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The implausible in pursuit of the indefensible?

Stephanie Flanders | 12:32 UK time, Tuesday, 16 November 2010

When Ireland explicitly guaranteed all the liabilities of the Irish banking system just over two years ago, the finance minister, Brian Lenihan, said it was "the cheapest bank bailout in the world."

It is turning out to be very expensive, not just for Ireland but for the whole of the eurozone. The European ministers meeting in Brussels today know that they have also made promises to the markets that they will find hard to keep.

Let me explain. Ever since this crisis began, the response by European policy makers has been centred around a promise that bondholders would be compensated in full for their investments - and a hope that this proposition would never seriously be tested.

Now that promise is being tested, in Ireland, which probably has the greatest mountain of problematic bank debt, relative to its economy, of any eurozone economy.

European investors and taxpayers look at Ireland, and they start to see what that promise to bondholders actually entails, not just for Ireland but for rest of the zone. And what started out as implausible, begins to look downright indefensible.

I've been banging on about the ECB role in the saga for months (see, for example Greek sovereign debt: Exit closed? and Ireland: A problem soon to be shared). Robert Peston provides a very useful reminder of the numbers involved in his two latest posts (How big is Europe's crisis? and Will the ECB pull the plug on Ireland?)

By providing cheap and unlimited liquidity to banks, the ECB has effectively found itself filling the gap between what the European governments had promised to the bond markets, and what they can actually afford.

Graph showing ECB support to banks

It has, to put it mildly, not been comfortable with playing this role. And in recent months senior ECB figures have been making their reservations felt, pressing governments to decide exactly how much they were going to support troubled economies like Ireland, and on what terms.

This has combined with the German chancellor's understandable - but deeply inconvenient - desire to send a message to German taxpayers and the markets that the promise to always and everywhere bail out bondholders has a use-by date. Come 2013, anyone buying eurozone sovereign debt should expect to pay the price for their mistakes (see my post From 'competitive depreciation' to 'competitive miscommunication').

As a result, this looks very like crunch time for eurozone ministers.

As I said on the Today programme this morning, perhaps the biggest flaw at the heart of the eurozone system was its version of the "Three No's": there would no exit, no bail-outs, and no default. That's possible in a perfect world where no country ever gets into trouble.

In the real world, when countries have crises, at least one of these rules will inevitably be broken. The founders planned for success, and didn't make much provision for failure.

In those fateful weeks of April and May, the eurozone governments decided to suspend the ban on bailouts right now, with a quiet promise (to Germany and others) that the "no default" rule would be lifted in future, when the crisis was past. But even here, they were planning for success without really preparing for failure.

Looking at the sovereign borrowing of all of the peripheral economies, and the debts of their banking systems, no serious investor expects every penny of that money to be repaid.

Even if it were possible politically, I doubt there are many people who think it would be healthy for Europe's economy or its democracy to transfer all of those obligations to the public balance sheet, to be financed by repeated rounds of fiscal austerity.

In reality, as we see in Ireland, transferring all of those obligations tends to make a much more damaging sovereign default that much more likely.

Understandably, European governments are desperate to avoid a conversation about how - and how far - the debts of European banks or countries might be restructured. So they keep promising that governments will stand by their banks, and the eurozone system will stand by their governments.

But investors ought to be asking themselves which would be more damaging to the long-term value of eurozone assets: governments breaking their promises to eurozone private bondholders, or governments trying to keep them?

PS You can hear me discussing the consequences of Ireland's economic woes on the rest of Europe with the BBC's political editor Nick Robinson on the Today programme:

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Comments

Page 1 of 3

  • Comment number 1.

    The truth is very little has changed since you coined the acronym PIIGS other than the size of the problem has grown. I know the Europhiles want it all to be better but until they get their house in order nothing is going to change. And Even the President of the EU knows this and the severity of their predicament. I think he has set out the severity well and that the very existence of the Euro and even the EU is at stake if they don't get this rite.

  • Comment number 2.

