European Tribune - Community, Politics & Progress.

Will PIIGS Fly?

by Frank Schnittger
Fri Feb 5th, 2010 at 06:22:18 AM EST

Goodbody Stockbrokers - News and Comment - Morning Meeting Wrap

The markets keep picking off the countries where sovereign debt risks are perceived to be real one by one. After Ireland last year and Greece over recent months, attention seems to have moved on to Portugal. In fiscal crises, contagion leads to countries being guilty by association, which is why the PIIGS acronym (Portugal, Ireland, Italy, Greece and Spain) is a somewhat unfortunate association for the countries involved.
It is also an association that is difficult to shake off, although Ireland has done a pretty good job over the past twelve months, as it is has shown real political will to tackle the problems in the public finances. There is no doubt that all of these five countries have issues to deal with at the current time, but there are also a few important features that differentiate them.

The similarity is that all of the countries, bar Italy, will experience budget deficits in the range of 8%-11% of GDP in 2010. Starting debt levels differ though with Greece already well over 100% of GDP, while Ireland stands at 65% and Spain at 55%. These two variables are often cited as the main gauges of sovereign risk, but they ignore the wider balance sheet for the economy as a whole - the balance of payments. The balance of payments records transactions with the rest of the world, while within this one can look at the private sector and public sector balances. This is where the differences really become apparent between the countries mentioned above. Portugal will run a current account deficit of 10% of GDP in 2010, while Ireland may run a small surplus, according to the latest estimates.

For Ireland, this means that the large public deficit is being offset by a significant private sector surplus, as households and businesses have slashed spending in the recession. Greece will run a current account deficit of 8% of GDP, while Spain is expected to run a deficit of 5%. In this regard, Portugal and Greece look to be in the most vulnerable position. While spreads on ten-year Irish bonds relative to bunds are still larger than that of Portugal, we would not be surprised if this changes in the very near future, as it has already occurred at shorter maturities. With fiscal consolidation progressing at different speeds in the different countries, a further differentiation is likely at some stage. For now though, fear rules the roost.

Are the markets correct in lumping such diverse countries together despite their wildly different economic circumstances? Are national bonds (and interest rate differentials with Bunds) a valid measure of the relative risk of default of the nations concerned? Does any of this reflect economic fundamentals rather than the current market fashion du jour?

What are the prospects for recovery and development for these very different economies. What economic strategies are their Governments pursuing, and is it all determined by neo-liberal economics?

Will the Euro and the ECB play a positive or a negative role in their recovery? Will the EU have to become more directly involved in directing the fiscal as well as monetary policy of member states? Is the Growth and Stability Pact which sought to limit member state public sector borrowing requirements to 3% of GDP and National debt to 60% of GDP both totally out of date and completely inadequate to the task of harmonising/converging member state economic development? Will, as Eurosceptics hope, the growing divergences tear the Eurozone if not the EU apart?

Is this all neo-liberal scaremongering to extract further concessions from hard pressed workers and low to middle income taxpayers or are there real and serious structural problems which need to be addressed? If so what are these problems and how should they be framed? Is neo-liberal economics the only game in town at the moment, or are alternative strategies also being pursued?

These questions are the ones uppermost in my mind, but I'm sure readers here will have many more - and hopefully the expertise to answer at least some of them.

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Will PIIGS Fly? | 82 comments (82 topical, 0 editorial, 0 hidden)

Don't be STUUPID (4.00 / 6)

NBC Evening News the discussion of the news of the 268 point drop introduced the term "Sovereign Default" to its viewers, along with PIGS, a new acronym for Portugal, Italy, Greece and Spain. Zero Hedge has proposed an alternate acronym, STUPIDs for Spain, Turkey, U.K., Portugal, Italy and the Dutch = Netherlands. Commentators immediately amended this to The STUUPIDs by including the USA.

On a serious note, I am starting to be really annoyed by the attention everyone pays to these damn "investors". Using the markets as guides for policy is like reading the future in the flight patterns of flocks of birds.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 09:20:00 AM EST

Re: Don't be STUUPID (4.00 / 2)

Hat tip to ARGeezer.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 09:20:22 AM EST
[ Parent ]

Re: Don't be STUUPID (4.00 / 4)

But investors are the really serious important people who are really run the world and to whom we should all pay homage for making our lives so much better. Don't you know that?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Fri Feb 5th, 2010 at 10:11:36 AM EST
[ Parent ]

Re: Don't be STUUPID (4.00 / 3)

Well, when living in an absolute monarchy one tends to pay attention to any problem of the monarch, by necessity.

As long as we live in liberal capitalist system where about 80% of the social life is ruled by a dollar a vote, you have to care about the plutocratic rulers.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Fri Feb 5th, 2010 at 10:11:48 AM EST
[ Parent ]

Re: Don't be STUUPID (4.00 / 5)

But this is not a group of plutocratic rulers, it's a herd of headless plutocratic chickens.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 10:16:05 AM EST
[ Parent ]

The "D" is actually for Dubai (4.00 / 6)

not for the Dutch.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 10:26:26 AM EST
[ Parent ]

Spain's recession (4.00 / 3)

(source: El País)

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 09:24:16 AM EST

Re: Spain's recession (4.00 / 2)

And this with a 10% government deficit for 2009.

If the government tightens its purse in 2010, will the recovery be aborted?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 09:26:21 AM EST
[ Parent ]

Re: Spain's recession (none / 0)

Looks to me a clear case of holding your nerve as the economy recovers and then worry about the deficits when long term ""trend"" (note double ") growth has been regained - together without doing the long term infrastructural stuff and counter-cyclical stimulus spending which is enabling the recovery in the first place.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Fri Feb 5th, 2010 at 10:14:59 AM EST
[ Parent ]

Re: Spain's recession (4.00 / 3)

With any luck, Spain could be back in positive interanual growth in 2010Q2.

