Ireland now in talks with EU. It’s on the wires and the BBC.
Eu officials said talk had begun. The European Commission hasn’t officially denied it.
BBC reports figures for the bail out could be around 60-80 billion euros.
That’s the news. More interesting is what the terms of the bail out will be. The people who most want to know the details are going to be the bond holders of Greece and Portugal. Because whatever terms Ireland gets will be read as setting the terms for other nations when they default and restructure.
If the bail out is a 100% all expenses paid loan from the EFSF then it will be seen as being the same as Greece. That is a European bail out, not a restrucutre nor default. Ireland would then have to pay interest and would be forced to accept terms set by Europe.
That would avoid the bond holder panic that a restructure/default would provoke but would still be bad enough. Don’t forget the Irish Government has a wafer thin majority and faces three by- elections. So the details being looked at are going to be how tough can the EU make the settlement so that no one thinks its a sign of a free bail out for any country that wants one, BUT not so tough that it provokes a revolt among Irish voters. Because if the Irish were to vote out the government in favour of a party that pledged to reduce the cuts or to make bond holders pay – well that would scupper the EU’s whole plan.
So they have to make the settlement tough enough to keep Germany and the bond market on side but not so tough that it strikes the Irish voters as a punishment.
That will be a tight balance to strike. Keep Germany happy that this isn’t going to open the flood gates for bail out after bail out. But also don’t make it so tough that the voters rebel. And in the middle – make sure that the bond holders don’t feel they might be asked to take a loss either.
If the bond holders get the feeling this is the first step towards eventually making them take their losses instead of protecting their wealth, then a contagion of fear will ripple out from Ireland to Greece and Portugal, with bond holders in all those nations trying to sell. A little fear might be good, help keep the euro low and hurt the U.S., but not so much panic that borrowing across Europe becomes impossible.
Monday the markets will be jittery as hell wanting to be assured that it will be the EFSF and ECB who will pay and not them.
The essential fight between bond holders and citizens will not have changed only the level at which the fight/decision/sell out happens. Now it is not at the level of the Irish Government but at the level of Europe. Does that make it more or less likely that the wealthy will get protected and the people sold out? I leave you to decide.
I just can't see how they can walk that tightrope. An article in the Graun spoke to people in Dublin and the feeling is that they will turn very anti-EU and start a 'Tea Party' movement. The young are leaving in droves (who can blame them?) and when someone describes themselves as a self employed builder that is code for 'unemployed'. It is already dire in that country, no fault of the citizens and they are being asked to double the cuts. I just don't see them taking this lying down.
Now on the Back of the USA's QE 2. and Irelands Denial of Needing 60-80 Billion Euro Bailout.
Whilst the BBC claims that talks with EU officials have indeed started
Businesses in the UK urge the Bank of England to pump another £50bn into the economy.
Saying they believe the economic slowdown is likely to continue well into the first half of 2011
http://www.guardian.co.uk/business/2010/nov/15/business-organisations-quantitative-easing
Plenty of economic news. But none of it looks good to me.
A question to you Golem concerning the Irish situation. I am wondering If the bonds start to lose value because of a widespread fear that losses are on the way or even a default…then who will then buy them from the current boldholders? Other investors who are willing to take the increased risk? ( this must be very high when even on the Today programme this morning a question was mooted as why Ireland did not simply default) Surely it might be in the ECB's interest rhather than to bail out the bondholders to instead buy up the bonds when they hit rock bottom and then solidify the price after panic recedes. Would this not be a better solution at least in theory?
Of course if the ECB's real interest is to SUPPORT the bondholders then that is why they wont.
It might be very useful not least to the Irish and Greek populations to have the real consequences of a default spelled out….would it be that terrible? What would actually happen? Defaults did not seem to wreck in any permanent way other economies who did default. Of course they would not be able to borrow but that seems to be happening anyway as risk they might has pushed borrowing costs to astronomical levels.
Hello wirplit,
The bonds do go up and down in value exactly like a stock. So as fear iof default increases the bond will lose their value and trade for less and less.
But people will still trades them so long as threr is a chance of even temporary recovery of sentiment. Don't forget bonds are traded as stocks are not simly bought as an investment to be held to maturity.
So someone might buy because they have heard a rumour that, fopr example, a prominent German politician is going to suggest that the German push for a debt restrcturing is going to be far more generous thatn it might have been thought – well such a rumour might ease the fears surrounding Irish debt and its value will creep up a little bit.
It doesn't matter to the trader is the end game is still default as long as he can buy a hundred million in Irish bondsat a low poijt and resell them after the hopeful rumour.
