Anyone got any ideas what the impact of accepting a bail out will have on the economy and the economic outlook of the UK?
The effect of the Irish bailout on the UK is basically zero.
The effect of the Irish bailout on the UK is basically zero.
This was sent to Loren Goldner's Meltdown III e-list:
1.Essentially, the Irish government turned the entire country into a "bad bank" to take over the non-performing assets of Anglo-Irish and other banks. The government created the National Asset Management Agency [NAMA] to buy the non-performing instruments from the banks. The banks themselves were less than candid about the quality of the loans, and their own exposure, and the government being a sucker never got the even break, paying about 75% of the face value for the equivalent of euro 77 billion in "assets." The assets have since been devalued, requiring further injections from the government to keep the banks afloat. In October 2008, the govt. state that it would need to inject euro 1.5 billion into Anglo-Irish bank to "stabilize" the institution. As of October 2010 the actual amount has been about euro 23 billion, with another 11-12 billion to come.
The "haircut" now on the assets the banks still hold is now at 56% and the amount the Irish govt will need to supply the banks to meet collateral obligations and maintain day to day operations is expected to reach euro 46 billion, an amount equal to 33% of all goods and services produced in Ireland this year.
2. Enter Merkel, the arch-Angela of death. Angela was bit perturbed over being compelled to support the bailout of Greece, and the establishment of EFSF-- European Financial Stability Facility-- that big
"off-balance sheet" funding vehicle designed to bail out any country stupid enough to turn to it and the IMF for help. The EFSF will issue "instruments"-- i.e. debt, to provide funds to said country and the debt will be secured by... by the budgets of the governments of the EU countries themselves, in essence turning all of the EU into a big bad bank.
Anyway despite the fact that the EFSF has 3 years left to go on its contract, and has a no-trade clause, Angela tested the market, and roiled the waters, by demanding that the EU look at a successor to EFSF that would require the private debt holders, the bond buyers, the banks and their customers, to shoulder more of the burden, to take a bigger haircut. But nobody wants to sit in the chair when Sweeney Todd is the barber.
The bond market freaked, or pretended to freak knowing that nothing separates a fool from his money quicker than fear, and started to drive down the face value of Irish debt, particularly sovereign debt, thereby driving up interest rates and the spread in yields between Irish bonds and German bonds of similar maturities. In addition the price of insuring Irish bonds against default, those world famous credit default swaps which proved so problematic for AIG, and made so much money for Goldman Sachs, Deutsche Bank etc. soared.... soared so much in fact that it effectively swallowed the interest anyone might earn from insuring a 5 year note against default.
This is the highly leveraged structured investment asset backed paper version of your house being underwater. Literally and metaphorically.So.... so those holding the Irish debt can't sell in the secondary markets without risking a razor cut below the chin line; nor can they purchase CDSs against default without losing anything they might receive in interest.
Thank you Angela.
Ireland's finance minister, a certain Mr. Lenihan thinks this is all a tempest in a teapot, that the markets are overreacting, that there is no cause for alarm because Ireland has enough cash reserve to fund its
operations through the end of the year and into 2011, thus avoiding the need, the embarrassment, not to mention the expense of going back to the bond markets to raise cash. Does that sound Greek to you? It sounds Greek to me.
Now to make things even better, while the initial distress was precipitated by the collapse in commercial real estate, and commercial real estate loans, Ireland's residential mortgages are faltering with the number overdue 90 days or more increasing by 50% in 2009 to 4.6% of the number outstanding.
What's the big worry? Our friend, Mr. Contagion. If Ireland goes, what about Portugal, what about Spain? What about Italy, whose debt mass dwarfs that of Spain, Portugal and Ireland, debt accrued in large part to keep Berlusconi supplied with underage pole-dancers. Anybody got a lead shoe we can throw at his recently reconstructed face?
So, on last Friday [11/12]everybody was waiting for markets to open on Monday and how the market would value Irish debt since Angela Lansbury Merkel Lovett opened up her new meat pie take out shack featuring Irish meat. Apparently the opening was a success, and the patient is close to dying.
3. Now it gets even better as ECB did some accounting of its own balance sheet and uh-oh, realizes the Irish banks now account for about euro 130 billion or one quarter of the direct loans it has given out. So if it's given out that much in loans, and NAMA has purchased so much else, what can be left in the banks themselves to use as collateral? Only stuff that's so bad not even the ECB will accept it as collateral; which must give us pause... Meanwhile, corporations are pulling their deposits from Ireland's commercial banks.
Pause over. . the ECB's own balance sheet now shows assets [essentially the collateral accepted for loans-- in short, liabilities] at 21 times its own equity capital as reported by the Financial Times 17 November. So now we can see another reason why the EU is pushing so hard for Ireland to accept the bailout-- it's the only way to save the ECB.
God, I love it when a plan comes together.
Re the effect on British capital:
UK PM D. Cameron: "Obviously if you look at the relationship between Britain and Ireland, it's one of our biggest export markets...We export more to Ireland than we do to Brazil, Russia, India, China combined.”
According to Irish Independent journo Thomas Molloy: “There is no other European country that stands to lose more if Ireland's economic problems worsen or the banking sector collapses."
Office of National Statistics for 2009 indicates that trade, driven by food and drink, fashion and textiles - was worth £23.8bn (28bn euros) to the UK.