Now notice two things about that chart. We don't have a whole cycle to play with and in fact it appears we don't even have the previous peak which must have happened in 2006, but anyway...

It looks like the recession is deeper and shorter than the growth phase. This is possibly because the counter-cyclical public deficit (whether "automatic stabilizers" or "emergency stimulus") kicks in and brakes the contraction whereas the growth phase is allowed to run its course.

Another feature is that swing in the rate of change of GDP is in excess of 8% (from > 4% to -4.2%) and this with a countercyclical deficit of 10% of GDP for 2009. So...

It may be that the 3% public debt limit in the Stability and Growth Pact is too tight.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 10:41:05 AM EST
[ Parent ]

Stability Pact (4.00 / 6)

It may be that the 3% public debt limit in the Stability and Growth Pact is too tight.

I don't see why. It's a useful number to instill some budgetary discipline in normal to poor years, and by and large it has worked. It's no a constraint in severe recessions, as current numbers show. It's a good medium target to have to return to "normal."

The number was selected as that which makes debt remain constant at 60% of GDP at "normal" growth rates, which is not an absurd goal on its face.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 10:55:27 AM EST
[ Parent ]

Re: Stability Pact (4.00 / 2)

Because the GDP growth rate swing between peak and trough can be as much as 8% or more.

So, if the deficit limit is 3% what is the guideline yearly budget surplus governments should be running? 5%? A 3% debt limit assumes the GDP rate swing will be something of the order of 4% and is a consequence of bullshit "great moderation" "we tamed the business cycle" "small government" neoliberal bullshit.

It makes a whole lot more sense to have an over-the-cycle guideline and to force states to run budget surpluses in the growth years instead off saying that a 1% deficit when GDP is growing at 4% is A-OK just because the deficit is less than 3% and the debt less than 60%.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 11:02:12 AM EST
[ Parent ]

Re: Stability Pact (4.00 / 2)

The number was selected as that which makes debt remain constant at 60% of GDP at "normal" growth rates

I'm assuming that's a back-of-the-envelope calculation. Can you spell it out for me? I just don't see it.

Also, please remember to mention whether one needs to assume that "the recession is an outlier" in the definition of "'normal' growth rates".

What size of the government revenue as a fraction of GDP is assumed for the calculation?

How long and deep is the business cycle assumed to be in the calculation?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 11:16:59 AM EST
[ Parent ]

Re: Stability Pact (4.00 / 2)

In addition, I thought debt at 60% GDP was not a guideline value but the maximum allowed. As such, it shouldn't be the target during "normal growth".

Also, the 3% was also supposed to be a maximum allowed deficit, not a guideline value during normal growth.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 11:25:33 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 4)

http://krugman.blogs.nytimes.com/2010/02/05/the-spanish-tragedy/

Go to the link to see the nice graph!

As Europe is roiled by sovereign debt fears, it's important to realize that the crisis in the largest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) has nothing to do with fiscal irresponsibility. On the eve of the crisis, Spain was running a budget surplus; its debts, as you can see in the figure above, were low relative to GDP.
So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble -- and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.
If Spain had its own currency, this would be a good time to devalue; but it doesn't.
On the other hand, if Spain were like Florida, its problems wouldn't be as severe. The budget deficit wouldn't be as large, because social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington. And there would be a safety valve for unemployment, as many workers would migrate to regions with better prospects. (Wages wouldn't have gone up as much in the first place, because of in-migration).
The point is that this has nothing to do with a spendthrift government; what's happening to Spain reflects the inherent problems with the euro, which now more than ever looks like a monetary union too far.

by Metatone (metatone [a|t] gmail (dot) com) on Fri Feb 5th, 2010 at 10:27:17 AM EST

Re: Will PIIGS Fly? (4.00 / 4)

Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration.

Hear, hear!

inherent problems with the euro, which now more than ever looks like a monetary union too far

The problem is not with the Euro, it's with the nationalistic/neoliberal refusal to have a European fiscal and economic policy.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 10:44:17 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 3)

If Spain had its own currency, this would be a good time to devalue; but it doesn't.

€22bn of investor money left Spain yesterday, presumably to land in US Treasuries. I wonder what that would have done to the peseta if we still had it. I also wonder whether such an involuntary devaluation is as good as Krugman assumes a voluntary one would have been.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 10:46:10 AM EST
[ Parent ]

yes (4.00 / 5)

people forget what currency crises were like only 25 - nah, make that 15 - years ago...

The reality is that finance is based in London and the US, and somehow discount the relevance of the devaluation of their own currencies, because it doesn't translate into immediate losses (if anything, devaluation of the pound or the dollar boosts domestic profits of companies with international operations, and the returns of investments in foreign-denominated securities...). So the 10+% deficits of the UK and US (not to mention the near-bankruptcy of many US States) don't seem to create all that handwringing... - or only inso far as to have calls for Social Security oe pensions or social transfer cuts...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 10:59:18 AM EST
[ Parent ]

Re: yes (4.00 / 5)

what currency crises were like only 25 - nah, make that 15 - years ago

George Soros and the pound, right?

As I mentioned in another comment, Iceland's currency was destroyed in a day in 2008.

Not to speak of the Argentinean corralito crisis in 2001, Russia in 1998, and the Asian Tigers in 1997.