    112. At 11:32am on 16 Nov 2010, you wrote:
    So following on from yesterdays bombshell that Greece owes more than was thought. Now we have the Irish saying they don't want a loan but the EU saying you have to take it. After all Auntie knows best for you have debts that you can't afford and no one wants to lend you any more money. Good, you may well think, the only problem is that it was Auntie who let you get into this state and worst of all, is that your brothers and sisters are in an equally bad situation, but no one is supposed to know that yet, it's a secret.

    And now the unelected President of the EU, a mainly unelected institution says that unless they can solve this problem it could be the demise of the Euro and probably bring down the EU. I can see why he president as he must have a degree in stating the bleeding obvious....

    At the same time we have a release from the ECB saying that they could be forced into pulling the plug..... They may well be trying to throw the baby out with the bath water.

    And the EU keeps on trundling along arguing about it's budget and trying to get us all to put more into it's collection plate. It does remind me of one of those evangelists down in the South of the US of A. You know the ones who are on the telly. They collect millions for their ministry for it only to come out that it has been spent on wine, women and ***. The only difference is that we already know that the EU is wasting our hard earned money and we keep on popping the money into it's collection plate. Where as at least the the Americans stop donating and throw the minister in prison...

    However we are all OK as inflation has risen once again so we don't have to worry about the perfect storm...... just worry about paying the bills.


  • Comment number 3.

    Bailing-out the banks without sufficient safegaurds back in 2008 has led straight to this position. Nation-states and their banking systems have merged seemlessly into one corporate entity. Ideas of market competition and even fundamental supply and demand balances have been abandoned in favour of the corporate state. A present 'we' are locked into the death-spiral of banking failure and ever-increasing taxpayer liability. Is there a way out? I can't see one.

  • Comment number 4.

    "So they keep promising that governments will stand by their banks, and the eurozone system will stand by their governments".

    They can promise what they like but their promises are worthless. The Euro is in terminal decline and the EU is in denial

  • Comment number 5.

    It is difficult to know what the answer is to this crisis. As someone who lives in Brussels I can say that we are all getting very tired of this.

    My feeling is that the Euro will fail, and with it the Eurozone.

    Amongst Europeans there is very little enthusiasm either for the EU or the Euro. It is only the eurocrats employed in Brussels who are fighting for the survival of the Eurozone. After all, where will they get such a good job again?

    For most Europeans that I talk to, they want the Euro put out of its misery!

  • Comment number 6.

    If the EU has any long term value it will seek ways of working together to grow its way out of the crisis and think more long term in financing rather than crisis bail-out. The Eurozone is potentially as strong as its weakest link and the Irish seem to have figured this out. Their possible default is a threat to the whole and so it would seem they are into negotiation. If others adopt a similar approach the Franco German axis will have to re-think the whole approach to recovery and the Euro. The alternative is several successions from the Euro with big devaluations, rescheduling of debt etc. Is this what the founders of the common currency had in mind?

    An excellent dilemma posed at the end. What would be silly is for governments to wind their economy down through more cuts which will make the quality of the 'hosted' debts worse but isn't that what Ireland is doing and the UK, but at a more gentile pace?

  • Comment number 7.

    This economic commentary is descending into semantics now.

    Countries have to make and sell things to survive in the world. The end.

    You can't borrow your way out of debt. We can't, Ireland can't.

    Stephanie - you're the economist - you figure it out.

    The only way forward is default and pull out of the EU and Euro and for the PM to stand up and say what the way forward is.

    I think China engineered all this going back over a decade. What will their next move be I wonder? Alliance with N Korea and then..?

    GC

  • Comment number 8.

    You've hit the nail on the head, Stephanie, when you say that 'The founders planned for success, and didn't make much provision for failure'.
    The whole premise of the single currency was that it HAD to work - despite us 'armchair economists' out here in Realityland puzzling over how one size could possibly fit all those diverse national economies - added to which of course, with a few exceptions, the countries of the Eurozone set about breaking the tight fiscal rules required by membership of the Euroclub.
    We live in interesting times, that's for sure...

  • Comment number 9.