As for the ECB waiting for the bonds to bottom and then buying them up this would indeed be a viable solution. The solution you suggest is tantamount to telling the bond holders they are going to have to take what everone always refers to as a 'ahir cut' – a loss.
The problem is that this is the policy the bond holders (aka banks et al) don't want because it makes them take their lumps. So if they think things are gong in this direction they a) lobby like hell with carrot and stick), b) put the frighteners on the politicians by doing their best to force up CDS/insurance costs on not only Ireland but other vulnerable countries as well. In this case mainly Portugal.
The bond holder's strategy, and don't forget the bond holders are in many cases the same big banks who ALSO stand to lose on the bad debts as well (ie they hold the bad debts and the bonds) – their strategy is to make dealing with any single problem impossible by tying it to other problems – or to put it another way, they try to ensure all problems appear to be systemic so that none of them get dealt with.
Our leaders and or central banks may be in sympathy with their school fellows in the private banks but we don't need to imagine a conspiracy – just ordinary cowardice will suffice.
Hi Golem,
Been reading a lot of CiF comments today and there seems to be a lot of speculation over who exactly is holding Irish sovereign debt.
Your reply to wirplit above would suggest to me that the institutional bondholders (pension funds etc) would have sold off their bonds in the previous months to avoid risking any loss and protect their investors. Can't imagine them hanging on and hoping for things to get better. For the banks however, it may have been wiser to hang on to and possibly even buy up Irish bonds in order to have more leverage over the Irish politicians when it comes to demanding bailouts.
What do you think about this? Can we deduce by this reasoning that the banks in need of bailing out are by far the major holders of Irish sovereign debt or would they just not have had the cash to buy up the bonds abandoned by the pension funds et al?
If the banks are by far the major holders it makes the case for default all the stronger as there would be a more contained fallout, right?
I know no concrete data is available – I'm just trying to 'read the game'.
Hello Jamie,
Like you I have no real data to go on but I did have the same thought as you. I think various sovereign funds will have bnought them up as well as the banks. I feel pretty sure Irish Banks were asked to step in and buy up at various times so as to avoid it looking as if there were no buyers.
Every time people started to sell it would look like a crisis was on its way and each time I am sure there would have been the temptation to think it a good, even a responsible idea, to ask Irish banks to 'rescue' the situation and 'avoid' a melt down by stepping in to buy. They would then have tenedered them to the Irish Central bank who would have off-loaded them to the ECB whenever they could.
The only problem was not to buy too easily or too many as that would have had the opposite effect of 'telling' the market there was a sucker around who would buy any and all. SO they must have had to judge it carefully and disguise who was buying as much as they could.
I think various other banks would have like the look of the volatility over the last few months as a way of making a quick profit gettin in and out again quick. I think many of them are still exposed. Citi, JP Morgan Chase, Bank of NY Mellon, BoA via Merill Lynch, and Deutsche all of whom are also still holding, I think, lots of senior tranches of CDOs and synthetic CDOs as well.
Like you I expect it to be the banks who are sitting on it. I think London is exposed as much as anyone. But we are exposed to the original loans.
All this talk of changing the corporation tax is running against Ireland's great hope of recovery which is in part to attract what they hope will be a ressurgence of CDO creation. They want Ireland to re-emerge as the SIV capital of europe.
I think there is more thatn a bit of self serving in the German arguments. They would quite like Ireland to lose some of that business when/if it returns and wouldn't mind if it came Frankfurt's way.
Personally I think Ireland needs to play hard ball with its EU 'partners'. I also still think Ireland is being urged to accept a bail out more for the well being of European banks than for the health and well being of her own citizens.
I also think the consequences of Ireland restructuring on her own terms would hurt other nation much more than it would hurt Ireland. But none of them have the balls. Not the Irish, not the Brits not the rest of Europe either. And the Yanks have no balls at all. I'm talking polticial class here you understand not the people.
Anyway, like you I satnd on the outside looking in.
Ah yes, I forgot about the ol' Central bank two-step.
By the look of it it's a done deal anyway and the bailout will be signed off tomorrow. The banks get to live another day courtesy of us taxpayers.
I hope they're grateful.
"Ireland's great hope of recovery which is in part to attract what they hope will be a ressurgence of CDO creation. They want Ireland to re-emerge as the SIV capital of europe."
Who are 'they'?
Sorry if that seems obvious but I'm doing my best to keep up!
I've just discovered this blog and I'm really impressed. You seem to be a straight-talker.