It's just that, in a typically smug fashion, the Angloamerican Masters of the Universe from the City and Wall Street thought it could never happen to us.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 11:20:57 AM EST
[ Parent ]

Re: yes (4.00 / 3)

I'm getting pissed.

I just read an economist tell an old joke about two pilots that fell into a jungle. They hear a lion roar and one of them puts on running shoes. The other says to him, "You can't outrun a lion." The first guy says, "I don't need to outrun the lion, I need to outrun you."

Greece is like the latter. In the midst of a global meltdown, and really in the midst of a global market, they became complacent. It's not the recession that has caused this but a race to the bottom. When you're competing with the third world in an increasingly competitive market, you better figure things out quickly or you will get picked off. The problem is, humans aren't equipped to go from eating steak to cabbage so quickly. And therein lies the problem.

by Upstate NY on Sun Feb 7th, 2010 at 10:53:32 AM EST
[ Parent ]

Re: yes (4.00 / 4)

What Krugman is making is a welfare argument against the euro, and I think it's a good one that should be addressed directly. He is saying that the policy result, and possibly the implicit intent, of a common European currency has been to influence a perverse transfer of wealth from poorer, less skilled Europeans into the hands of higher skilled, higher paid, and more internationally mobile Europeans and foreigners such as bankers and people working in trading sectors -- in other words, the same pirate class going back to the days of mercantile trading companies.

Given European political support for lower income workers over the last two centuries, this wouldn't normally be a problem because welfare and wage policies would reverse the transfer back to such workers. But Krugman is arguing that the Euro puts obstacles, perhaps deliberately, in path of the welfare state model because it reduces the available options to mitigate poverty to those of a politically explicit nature: Only if governments have both the fiscal capacity and political will to increase net welfare/wage transfers can high unemployment and resulting deprivation be structurally addressed. Where that capacity and will have become limited, it's workers who lose, not bankers and traders.

If a European country with persistent high unemployment had its own currency, even if political authorities were unable to address the problems of deprivation themselves, market forces would eventually do the job for them by devaluing the currency to the point where domestic industry and exports grow again. Krugman's argument is thus that the euro is a more neo-liberal policy framework for much of Europe than a floating currency regime would be. It benefits traders, bankers, and funcionarios at the net expense of many common people.

by santiago on Fri Feb 5th, 2010 at 12:27:54 PM EST
[ Parent ]

I hear you (4.00 / 7)

but the result of the euro has, in fact, been a great boon for the poorer countries, who suddenly benefited from German-like interest rates because the markets, for some reason, suddenly decided to treat all eurozon government debt as identical now that it was the same currency, instead of differentiating per country. They are now suddenly reconsidering, thus the massive movements in CDS spreads (instruments which make such change easier, btw).

Why should Greek debt suddenly have become more trustworthy because it was in euros? Is Californian debt more reliable because it's in dollars than in local IOUs?

The markets made a mistake, which meant a massive windfall for Spain, Portugal, Ireland and Greece for 10 years, now coming to an end. it's back to normal evaluations, and more realistic debt prices for these countries, but it's not the end of the world.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 12:48:27 PM EST
[ Parent ]

Re: I hear you (none / 1)

Question.

In theory, as I understand it, interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment. Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro. This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole. And this was one of the arguments presented for the introduction of the euro.

Or am I full of it?

No one could have predicted

by ATinNM on Fri Feb 5th, 2010 at 01:16:18 PM EST
[ Parent ]

Re: I hear you (4.00 / 2)

interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment

What interest rates?

The European Central Bank sets a single base rate for all of the EU.

However, you are right that there are credit spreads between the different Eurozone sovereign debt issues, as well as between firms in different sectors and countries.

It is possible that, because of monetarism, too much importance is attached to the single base rate set by the ECB where it is the other market-set interest rates that matter.

Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro

Here I prefer to think of higher interest rates as penaties that borrowers have to pay, not as something that makes lending more attractive to them because they are offering to pay a higher interest rate. A higher interest rate spread doesn't help.

This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole.

I think the outcome of interest rate differentials is that, say, German firms, will be able to take over, say, Spanish films, because of their loewr credit spreads. I don't think that has much to do with macroeconomic convergence.

I think the macroeconomic convergence must come from local inflation differentials which cannot be compensated by the various Eurosystem central banks by means of different local "base rates".

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 02:41:50 PM EST
[ Parent ]

Re: I hear you (none / 1)

On a macro level, that's indeed true, but on a personal level, every Greek saw the price of things double relative to income a decade ago, and they were not able to scale back lifestyles as quickly. Whoever imagined they could does not know much about human nature. Greeks by tradition were not keen on debt, and their high home ownership %s made even mortgages a rarity. I hate to demean my own people but the scenario was a little like giving your child a credit card before going off to college. No Greek government could have withstood the immense pressure of a public workforce concerned with losing tons of buying power so quickly. That was not going to happen.

The problem is that a country with a good social welfare system that also has a first class education and training system may pass by training workers to compete in this highly competitive atmosphere. Greece is not that country. It's lack of diversification is it's problem.

I know this is not going to happen, but if it devalued, Greece would also find that the lack of diversification would be a big boon to the welfare of average citizens. Tourism and Int'l Shipping still make up more than 50% of GDP, and then there's trade in agriculture etc. With the flight of capital from the country, the fourth pillar of the economy (Banking) is about to be brought to its knees) but nonetheless, Greece's three main industries are still competitive and they bring in lots of outside dollars. Unless the shipping owners re-register their ships elsewhere--in an incredible show of cowardice--Greece has the easy means of improving the situation of its citizens. A cheaper tourist destination would help people internally. Transferring shipping dollars into a devalued currency would also help. The problem of course is that you'd totally scare away foreign investment (but if you look at the statistics, foreign investment is abysmally low in Greece) and that you'd lock Greeks inside the country, just as they used to be when Greeks used to go on vacation to Bulgaria.