    Just think, if the euro implodes and takes the EU down with it, how much better off will European nations be? If we in the UK aren't sending however many millions of pounds every week to the corrupt and wasteful eurocracy we might even be able to make the trains run on time.

  • Comment number 10.

    With Europe without audited accounts for 8 years from what I read, can we really expect things not to be abused and go wrong.

    There are too many measures that have glossed over to bring countries into the EU and now the EU is facing that lack of focus head one, as the mess created by rushed poor decisions starts to unravel.

  • Comment number 11.

    #3 TheNewPonzi. You describe the position accurately. There is a name for the current situation - it is called Fascism, and it has been tried before with well known consequences.

    The way out is to depose the fascists, institute a debt jubilee, prosecute criminals and re-establish the rule of law. It is oh so simple.

    That none of this will happen tells you that the vast mass of the people must in someway be looking forward to total economic annihilation.

  • Comment number 12.

    . At 12:54pm on 16 Nov 2010, Chris London wrote:
    "the very existence of the Euro and even the EU is at stake if they don't get this rite."

    As in 'last'? :)

  • Comment number 13.

    #8 david. If only it were so, if only the BBC had hit the nail on the head. Sadly just more misdirection.

    No-one plans for failure in the simplistic way suggested. There is no plan in the UK for the failure of sterling, there is no plan in Japan for the failure of the Yen and there is no plan in the US for the failure of the $.

    Right now all fiat currencies everywhere are in imminent danger of failure. How much better for the BBC to ignore that truth and subliminally invite the mockery of mainland Europe.

  • Comment number 14.

    #13 Sterling cannot fail nor can the Yen or the dollar for the simple reason that if nothing else works the govts of UK, Japan and USA can print more of the stuff. Fundamentally that is the advantage of taking on debt in the currency you control. There are of course consequences of printing lots of the stuff - hyper inflation a la Weimar Republic being the main one but a controlled printing operation can work, after all QE has not significantly increased inflation...yet.

    You are picking up buzz words such as fiat currency (as others have on fractional reserve banking) and labelled that as the fundamental problem without any real justification

  • Comment number 15.

    Monetarily speaking, individuals can, and often should be allowed to fail, banks to, but not nations.

    The ECB will have to print some money and give it Ireland, and then print some more and give it Greece, Spain, Portugal et al.

    The prudent won’t like it of course, but that’s just hard lines.
    No point being in a Union, if you’re just going to stand by and watch the destruction of your fellow members.

    It ceases to be a European Union if they let member states fail, it just becomes a European nonsense.

    No Bailout = No Union
    No Union = No need for Euro Politicians

    Now what would you push for if you were a Euro politician?

  • Comment number 16.

    The Germans are quite right to raise the issue of so-called moral hazard. Why on earth should taxpayers guarantee the risks taken by financial institutions?

    The banks would say: "if we go bust, the whole economy comes down too", but as things stand the banks survive while millions of individuals go bust. Is this really any better?

    If the euro is to survive - and we should hope it does - its member countries will have to agree to a common set of fiscal rules.

  • Comment number 17.

    The connection between the EU (set of treaties on trading and connected issues) and the euro (commitment to common economic policies) is surely overplayed. Would the collapse of the euro necessarily threaten the EU structures, including as they do nations outside the Eurozone?

    I could never see Germany and Greece sharing a currency sustainably, and opposed the idea of the UK joining in the euphoric jamboree. But it's great that we can all trade with each other, tariff-free.

  • Comment number 18.

    Interesting to ponder the fact that Ireland started their programme of public spending cuts in December 2009 to try and counter their massive deficit.

    It would seem this has tipped them over the edge becaue they could not climb back from it fast enough.

    And the fate of the UK next year following its spending cuts this autumn?

    I wonder..............................

  • Comment number 19.

    "In the real world, when countries have crises, at least one of these rules will inevitably be broken. The founders planned for success, and didn't make much provision for failure. "

    Yep! It was all to be onwards and upwards for Europe to become a single nation state and the World's dominant economic power, unfortunately this flew in the face of economic reality.

