Well, today I am taking an unusual decision. I am publishing whole an article from Ireland, by the Irish Independent's Alan Ruddock. I am doing this since I think the whole situation in Ireland should be of interest to Spanish readers, since Ireland is in many ways the country in the Eurozone which is most like Spain. With the important difference that Ireland has already started to get to grips with its correction, while Spain has hardly started.
Before going ahead, I would draw attention to a Paul Krugman post yesterday, since I agree with this almost more than I can say. The basic point is that the Obama-Geithner plan looks like it may well not work,
because people are buying up assets which no one really knows the value of. The thing is why has the banking system dropped so much in value.
If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.
But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.
Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.
There is an analogy in the European situation as I try to argue in my
Krugman Says Nationalise The (Bad) Banks, And I Say Nationalise The (Bad) Countries post.
And
in a subsequent post he makes the following point:
Brad treats the prospect that assets purchased by public-private partnership will fall enough in value to wipe out the equity as unlikely. But it isn’t: the whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price. You might say that we know that the stuff is undervalued; actually, I don’t think we know that.
That we simply have no idea what most of this toxic stuff is worth is what I have been tirelessly arguing on this blog (and to many protests from the "analysts" since summer 2007 about the Spanish cédulas hipotecarias. Since we have no idea at all what the Sapin's houses (and the associated mortgages)are worth, how could we? Basically we have no real idea to within any reasonable order of magnitude what Spanish GDP over the next decade is going to be worth. Which is why I have been arguing all along that the ECB should buy up all 300 billion euros (or so) worth of them (30% Spanish GDP) and park them in the vault in a locked box marked "not to be opened till 2030" (like the ECB minutes).
And also why I argue we need another 300 billion euros from those EU Bonds I hope we will be seeing one day, simply to clean out all the bad building and developer loans there are in the Spanish banking system. Do we need a Swedish solution for the Spanish banks, I don't know yet, I think we need to wait and see how the situation develops before making judgements like that. The cyst is swollen and festering, but it hasn't burst yet.
Meanwhile it is the Spanish real economy that is breaking apart at the seams.
Back then to Alan Ruddock. I would single out a couple of paragraphs as worthy of note (as well as all the background on the furor about the ECB bailout fund.
He is definitely for the Swedish solution in Ireland:
If the leaks so far are to be believed, the Government is being guided towards yet another half-way house solution that will shovel all the costs onto the taxpayers, all the rewards onto the banks and will store up more trouble for a later day without freeing up the banks to lend into the economy.
The neatest solution -- temporary nationalisation of the banks, the creation of a 'bad company' to hold the bad debts and the re-privatisation of the cleaned up banks -- is avoided like the plague. Instead, we will either carry the insurance risk for the banks' poor lending decisions, or we will buy those bad debts for ridiculously inflated prices.
So now,
here is the complete article.
Kill or cure: Budget is crucial to our survival The Government must drag the country out of this crisis before the EU comes looking for its pound of flesh, writes Alan Ruddock
There was no ambiguity in
Otto Bernhardt's comments last week to
Reuters, the international news agency. Bernhardt, who chairs a finance policy group in the German parliament and is a relatively senior member of
Chancellor Angela Merkel's CDU party, was outlining the
European Union's plans to bail out struggling member countries.
"The finance ministers have agreed the procedures. The core point is: 'We won't let anyone go bust','' he told Reuters.
Ireland, he said, was in the "worst situation of all", followed by
Greece, and he was clear, too, about the pound of flesh that
Germany would extract as the price of its support.
"We would look very closely at past sins. We will not tolerate there being low-tax countries like Ireland for example. We will insist on a minimum corporate taxation rate."
In the event of a default, or imminent default, Bernhardt said: "We are in a position to act within 24 hours. The
ECB would take immediate action. The ECB can make an unlimited amount of money available . . . What is the alternative? We would otherwise lose our currency."
His comments caused consternation in
Dublin and
Brussels and were dismissed out of hand by
Brian Cowen, the Taoiseach, and
Micheal Martin, the Minister for Foreign Affairs. Peer Steinbruck, Germany's finance minister, was a bit more circumspect. "I can't confirm such a meeting (of finance ministers to agree the plan) or such conclusions," he said.
Bernhardt later claimed he had been misinterpreted, but it is hard to see how. He was speaking the unspeakable, but it makes sound sense: if Ireland or Greece or any other struggling member of the eurozone should tip perilously close to default, Germany and the rest of the EU will have little choice but to lend immediate support, because if they allow default they will invite the destruction of the euro.