I'd say that Greece is more like Argentina than it is like Haiti.

by Upstate NY on Sun Feb 7th, 2010 at 11:02:10 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

I wonder what that would have done to the peseta if we still had it.

What would likely have happened is that less would have gone toward US treasuries and more would have gone toward the stronger currencies among the largest European trading partners of Spain. Exchange rates are more a function of one's largest trading partners than anything else, with speculator activity being more like random "noise", even when it is deemed a crisis.

Krugman is arguing that the Euro is a policy framework whose purpose and effect has more to do with making the jobs of international bankers and economists easier and more rewarding than making the lives of working class people better. It's still a good argument.

by santiago on Fri Feb 5th, 2010 at 11:55:49 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

Yes, but it's not an argument against the Euro but against (repeating myself) the nationalistic neoliberal refusal to have a European fiscal and economic policy.

A single market begets a single currency which begets a single economic policy. Birth pangs...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 12:03:39 PM EST
[ Parent ]

It's an argument against either (none / 1)

I think Krugman implicitly assumes that it's near impossible to solve the European fiscal and economic policy unification problem given the strength of nationalism, what we know to date about the sources of altruism, and neo-liberal political elements throughout Europe, even with a common currency. But then again, the EU has already implemented similar net transfers of welfare, albeit on a smaller scale, from most of the rest of Europe to (largely) French farmers in its common agricultural policies, so maybe he is too pessimistic.

by santiago on Fri Feb 5th, 2010 at 12:37:29 PM EST
[ Parent ]

Re: It's an argument against either (4.00 / 2)

If he's assuming that he should make the political point explicitly, because he appears to be making a purely economic argument and assuming that the EU is just like the US.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 05:00:00 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

I wonder what that would have done to the peseta if we still had it.
What would likely have happened is that less would have gone toward US treasuries and more would have gone toward the stronger currencies among the largest European trading partners of Spain.

Okay, so the peseta would have depreciated against the ~~Euro~~DM.

But still, Exchange rates are more a function of one's largest trading partners than anything else holds in normal times. This here is a flight to safety by "foreign direct speculators" (and some domestic speculators seeking safety abroad) and has nothing to do with trade flows or central bank reserves.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 12:05:57 PM EST
[ Parent ]

Not so, it's all about trade in the end (4.00 / 2)

Crises provide moments of volatility, but it's persistent structural issues that result in the welfare problems that underlie Krugman's concerns. The longer term planning and budgeting of real industry combined with industry's access to credit markets means that momentary flights to quality have little impact on employment or production decisions. Persistent trade imbalances or fiscal imbalances are what affect employment much more. Absent transfers of European wealth in the form of payments from Brussels to Madrid, and absent migration of Spanish unemployed workers to other parts of Europe, devaluation of the value of Spanish production would be how market actors -- exporters, importers, and domestic producers and consumers -- would limit imports from Germany and other places while increasing domestic production and exports.

Viewed this way, it is easy to see why many economists viewed the Euro as an essentially German scheme to sustain a positive structural trade balance with the rest of Europe, with resulting wealth benefits for German workers, indefinitely.

by santiago on Fri Feb 5th, 2010 at 12:56:19 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (4.00 / 2)

The longer term planning and budgeting of real industry combined with industry's access to credit markets means that momentary flights to quality have little impact on employment or production decisions.

I disagree.

The Indonesia currency collapse of the late 90s thrust the firms whose currency-of-account was the rupiah into the bargain bin and those firms were snapped-up by those whose currency-of-account (US dollar, mostly) became more 'valuable' in relation. This switch in control definitely had an impact on "long term planning" of those firms.

No one could have predicted

by ATinNM on Fri Feb 5th, 2010 at 01:07:27 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (none / 1)

I'm not sure that we can say that change in ownership or control really has an impact on long-term planning regarding employment or production. It would appear to have more of an impact on whether the profits accrue rich Indonesian capitalists or rich foreign capitalists, but this wouldn't affect production or employment in any negative way.

by santiago on Fri Feb 5th, 2010 at 01:28:16 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (none / 1)

The effective employment dropped from around 75% to around 65% in Indonesia in 1997.

Perhaps a 10% drop doesn't seem like much of a change. But I do remember one or two comments about its significance at the time.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Feb 5th, 2010 at 04:39:02 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (none / 1)

Yes, and that's what I believe Stiglitz's point was too: That unfettered currency speculation is NOT good for developing countries, and to make his point he asked the welfare question first: "Who, if anyone, gets hurt by currency volatility in some known cases of major, speculator-induced currency crashes?" He didn't assume, a priori, who the real victims were.

The larger issue with Indonesia from what I remember is that, perhaps like China today, it was trying maintain a given, unsustainable rate that currency speculators sniffed out and moved on, forcing the government to free the exchange, at which point everyone dumped the currency because the arbitrage profit opportunities were over.

by santiago on Sat Feb 6th, 2010 at 01:24:20 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (none / 0)

santiago:

I'm not sure that we can say that change in ownership or control really has an impact on long-term planning regarding employment or production.

If this is the case, then the whole of Irish industrial policy since the '60's has been a waste of time because it was predicated on attracting the EU HQ, R&D and other high value activities of key global firms into Ireland on the basis that more investment would then follow. Thus Microsoft, Oracle, Google, Intel, IBM, Motorola, and a host of big pharma and biotech companies located here, employed thousands, and added billions to our corporate tax take (despite low 12.5% rates) and laregly kickstarted the Celtic Tiger.