    For all the speculation about "The End of the Euro" just how plausible is that? I live in NI and I remember the mammoth logistical effort in the days leading up to the switchover with every ATM across Europe having to be emptied and refilled within a few hours. If you were going to leave the Euro just what would happen? How long would it take for Punts, Drachmas and Pestas to start circulating again and what would happen in the interim?

  • Comment number 20.

    Angela Merkel's administration worries that the forms of bailout could be regarded as unconstitutional and wants a new codified law with all of the checks and balances to protect Germany from being de-facto guarantor of last resort. Instead of a European Union she is starting to see something starting to look like a liability transfer pact which her voters might not tolerate.

    No Euro-fudge is available on this....

  • Comment number 21.

    #14 Justin150. Hyper inflation effectively destroys a currency.

    You suggest I provide no justification, but where is yours? On what basis do you believe that a "controlled printing operation can work"?

    There are plenty of signs of inflation. Look at commodity prices for pretty much any commodity you can think of. Look at prices for precious metals.

    Look at the way the kleptocracy produces inflaion statistics, ask what such things as hedonics are designed to achieve if not to suppress reported inflation numbers.

    Look at the real aim of money printing - i.e to hold up asset prices at a level far in excess of fair value. If money printing is so successful why are asset prices falling and commodity prices rising. Could it be that all the funny money is being diverted into commodities and away from assets?

    Even if it achieved its aim of keeping asset prices at a level above fair value, why would this be beneficial for the long term health of the economy? How would anyone afford those assets without access to continual free money? How can you have controlled printing when you need to print without end and without limit?

  • Comment number 22.


    Society seems to prefer to live in state of denial, rather than face facts. Our government knows , the EU knows

    that lreland will have to pass round the begging bowl, but their government refuses to face the reality of their

    situation. WHY!!!!!! The PIPER has to be paid. Perhaps Ireland would prefer to take the EU down with the sinking

    ship. Perhaps it might be the best thing to happen to the eurozone, then we can all start with a clean slate.

  • Comment number 23.

    I told you so! Many, many times ...

  • Comment number 24.

    The actual Euro problem is the UK City's position (that they want to destroy the Euro or give the appearance of doing so).

    They want to destroy it because if it is successful then they will make less money from arbitrage and exchanging money.

    They also want to make as much a 'to do' about the Euro so as to convince gullible fools to part with their money for a cheap price so the bankers can make to maximum profit when it turns out that the Euro is a strong currency. To this end the BBC's commentators are being used as dupes.

  • Comment number 25.

    No currency union has ever survived without political union but the lessons of history are rarely learnt.
    There will be some unravelling of the Euro sooner or later-probably sooner as things now appear.
    When the single currency was introduced I was constantly told that sterling joining it was inevitable. Death is inevitable but fortunately we didn't commit currency suicide.

  • Comment number 26.

    14. At 2:35pm on 16 Nov 2010, Justin150 wrote:

    "#13 Sterling cannot fail nor can the Yen or the dollar for the simple reason that if nothing else works the govts of UK, Japan and USA can print more of the stuff. Fundamentally that is the advantage of taking on debt in the currency you control. There are of course consequences of printing lots of the stuff - hyper inflation a la Weimar Republic being the main one but a controlled printing operation can work, after all QE has not significantly increased inflation...yet."

    You seem a little confused Justin.

    When you have hyper-inflation the currency HAS FAILED!

    In Weimar, when the new currency, the Rentenmark, replaced the worthless Reichsbank marks on November 16, 1923, it was at 1 Rentenmark to 1 Trillion Reichsbank marks (12 zeros were removed).

    And to all those who think the UK can not default because it can just print more money -wrong!

    Printing money is defaulting!



  • Comment number 27.

