to cover the ill-advised blank cheque the Irish government wrote to bail out their country's banks after their property markets went bust. This was as dumb as it sounds: the banks said they were having a liquidity problem; the government said not to worry, we've got your backs, no matter what; and then the banks kept finding more holes in their balance sheets until the Irish government ran out of money to shovel into the bottomless pit. (Timeline from the Irish Times.)

Normally, you wouldn't think it would take a lot of arm twisting to get someone in that situation to accept a hundred billion or so, but as has been pointed out, this is a loan and interest will be due as well as principal. And there will also be plenty of strings attached, the exact nature of which are deliberately obscured for political reasons. In any case those strings will probably change with events.

The European Union has of course immediately approved the Irish government's request.

Lost on no one is a) the fact that the Irish banks have in the last few weeks run out of anyone willing to lend to them, except the European Central Bank itself; b) investors now consider any number of European countries shaky debt risks, Ireland included; and c) that the biggest holders of Irish bank paper are German and British banks.

Put another way, what is going on is a roundabout bailout of bad loans from German and British banks to Irish ones, funded by the richer countries of the EU. Meanwhile, the richer countries (Germany, primarily) can claim they're merely coming to the rescue of Ireland in its hour of need. Oh, and of course, the EU will need to take a bit more control of Irish finances...just to make sure that hundred billion credit line is being used wisely.

All this because the last hundred billion euro line in the sand-- across Greece--didn't stop the credit markets figuring out and acting on the dodgy state of finances across the peripheral countries in the Eurozone. There aren't too many more places to draw lines: Portugal is next, and can plausibly be bailed out, but if Spain or Italy ever come to need a bailout, the game is up. Their budgetary holes are too big for even the German taxpayer to fill.

Comments

[3diff.livejournal.com]

These bailouts are all about shoving the problems under the rug and hoping that the general situation will improve enough that they can be ignored. If they are lucky, the economy will improve enough that the Spanish and Italians won't need the full treatment.

All true

[drwex]

I can't see how they're going to get off this merry-go-round.

[achinhibitor.livejournal.com]

the government said not to worry, we've got your backs, no matter what; and then the banks kept finding more holes in their balance sheets

Big surprise!

[achinhibitor.livejournal.com]

The average Irish family owes something like 100,000 euros. Like the recent US bubble, these various countries have been consuming in excess of their production. If done correctly, this sort of "chain letter on the future" can work well, but people rarely do that, and eventually the creditors stop trusting that they will be repaid, precipitating a crisis. So the challenge is for the debt to be paid off or charged off by various parties in a way that doesn't cause the financial system to seize up in the mean time and reduce production to below what it would otherwise be. In the best case, there will be lots of belt tightening and nose-to-grindstone.

[achinhibitor.livejournal.com]

I can now see why the Irish banks weren't treated to a FDIC-style cleanup (where the depositors get their money back, but the lenders to the banks are ruined) -- most of those lenders are other banks, and the regulators are trying to avoid financial contagion. Unfortunately, this shows the wost sort of moral hazard, with banks learning that they can lend to shaky banks and (in effect) have their loans guaranteed by the EU.

I wonder if the other shaky countries can implement enough austerity and reform to fix their budgets without causing recessions that destroy their tax bases.

[frotz.livejournal.com]

So what do you think is next if it does come around to Spain or Italy? Euro failure? It looks to me like a race against time at this point for that pair vs. a general recovery.

I know a banking nerd (Swiss, btw) who claims that the central banks have quite deliberately been keeping stockpiles of national currencies in key locations in case they needed to pull out of the Euro in a hurry. That seemed more far-fetched a few years ago, but not so much now. (The actual mechanics of it are an interesting problem ("quick, turn our money into 'German Euros' before they pull out"), but not I think insoluble.)

[nathanjw]

I think part (c) is the really critical part. It's not so much bailing out Ireland; it's bailing out the creditors of Irish banks. Who are, on the whole, not Irish. (See also: AIG) The narrative needs to discuss who is actually being propped up here, who it is that would be in trouble if the Irish banks said "Sorry, not paying, fuck you."

[r-ness.livejournal.com]

these various countries have been consuming in excess of their production

In the case of Ireland, the single biggest hole in the budget was the bank guarantee. While their budget went out of balance when the property market tanked (tax revenues dropped and social insurance expenditures rose), the Irish government was running surpluses until they decided to bail out their banks. That turned out to be entirely beyond the government's capability to do.

[r-ness.livejournal.com]

So what do you think is next if it does come around to Spain or Italy?

Truthfully, I have no idea.

The larger point is that the Euro currency in particular and the European Union in general is a political project, not an economic one. So I think the politicians of Europe will try everything they can to keep the political project on track, no matter how economically unworkable it is.

The question is whether the economic contradictions will overwhelm them before conditions improve.

[win-ru.livejournal.com]

And can they say it?

[win-ru.livejournal.com]

Our site is interested in some original commentary on the situation with Ireland. So if somebody likes to - welcome.

[achinhibitor.livejournal.com]

True. But the population as a whole was getting more goodies than they were producing. I'm not sure which people got those goodies, but a good start is looking at everyone who sold real estate at a price far higher than it was genuinely worth. If I make an extra 10,000 euros by selling at the top of the bubble, someone is going to take it in the shorts for those 10,000 euros eventually. Another group to look at is people who over-borrowed to buy a house -- they got to live in a house they couldn't afford for several years.

[r-ness.livejournal.com]

Extend and pretend!

[r-ness.livejournal.com]

I'm not sure which people got those goodies, but a good start is looking at everyone who sold real estate at a price far higher than it was genuinely worth.

Ah, that would be the property developers, then.

Privatize the gains and socialize the losses, baby!

[r-ness.livejournal.com]

It's particularly problematic because the Irish property bubble was largely the result of low interest rates set the ECB. Those rates were low in the past because the ECB was concerned about setting rates to keep Germany from falling into recession, despite the fact that those low rates were quite wrong for booming Ireland.

Having a single currency--and thus, single monetary policy--without ways to adjust for the imbalances means problems like this will just continue to happen.

Germans are whining now about having to pay for everyone else without acknowledging that they've already benefited from the situation.

I think if the Irish had told the ECB to pound sand, they'd at the very least have kept more leverage and gotten a better deal.

[r-ness.livejournal.com]

Gideon Rachman asks a similar question in a recent column for the FT:

“Tell me how this ends,” was the question posed by General David Petraeus about the Iraq war. European leaders are asking the same question as they contemplate the crisis in the eurozone.

He guesses the Eurozone will break up, and it will be Germany which walks out. That's more than I'm willing to guess.