They have not left and are still huge employers and value adders, and tax revenue generators and have led to many spin-off investment and expansion decisions because key management were located here - even thought the Irish cost base gradually rose to one of the highest in the world.

As a former long term of an iconic Irish firm taken over by a British one I can also vouce for the fact that slowly, over a decade or so, all top management functions, decision making and corporate biases gradually became British resulting in many illogical pro-British decisions when functions/investments would more cost effectively have been made in Ireland.

Likewise, I would argue, that much of the "City" financial services industry is now located in London purely for historical/cultural/management bias regions and should much more logicically and cost effectively be re-located to Frankfurt, Dublin, or some Swiss Canton.

Change of owner/management control is a vital factor in economic development and investment decisions and cn defy all commercial logic almost indefinitely. It is an economists conceit that cultural, managerial, political, and organisational factors are not key aspects of location/investment decisions.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sat Feb 6th, 2010 at 07:37:25 AM EST
[ Parent ]

Re: Not so, it's all about trade in the end (4.00 / 2)

If this is the case, then the whole of Irish industrial policy since the '60's has been a waste of time because it was predicated on attracting the EU HQ, R&D and other high value activities of key global firms into Ireland on the basis that more investment would then follow.

Two things:
1) There is, indeed, a very large literature in economics, urban planning, policy studies, and other fields that argues precisely that trying to attract employers, especially with subsidies, is usually a worse strategy compared to simply investing in education and transportation infrastructure and attracting employers on the basis of superior efficiency or value added.

But, 2) What you are listing are not, in fact corporate HQ's -- that is, native or resident ownership of production facilities. The firms you describe are all foreign-owned companies, or at least public companies with majority foreign ownership and NO embedded local control over business strategy and policy. So, if other capitalists suddenly took over Google or Motorola because it could pick up their shares for cheap due to the collapse of the US dollar or other currency, there is no reason to think this should have any effect on employment in Ireland whatsoever, particularly if Irish facilities were profitable ones for the larger firms.

by santiago on Sat Feb 6th, 2010 at 01:15:42 PM EST
[ Parent ]

Re: Not so, it's all about trade in the end (none / 1)

I'm not sure that we can say that change in ownership or control really has an impact on long-term planning regarding employment or production.

One can point at evidence to argue either way. If the purchaser is Warren Buffet, or like him, who is interested in a long-term cash flow from ownership/control then there is little to no impact on employment and production -- operation, if you will. If the purchaser(s) are only interested in looting the company for a one-shot, short term, gain then there will be a major impact on the long-term up to and including the existence of the company over the long-term.

No one could have predicted

by ATinNM on Sat Feb 6th, 2010 at 01:36:53 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

The euro is a currency-of-account that may, or may not, make the life of those who produce wealth easier. That last depends on government policy which is not under control of Brussels.

At least as I understand the matter.

Correction requested.

No one could have predicted

by ATinNM on Fri Feb 5th, 2010 at 12:55:56 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

It depends on government policy PLUS inherent advantages or disadvantages that individual countries possess when exposed to a full-on, free trade regime such as the EU. And that's where a fixed currency can benefit some countries in that regime while penalizing lower-income, working people in other countries. The fixed currency imposes constraints on government policy that are only faced by countries where capacities to act have become limited, which means that more workers in countries with fewer constraints gain the benefits of the free trade system at the expense of workers in countries that face more constraints.

by santiago on Fri Feb 5th, 2010 at 01:22:17 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 3)

The Euro is insurance against currency crises. Where "investors" could have crashed, in succession, the currencies of Ireland, Iceland, Greece, Portugal and Spain, they have succeeded only in crashing the Icelandic Krona, and depressed the stock and debt prices of the other countries. Now they have to crash the German and French currency if they want to attack the PIGS.

Given that, at the height of the Asian crisis of 1997, Krugman advocated capital controls and fixed exchange to protect local economies from the capital flight of foreign direct "investors", the Euro has to be a policy win.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 01:41:45 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

Yes, you're exactly right: The euro is a form of insurance against a currency crisis, and having that kind of insurance provides some benefits when the world's financial system collapses like it did. But, like all insurance, it comes with a cost, so the question is, who bears the costs and who reaps the benefits? Would Ireland, Greece, Portugal and Spain have experienced currency "crashes" in the current crisis? Maybe. The risk was certainly higher than it was by belonging to the eurozone, but a lot of it depends upon the size of the country's banking sector in relation to the rest of the economy, and Switzerland and Sweden have big banking sectors and didn't see the kind of crash you're talking about, so we have to talk in terms of probabilities not certainties here.

Then, if a crash does occur, how bad is it really for working class people compared to the trans-nationally active banker and merchant class? In most cases, where, unlike Iceland, a manufacturing and agricultural sectors exists as does the infrastructure for some expansion, even massive depreciation of currency can still be a net stimulus for employment and thus result in a net transfer of wealth from the bankers, merchants, and capitalists to the workers in a given country. A lot depends on the case-by-case particularities, but I don't think we can make a blanket statement that the euro is a policy win for everyone in Europe, particularly the average wage laborer in many countries.

by santiago on Fri Feb 5th, 2010 at 02:19:31 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 3)

I think the policy fail™ is the Growth and Stability Suicide Pact. I should gather my thoughts on that in a diary.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 02:28:36 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 4)

santiago:

massive depreciation of currency can still be a net stimulus for employment and thus result in a net transfer of wealth from the bankers, merchants, and capitalists to the workers in a given country.