    You should all navigate over to the Irish Times website and read the commentary by Prof. Morgan Kelly - an economist from UCD. He's been calling the shots correctly since the beginning of the Irish crisis.
    http://www.irishtimes.com/newspaper/opinion/2010/1108/1224282865400.html
    What he has to say about the state of Ireland's finances, and the people who run the banks, government and big business makes shocking reading. For him, the bank bailout is just the first stage in the collapse.
    I quote "As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them."
    The next stage is mass default on unsustainable mortgages.
    I quote "Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started."
    And finally "With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s: we get to survive.
    How low is sufficiently low? Economists have a simple rule to calculate this. If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time. After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us.
    This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a State bankruptcy that will destroy what few shreds of our international reputation still remain.
    Why would the ECB impose such a punitive interest rate on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control."
    It seems many people agree with him, except of course government ministers, bankers and the property developers.
    Little changes. I feel a deep sadness for the people of Ireland, I really do.

  • Comment number 28.

    21. At 3:17pm on 16 Nov 2010, armagediontimes wrote:

    'Could it be that all the funny money is being diverted into commodities and away from assets?'

    You are almost there...

    Ask yourself these questions:-

    Who is buying the commodities?

    Who is printing money?

    What was the banking dynasty name Robert Peston dropped into his blog oh so cryptically today?

  • Comment number 29.

    Would be nice if one or more countries just repudiated the debt. As the debt is a result of the gambling and unregulated lending of the banks. Banks gave loans with nothing to back the loans. The banks are the ones responsible and bought off the governments with favorable ratings from the rating agencies controlled by the banks.
    It is time to start acting on behalf of the citizens and let the banks learn the lesson of responsbility. Will prevent the banks from doing this again...until they figure out a way to do it again. Nationalizing the banks should be put up for discussion as there may not be another way out of this situation. There is nothing sacred about banks, in fact the history of banking is nothing more than abuse of nations and individual depositors.
    The Medici family would be pleased with the current situation between governments and bankers....it hasn't really changed.

  • Comment number 30.

    Ahhh John from Hendon...the demise of the Euro is an evil plot hatched in the City. Even in these suspicious times you might have a problem making that one stick!

    It's hard to see the Eurozone collapsing because "turkeys don't vote for Christmas" and expediency will see the necessary but politically unpalatable actions taken just before the crisis overwhelms us! As a mildly Eurosceptic Brit this is at first glance rather funny...even my own predictions for the Euro from a decade ago are coming true, which gives me a totally false sense of satisfaction and belief in my own predictive powers!

    Look closer though and this is far from funny! Millions of people around Europe will pay a terrible price for the misty-eyed idealism of a vague coalition of centre-left, proportionately-represented, anonymous euro-politicos who believed that the currency markets would help deliver the deep political union that the Continent's citizen's were luke-warm about. The UK was characteristically prescient in recognising the structural risks and loss of flexibility and refused to join (a long overdue thank-you to John Major and Norman Lamont), though it did help spark the Balkan War (the UK's quid pro quo for the Maastricht opt-out was to agree not to veto Germany's desire to recognise Croatia as a sovereign state...and we all remember where that led!). The economic fallout though will rain down over these islands and we will be badly affected by loan defaults and the collapse of important export markets.

    Herman van Rumpuy has made an emotive speech about "No Euro = No EU!" This in itself is alarmist and sounds more than a little self-serving. The EU limped along for the best part of 40 years without a single currency and it could do it again. Perhaps some nations will have to face facts and secede from monetary union. Perhaps others could stick within a shrunken Euro-bloc. To suggest however that we would lose everything, even the bits about the EU that are really positive and useful, is panic-mongering.

    Ironically, Angela Merkel is facing two ways on this! She has to placate angry German voters who are getting the "Das Daily Mail" version in which honest volk are paying for their feckless neighbours. At the same time though she has to manage Germany's industrial complex that has grown one of the biggest current account surpluses in the world on the back of a Euro depressed way below a proper currency valuation for the German economy by its "Club Med" neighbours.

  • Comment number 31.

    9. At 1:39pm on 16 Nov 2010, ThoughtCrime wrote:
    Just think, if the euro implodes and takes the EU down with it, how much better off will European nations be? If we in the UK aren't sending however many millions of pounds every week to the corrupt and wasteful eurocracy we might even be able to make the trains run on time.


    'the trains run on time', oh they will when the Germans replace the EU with something else.

    Europe will not go back to a collection of Nation States.