About 40% of exports from Northern Ireland go south of the border and, according to government figures, every person in the Republic spends an average of £3,607 per year on British goods.” (BBC)
“There is also the matter of the estimated £88bn worth of loans made by UK-based banks to Irish businesses and households. (BBC)
Info uncritically reproduced from BBC News website article: Is Helping Irish economy in the UK’s Interest?, Nov 18, which also contains other interesting info on the issue.
I agree with the above against the "zero effect" idea. The British economy is interlinked with Ireland's. The UK's loan exposure to Ireland is bigger than any other country and there are also links that weigh on trade, UK gilts and the pound. It is entirely in Britain's interest that the Irish economy survives this storm.
What these events also show is the emptiness of the ideas of Irish "independence" and "self-determination".
If, as seems likely, the general economic crisis deteriorates with this latest debacle, then it is possible that the major player in this drama, Germany, will get fed up with bailing out tin-pot economies and possibly return to the Deutchsmark in time. That would have very serious ramifications globally and not entirely economic.
IMF urges cuts in minimum wage and dole payments
The Irish Times - Tuesday, November 23, 2010
HARRY McGEE, Political Correspondent
THE INTERNATIONAL Monetary Fund has recommended gradually reduced dole payments and a drop in the minimum wage in a new position paper approved by its lead negotiator in Ireland.
The measures, which also advocate that more resources be given to Fás, are contained in an IMF staff position note posted on its website yesterday. It states that the document is approved by its head of mission in Ireland, Ajai Chopra, who is also the IMF’s deputy director in Europe.
The paper has examined the priorities for structural reform and governance in the euro area. In its country specific recommendations, it has stated that Ireland needs to introduce measures to tackle its high unemployment rate.
It recommended a “gradual decrease of benefits over time of unemployment and stricter job search requirements”. It also states that more resources should be provided to Fás to provide efficient job search assistance.
The paper has recommended a review of the minimum wage “to make it consistent with the general fall in wages”. This measure already forms part of the four-year austerity plan, to be published tomorrow.
It also suggests that public resources should be targeted to the “knowledge-based economy”.
In relation to attracting women into the labour force in several countries including Ireland it urges tax changes and better child care. The report says that “cutting labour income taxes paid by women by 5 percentage points” would increase the GDP by 1¾ percentage points.
The Government’s four-year plan will include measures to drive down costs to business in order to increase competitiveness, the Government’s economic adviser Alan Ahearne disclosed yesterday.
He said the plan would seek reductions in the costs of electricity, waste disposal, broadband and professional services such as legal fees.
The plan had been due to be published today but has been delayed for 24 hours because of efforts by the Green Party and by the Department of the Taoiseach to have key measures included in the document.
The measures included a few key Green policy areas – such as wider provision of broadband services in rural areas – as well as the insistence of the Department of the Taoiseach that language be included in the document that would make it more amenable to social partnership.
An €85 billion loan will be made available to the State as part of the bailout package being provided by the European Union and the International Monetary Fund, according to a Government source.
Negotiations are expected to be concluded by the end of the month, at which time a memorandum of understanding will be signed, imposing the conditions the State must fulfil during the three years of the programme.
A Government source accepted the IMF and the EU would have power of approval over both the plan and the budget. Mr Lenihan said that IMF and EU officials were “broadly satisfied” with the four-year plan.
“I am quite satisfied on the basis of the discussions to date that the budget that will be presented to Dáil Éireann on December 7th will be our own budget, nobody else’s budget. There has been no request for any change on that,” Mr Lenihan said.
The Minister said the country had a “very good future”, and that a very severe recession had been stabilised. He noted that Britain had sought IMF assistance in 1976 and come out of it after a few years.
The development of the present Irish "troubles" are very important and I think raises further questions about the long term. Of course this is not an Irish problem but an international one.
There's no direct mechanical link between the development of the economic crisis and the development of imperialist rivalries - but there are links. The IMF are in these talks as representatives of US imperialism as tension rather than "solidarity" (ECB) or "good neighbourness" (Osborne, UK Chancellor) underlines the current proceedings. The US and UK want low the low tax and deregulatory regime maintained. Germany, and to a lesser extent France otherwise. There's a whole raft of disagreements underlining the bail-out not least from the British ruling class with its massive banking "investment" in the property boom and the construction industry - both of which look like taking a further hit. German banks are also affected by this.
On a wider level, the tendency for a two-tier euro has been strengthened. In fact it's more than a two-tier euro because there is a definite German-led economic and political bloc forming which includes Holland, Austria and Nordic countries outside of the euro even. The recent revival of the Anglo-French military entente is not entirely separate from these developments in the longer term.
While these imperialist hyenas, UK, the USA, Germany, France, are picking over the bones of the Irish economy one thing they all agree on, along with the Irish political system, is that it will be - it is - the working class will pay. All these parties, whatever their differences, agree on this.This present Irish crisis is one more expression of the insoluble and global economic crisis of capitalism and the working class in Ireland, as part of the international working class, are at the forefront of the attacks.
So Ireland gets its bailout. But I can't help thinking that it's the European Central Bank that's being bailed out, not Ireland. The ECB is overexposed to Ireland, giving it much less chance of bailing out Spain. So, ECB covering its arse?