It might be, but it's odd how it never seems to work like that.

I'll remind you that massive depreciation of currency is reliably used an excuse for severe monetarist spending cuts, offshoring, and financialisation.

What has happened in practice is that in countries like Greece the required cuts are far lower than would have been 'required' otherwise.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Feb 5th, 2010 at 02:57:42 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

I don't know. I'd like to see the evidence, which I don't have in front of me right now. Do even sudden, large currency devaluations lead to higher employment in export or import competing sectors, or not? I suspect they do if the devaluation is sustained and not just noise along a different trend.

by santiago on Fri Feb 5th, 2010 at 03:11:37 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

The gist I got from Stiglitz's Globalization and its discontents is that these devaluations are a disaster.

You seem to imply upthread that it is possible for these devaluations to be good for workers while hurting the "internationally active firms". If the salutory effect on workers comes about from more favourable terms of foreign trade, how can the sudden bankruptcy of banks and import/export firms due to their foreign-currency liabilities blowing up be a good thing?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 03:23:54 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

I think he was referring to the uncertainty posed by the threat of currency speculators on less developed economies. (He argues, if I remember, for modest taxes on large capital movements in order to scare volatility inducing speculators away.) And yes, even in the case of Indonesia, it is quite possible that workers were hurt on net as well as owners, but we have to look at the actual outcome to be sure -- it's not evident that this should always, or even usually, be the case, which is why I keep saying that currency unions and pegs are case-by-case situations. Just because they work for some countries doesn't mean they'll work for all countries.

And it's not that there is a transfer of wealth from "firms" to workers, but that there is a transfer of wealth from bankers, traders, and firm owners to workers. Clearly if firms go out of business, workers are hurt as well or more than owners. But what I argue is that there is no reason to believe that a flight to the DM in today's Europe would result in the closure of any Spanish manufacturing firms. (It might result in a few banks and merchant houses closing shop, but that's part of the transfer of welfare.)

Spain is not Indonesia, so it's pretty questionable whether currency speculation could result in anything but a very temporary change in the exchange rate. The daily flow of huge amounts of goods and services over borders would have to eventually push rates back to levels consistent with country's current account balances. However, under a fixed rate regime like the euro provides, an imbalance such as high unemployment might only be solved through transfers of wealth from richer countries or migration, both of which are also highly restricted.

I think a large part of the dissonance on this topic comes from two different ways of defining what the EU really is. For many, particularly here, the EU is an institutional framework for international governance, which puts it against the neo-liberal narrative. However, for many others, the EU is primarily a free trade agreement, epitomizing the victory of merchants over the medieval militarists who established castles every few kilometers on the Rhine River to soak the traders on their barges. This view places the EU project squarely in support of the neo-liberal narrative. Generally, common currencies and currency pegging are pro-neo-liberal policies meant to support the welfare of traders and bankers at the expense of workers and local governance, so the establishment of the euro ahead of a stronger, continental welfare policy framework can look alot like the neo-liberals are winning.

by santiago on Fri Feb 5th, 2010 at 04:20:34 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

santiago:

And it's not that there is a transfer of wealth from "firms" to workers, but that there is a transfer of wealth from bankers, traders, and firm owners to workers.

Citation needed.

Preferably more than one.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Feb 5th, 2010 at 04:28:02 PM EST
[ Parent ]

This isn't a sourced entry (none / 0)

It's a definition of the terms being discussed. Firms don't own things -- people do. So when economists talk about the welfare effects of policies, they are not referring to inanimate objects or metaphysical placeholders for real people. They are talking about real live people, some of whom win at the expense of other real live people. Capiche?

by santiago on Fri Feb 5th, 2010 at 07:02:53 PM EST
[ Parent ]

Re: This isn't a sourced entry (none / 0)

Firms don't own things -- people do.

Legal persons own things.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 07:31:22 PM EST
[ Parent ]

Re: This isn't a sourced entry (none / 0)

Yes, but that's not what relevant when trying to determine welfare effects of policies. We care about what the agents and principals in a firm are doing and how they make out in the end, not what their avatar does.

by santiago on Sat Feb 6th, 2010 at 12:58:44 PM EST
[ Parent ]

Re: This isn't a sourced entry (none / 1)

That has nothing - at all - to do with the question.

The question is - what evidence do you have that proves your contention that wealth is transferred from owners to workers?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Feb 6th, 2010 at 05:56:02 AM EST
[ Parent ]

Re: This isn't a sourced entry (none / 0)

Oh, sorry. I'm not claiming that this what definitely occurs. I'm saying that this is what needs to be researched on a case by case basis before one can claim that currency devaluations are a bad thing for social equity and welfare.

The same question goes the other way: What evidence do you have that wealth is transferred from workers to owners when a currency crisis occurs? It might just as easily be a transfer of wealth from capitalist-owners to capitalist currency traders and thus have only minor welfare effects in terms of workers and other more vulnerable populations.

by santiago on Sat Feb 6th, 2010 at 12:39:31 PM EST
[ Parent ]

Re: This isn't a sourced entry (none / 1)

I would guess it depends on political climate and the actions it begets, rather then economics.

Sweden had in 70ies and 80ies fought unemployment with a series of devaluations, all the while having a high inflation which ate the gains of the devaluations. This had several effects, one of them was creating a generation with next to no mortgages on their houses, as inflation had been higher then interests rates for a long period.