    This crisis will resolve itself when the PIIGS are allowed to default; massive 'haircuts' all round are unavoidable.

    How much of Euroland is actually rotten. A minority. There is no issue with the core.

    Politicians are timid animals who inhabit that space behind the curve.

    Time to loosen the safety valves. Default, PIIGS, default.



  • Comment number 32.

    If the Euro is a basket place why is it worth 85p UK and USD 1.35.
    It still seems pretty strong to me.

    We had £1 = Eu 1.40+ stable for 2 years+, just before the 08 crash.
    Now we are at £1 = Eu 1.17.
    If the Euro is in crisis what does that say about the GBP?

  • Comment number 33.

    How much more of a hammering can this deeply flawed monetary union take?. Increasingly looking like, as some economists argue here, including Stiglitz, http://www.mindfulmoney.co.uk/1767/economic-impact/all-eyes-on-germany-as-eurozone-crisis-rumbles-on.html, that Germany in particular will need to exit euro allow some ‘orderly’ resolution of the mess. “The founders planned for success, and didn't make much provision for failure”...very nicely put...as I recall those founders used to pooh-pooh economists warnings about the euro, their predictions of the kind of fractures now taking place, taking pride instead in the fact that it was a political project above all. How the chickens have come home to roost.

  • Comment number 34.

    30. At 4:12pm on 16 Nov 2010, Anglophone wrote:
    ...to manage Germany's industrial complex that has grown one of the biggest current account surpluses in the world on the back of a Euro depressed


    Dated and devoid of facts. Industrial Complex (Krupp is long gone). FYI - Service sector 70% manufacturing 29%.

    Depressed Euro. It was 1.45 to £1 just 5 years ago.

    I would suggest 'biggest current account surpluses in the world ' more due to exporting quality around the world.

    Best till last.
    'The UK was characteristically prescient ' LOL

  • Comment number 35.

    32. At 4:24pm on 16 Nov 2010, jacko wrote:
    If the Euro is a basket place why is it worth 85p

    The German Euro is probably worth £1.50
    The rest of the Eurozone Euro.. about 20 pence.

    That, in a nutshell, is the problem

  • Comment number 36.

    Hi Stephanie
    Thanks for the update on the situation for Ireland and Portugal. I enjoyed your references to your articles and went back to your update in December 2009 which you have not referred too.
    "I don't think that the likes of Greece or Ireland - or Spain - will default on their debt, or even come close."

  • Comment number 37.

    • 14. At 2:35pm on 16 Nov 2010, Justin150 wrote:


    You are picking up buzz words such as fiat currency (as others have on fractional reserve banking) and labelled that as the fundamental problem without any real justification
    ........
    The justification can be found here
    http://www.delanion.com/Dying%20of%20Money.htm
    and here
    http://www.positivemoney.org.uk/
    as I have pointed out many time before. Why dont you read them.

  • Comment number 38.

    • 21. At 3:17pm on 16 Nov 2010, armagediontimes wrote:
    #14 Justin150. Hyper inflation effectively destroys a currency.

    You suggest I provide no justification, but where is yours? On what basis do you believe that a "controlled printing operation can work"?

    There are plenty of signs of inflation. Look at commodity prices for pretty much any commodity you can think of. Look at prices for precious metals.

    Look at the way the kleptocracy produces inflaion statistics, ask what such things as hedonics are designed to achieve if not to suppress reported inflation numbers.

    Look at the real aim of money printing - i.e to hold up asset prices at a level far in excess of fair value. If money printing is so successful why are asset prices falling and commodity prices rising. Could it be that all the funny money is being diverted into commodities and away from assets?

    Even if it achieved its aim of keeping asset prices at a level above fair value, why would this be beneficial for the long term health of the economy? How would anyone afford those assets without access to continual free money? How can you have controlled printing when you need to print without end and without limit?
    ...........
    Nicely put. QE is no solution. The problem is debt, and it has reached a level that cant be repaid. Trying to dilute it is and will continue to cause chaos.

  • Comment number 39.