Joaquin Almunia, the EU's economics commissioner, said as much recently when he confirmed that the EU did have a plan to help struggling eurozone states but said, "It is not clever to talk in public about this solution". Indeed.
Such common sense should be reassuring, but it is not. The knowledge that help is on hand is balanced by the realisation that the rest of
Europe thinks we will need that help and is already manning the lifeboats.
For Cowen and
Brian Lenihan, the Minister for Finance, Bernhardt's comments are nerve-jangling. Next month's emergency Budget will determine the country's future: within weeks, possibly days, of its delivery, Ireland will be declared a basketcase, or it will limp into remission.
And if that were not enough pressure, the slow-burning crisis in the Irish banking sector is still far from resolution. If the leaks so far are to be believed, the Government is being guided towards yet another half-way house solution that will shovel all the costs onto the taxpayers, all the rewards onto the banks and will store up more trouble for a later day without freeing up the banks to lend into the economy.
The neatest solution -- temporary nationalisation of the banks, the creation of a 'bad company' to hold the bad debts and the re-privatisation of the cleaned up banks -- is avoided like the plague. Instead, we will either carry the insurance risk for the banks' poor lending decisions, or we will buy those bad debts for ridiculously inflated prices.
First up is the Budget, though the point of crisis moves so swiftly that the banks could easily force their way to the top of Lenihan's agenda over the next two weeks.
Until the publication of last week's retail sales figures, the Government had been leaning ever closer to the opportunistic populism of the
Labour Party and the rest of the redistributive Left, softening us for a series of punitive tax increases on the 'wealthy' (code for the middle classes) and lesser tax increases on everyone else.
Those tax increases would be presented as a sign of Government toughness, but in truth they would be just another device to avoid tackling the real problem: the Government's spending.
Huge tax increases and headline cuts in some capital programmes might raise money on paper, but they will do nothing to deal with the structural problems that have caused the Government's borrowing requirement to spiral out of control, and they risk causing deeper harm to the economy.
The awfulness of those retail sales figures -- down 20 per cent in volume terms, the worst fall on record -- must have stopped Cowen and Lenihan in their tracks. The figures gave the clearest evidence yet that this country is gripped by fear -- fear of job losses, fear of tax increases, fear of shadows.
There is no chance of confidence returning to Irish consumers until they are certain that all the bad medicine has been administered, so the Budget has to be tough enough to make people realise that the Government has woken up to its responsibilities. If people fear that yet another emergency Budget is just a few months down the line, or that the December Budget will impose yet more pain, then spending will shrivel and last month's record will soon be broken.
The figures should also have made Cowen realise that taking yet more money out of consumers' pockets carries enormous risk. He must see that his priority is to cut government spending, and only turn his attention to tax increases once he has exhausted all other possibilities -- including privatisation and tax reform.
It is an incredibly difficult balance to strike and his task is made far, far more difficult by the failings of the
Bertie Ahern years. His and Ahern's abject failure to reform the public sector or embrace privatisation -- a direct result of the sclerotic effect of social partnership on Government thinking -- has left him with a huge problem.
The public sector trade unions are already flexing their muscles, calling strikes and filling the airwaves with disingenuous cries for 'fairness', when what they mean is 'let the private sector take the pain'. It is class warfare by a subtler route, but it is still class warfare.
Cowen has been conditioned by social partnership and is frightened by its breakdown, so he tries to rebuild it when he needs to confront it. His task is made more difficult by the opportunism of the opposition parties, who court populism to inflict political damage, but by so doing put the country at even greater risk.
Richard Bruton,
Fine Gael's finance spokesman, made a powerful case for politics as normal in Friday's
Irish Times. "Adversarial scrutiny and accountability will not be abandoned in favour of a phoney consensus," he said, dismissing out of hand the notion that Opposition and Government should form a united front to deal with the economic crisis. It is a valid point if the opposition parties can find the courage to scrutinise honestly. For the moment, they can not. They are blinded by the prize of destroying
Fianna Fail and cannot see that they risk destroying much more than just a political party.
Honesty is required urgently: from Cowen,
Enda Kenny and
Eamon Gilmore. They might all dismiss the idea of a national government, but they must agree on a unity of purpose. Whatever their political differences (which are slight), they must put aside personal animosity and personal ambition to deal honestly with this crisis. If they do not, the Government will not find the courage to tackle its spending and the markets will pass a very hostile verdict on the April Budget. And then we can prepare for Otto Bernhardt and his pound of flesh.