On the other hand Sweden had a currency crises in the early 90ies which served as the starting point for neoliberal reforms and the socdems taking the third way. Similar crises, same country, different result.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Feb 6th, 2010 at 03:30:28 PM EST
[ Parent ]

EU side story (4.00 / 3)

For many, particularly here, the EU is an institutional framework for international governance, which puts it against the neo-liberal narrative. However, for many others, the EU is primarily a free trade agreement, epitomizing the victory of merchants over the medieval militarists who established castles every few kilometers on the Rhine River to soak the traders on their barges.

I like that description of the debate.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 06:06:31 PM EST
[ Parent ]

Merci n/t (none / 0)

by santiago on Sat Feb 6th, 2010 at 01:04:54 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

Spain is not Indonesia, so it's pretty questionable whether currency speculation could result in anything but a very temporary change in the exchange rate.

It is also questionable whether a 6% stock market drop could result in anything but a very temporary loss of loan collateral for shereholders. And yet the political class is in a panic over "investors" because the dominant ideology tells them to.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 07:33:32 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

That's the whole point. Just because the political and chattering classes make a big deal of something, doesn't mean that it truly is a problem for working people. It might just be a bigger, insider problem for the elite than it is for most other people.

by santiago on Sat Feb 6th, 2010 at 12:43:19 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

the establishment of the euro ahead of a stronger, continental welfare policy framework can look alot like the neo-liberals are winning.

It's not for nothing that I sometimes say that the Brussels Consensus is taking the place of the Washington Consensus with much the same effects.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 07:35:13 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

And it's not that there is a transfer of wealth from "firms" to workers, but that there is a transfer of wealth from bankers, traders, and firm owners to workers.

This is like when you were claiming a housing bubble followed by a wave of defaults is a net transfer of wealth from financiers to homeowners.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 05:15:37 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

It might be such a transfer. My point is that we can't assume that it goes the other way either, a priori. Economically, the outcome could be either, and there's not even much reason to think that one way is any more probable than the other without actual empirical evidence to show the direction of welfare effects occurred. That's what welfare economics is all about, anyway -- that you can't assume you know the real winners and losers without defining your categories well and looking at the actual evidence.

by santiago on Sat Feb 6th, 2010 at 12:50:50 PM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 3)

The gist I got from Stiglitz's Globalization and its discontents is that these devaluations are a disaster.

I got the same gist from living through a few of them. After first continuing to drop, employment will pick up in their wake, but the spread of poverty will be a more lasting effect. And the next crisis will come certainly, especially after tax cuts.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Sat Feb 6th, 2010 at 04:11:13 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

What, no net transfer of wealth from the owners to the workers?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 04:55:42 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

No.

Although in fact a wave of deliberate defaults would be an efficient way to make that happen.

E.g. In the UK, many credit card agreements are legally unenforceable. Many mortgage companies in the US and the UK - and probably elsewhere - are unable to supply proof of ownership or proof of debt.

And so on.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Feb 6th, 2010 at 06:02:02 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 4)

many credit card agreements are legally unenforceable. Many mortgage companies in the US and the UK - and probably elsewhere - are unable to supply proof of ownership or proof of debt.

In fact, the creditors are banking on the fact that The Poor are Honest (diary by Chris Cook) a year ago

"What is it?" I asked, imagining that he was about to come out with yet a new junk mathematics formula?
"The poor are honest," he said, accompanying his words with his jaw dropping open as if to say, "Who could have guessed?"
The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today's neoliberal Chicago School language, the poor behave "uneconomically." That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 06:09:42 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

Norm asymmetry? (found 2 weeks ago in the Salon):

Economic View - Will More Borrowers Walk Away From Their Mortgages? - NYTimes.com

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.

by Bernard on Sat Feb 6th, 2010 at 01:33:13 PM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

And when Ireland had the Punt (which was never really separated from Sterling in the minds of global investors) we ended up with the worst of all worlds. Devaluations in line with Sterling and massive interest rates to reflect the risk of our punt largely because it was small, and therefore, by their definition vulnerable. (I well remember paying 15% on my house mortgage - and that was cheap compared to unsecured loans). The devaluation also caused massive inflation so that any competitive advantage gained by industry was relatively short-lived.

The problem with devaluation as a strategy for small countries' currencies is that it results in only a short term re-adjustment of the cost base, to be rapidly eroded by inflation, and carries a huge "exchange risk" price tag in the form of higher interest rates almost on a permanent basis.

The Euro in large part caused and also ended the Celtic Tiger. Businesses used to high and fluctuating interest rates could now plan on the basis of low and stable German style interest rates. This led to rapid expansion and inflation which should have been counter-balanced by fiscal policy in the absence of independent monetary policy levers.

Unfortunately the Government, for political popularity reasons acted in a pro-cyclical fashion, and the ECB rates - at first far too low - were then raised just as we were going into recession and needed them reduced. So we are always going to pay a price for ECB rates being determined by the Franco-German business cycle and need to use fical policy to counterbalance this.

However, otherwise, we benefit greatly from having a common currency with most of our main tarding partners, and from the protection the sheer size of the Euro gives us from speculators.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sat Feb 6th, 2010 at 08:23:00 AM EST
[ Parent ]

Re: Will PIIGS Fly? (4.00 / 2)

massive interest rates to reflect the risk of our punt largely because it was small, and therefore, by their definition vulnerable. (I well remember paying 15% on my house mortgage - and that was cheap compared to unsecured loans).

I think everyone was paying double-digit interest rates for mortgages in the 1980's, not just "peripheral" economies.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 08:24:56 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

There was certainly a huge premium on Irish rates compared to UK rates at the time - I don't know anything about other EC rates at the time.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sat Feb 6th, 2010 at 08:30:17 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

Britons sometimes complain about how hard it was to get a mortgage back then and the high interest rates and down payments, and how wonderful financial engineering has been for allowing people to finally get on the property ladder. (The last time I heard this said with a straight face in front of a roomfull of people was a couple of weeks before the Lehman Brothers collapse...)

Anyway, Volcker raised interest rates above 20% in 1982 and that propagated to the whole world...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 08:45:31 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 1)

However, otherwise, we benefit greatly from having a common currency with most of our main tarding partners, and from the protection the sheer size of the Euro gives us from speculators.

In addition, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. The fact is that just the impossibility of an attack on the currency has allowed the Irish government to get away with a blanket guarantee of all liabilities or all banks (which adds up to several multiples of GDP) without having to actually make good on it or accounting for it explicitly as government debt. If you had had the punt, the reaction of the markets would have likely turned that massive contingent liability into a disaster. But the markets can't attack the Deutsche Mark so the Irish government gets to make promises they can't possibly keep because they won't likely be forced to make good on them.

NAMA is a different issue - that's an actual, not contingent, liability.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 08:29:31 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

Migeru:

NAMA is a different issue - that's an actual, not contingent, liability

Nah - its off balance sheet - in a special purpose vehicle - so its not really real in the world of "modern" accounting.

If there is a negative with the Euro for us, it is that it made the lunacy of the bank guarantee to bond-holders possible. Otherwise we would (presumably) have let the banks go into into examiner-ship (our Chapter 11) or some such purgatory, and reconstituted them as new banks the next week - with shareholders and non-senior bond-holders and not taxpayers taking the hit.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sat Feb 6th, 2010 at 08:42:47 AM EST
[ Parent ]

Re: Will PIIGS Fly? (none / 0)

If there is a negative with the Euro for us, it is that it made the lunacy of the bank guarantee to bond-holders possible.

Like I said, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. It's a mixed blessing. I'm not sure what's worse for ordinary people. Systemically, in the long term, maybe the smoking crater is preferable. But zombie banks are less immediately painful.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 6th, 2010 at 08:48:45 AM EST
[ Parent ]

Ireland (4.00 / 5)

is getting special treatment because it has already implemented wage cuts. Wage cuts, like tax cuts, are always a Good Thing.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 11:00:05 AM EST

Re: Ireland (4.00 / 5)

Can someone please explain to me why during a time when economic activity needs to be increased removing money from those who generate 70% of economy activity is a Good Thing?

No one could have predicted

by ATinNM on Fri Feb 5th, 2010 at 12:53:11 PM EST
[ Parent ]

Re: Ireland (4.00 / 5)

More for Me™

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Feb 5th, 2010 at 02:58:31 PM EST
[ Parent ]

O/T Meta Observation (4.00 / 6)

Find it strange that corporation use accrual accounting and nobody says nothing yet governments are analyzed using cash accounting. If corporations were held to the same "standard" they'd be in receivership.

No one could have predicted

by ATinNM on Fri Feb 5th, 2010 at 12:49:23 PM EST

Re: O/T Meta Observation (none / 1)

It's worse. At least corporate balance sheets have equity.

The closest a nation has to equity is notes and coin, and of course, QE, which is analogous to a redeemable preference share.

I reckon - and both Taleb and Buiter are making noises along these lines - that the solution to the credit crunch lies in a debt/equity swap on a cosmic scale. Just not equity as we know it, Jim.

It could be a sort of a once and for all Jubilee, if you think about it.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Sun Feb 7th, 2010 at 06:21:58 PM EST
[ Parent ]

Re: O/T Meta Observation (none / 0)

Distributing some form of equity in/for government and other Public bodies and functions seems, to me, a route to disaster. Major corporations already have de facto control over the government, at least here in the US. Giving them de jure control as well fills me with dread.

No one could have predicted

by ATinNM on Tue Feb 9th, 2010 at 01:00:14 PM EST
[ Parent ]

Re: O/T Meta Observation (none / 0)

You mean that only governments debts and not their assets are counted? And what with the comparison with GDP?

Me thinks it is propaganda to create the proper climate for neolib reform.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Mon Feb 8th, 2010 at 09:02:27 AM EST
[ Parent ]

Re: O/T Meta Observation (none / 0)

You mean that only governments debts and not their assets are counted?

Essentially, although there's a bit more to it.

No one could have predicted

by ATinNM on Tue Feb 9th, 2010 at 12:30:21 PM EST
[ Parent ]

Piigs won't fly (none / 1)

Piigs label too ham-fisted for Barclays - The Irish Times - Sat, Feb 06, 2010

AT BARCLAYS Capital, Piigs won't fly. The securities unit of London-based Barclays told analysts yesterday not to use the acronym for Portugal, Italy, Ireland, Greece and Spain in notes to clients. The memo was sent to research staff.
The Piigs nickname has grown increasingly popular in the last month as investors dumped assets in the euro zone's smaller economies due to concerns the countries will struggle to control budget deficits. "By denigrating a nation in the process of trying to describe a financial situation, it sort of puts the people in that country behind the eight ball," said Peter Sorrentino of Huntington Asset Advisors, who is visiting Italy in March. "It serves no one's interest. We're all in the same boat together."
Investment banks from Citigroup to JPMorgan Chase have used the term in research reports. There were no instances of it in Barclays notes obtained by Bloomberg. - (Bloomberg)

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon Feb 8th, 2010 at 04:54:58 AM EST

Will PIIGS Fly? | 82 comments (82 topical, 0 editorial, 0 hidden)

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