    #31 Richard Dingle. Try looking at some actual facts. Take Deutsche Bank - currently hiding larger losses than the entire German GDP. Have a look at the Landesbanks, and recall how the losses at Hypo Real Estate rose from $40 billion to $102 billion in the course of one weekend.

    Take a look at Austrian exposure to the east, and ask why French banks have essentially taken all of French pension fund assets and invested it in the PIIGS.

    Systemic collapse is unavoidable.

  • Comment number 40.

    I cannot imagine that some people in Brussels are not now putting together an exit strategy from the Euro. They can't say they are doing it in public or the euro would tank. But the experiment has failed and find a way out they must. Let us be thankful that we kept out. There are bound to be consequences for us, but nothing like as bad as if we joined.

  • Comment number 41.

    Well if the Eurozone is in such financial trouble clearly, the salaries and expenses of our dear MEPs should obviously be cut to reflect the austerity that most citizens are facing - lead by example that's what I say.

    Only, after watching last night's Dispatches on Channel4, I don't think so somehow!!!!! Read more here...

    http://www.openeurope.org.uk/

  • Comment number 42.

    What else is missing from this conversation?...where on the BBC has there been disclosure of Rompuy's speech in Berlin in which he indicated this financial crisis was the opportunity for Europe to sweep aside national sovereignty and impose Federal rule.

    A speech in which he indicated that the upcoming changes to the lisbon Treaty are '...Taken together, these proposals are the biggest reform of the Economic and Monetary Union since
    the euro was created.'


    Is that news worthy or not? I would imagine such a declaration of intent to wipe out national states might well be.


    "A Curtain went up - Ein Vorhang ging auf "
    President Herman Van Rompuy 9th November 2010 Berlin

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117623.pdf

    Herman Van Rompuy pronounces the first "Berliner Europa-Rede",

    'We have together to fight the danger of a new Euro-scepticism. This is no longer the monopoly of a few countries. In every Member State, there are people who believe their country can survive alone in the globalised world. It is more than an illusion: it is a lie!

    He then goes on to say:

    The biggest enemy of Europe today is fear. Fear leads to egoism, egoism leads to nationalism, and nationalism leads to war ("le nationalisme, c'est la guerre" (F. Mitterrand)). Today's nationalism is often not a positive feeling of pride of one's own identity, but a negative feeling of apprehension of the others.

    All our countries have to deal with a new diversity. The time of the homogenous nation-state is over.

    Each European country has to be open for different cultures. However, we only have one civilization: of democracy, of individual rights, of the rule of law.
    Alongside diversity -- and diversity is certainly a strength of our societies --, we still need, in each of our societies, a sense of unity, of belonging together. This sense of unity can lie in shared values;
    or in a language, a shared history, a will to live together (as Ernest Renan said). And this will springs above all from the stories which we tell each other.

    Sharing a currency means that the decisions of one, affect all.
    We have seen how! This spring, the crisis of a country of 10 million people became the crisis of 350 million people; early May, it even turned into a global threat.
    What happens with pensions or debt in one country, affects the banks and taxpayers in another country. In good times and in bad times. What hurts Athens damages Amsterdam; and if Barcelona flourishes, Berlin prospers. The national and the European interest can no longer be separated; they
    coincide.


    Let me mention the three crucial points.

    First of all: We will better observe the economies of our countries, their competitiveness, the risks of housing bubbles and other vulnerabilities. We will act and correct if necessary.
    It is a real innovation!
    If we had had this instrument in the euro's first decade, a crisis in the Eurozone could well have been prevented.

    Second point: we will strengthen the Stability and Growth Pact, to substantially increase fiscal responsibility and penalise irresponsibility. Sanctions will kick in earlier, on more grounds, and be
    decided more easily. Some people are disappointed there is not more "automaticity" in the decisionmaking.
    Well, thanks to the new so-called reversed majority, more "automaticity" is exactly what we propose!

    It is a break-through.

    Third point: we will establish ‘a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole’. As President of the European Council, I will undertake consultations with
    the Heads of State and Government and the Commission President on the limited treaty change required to achieve this goal. We all want a robust and credible system to be in place in 2013.

    It is our duty.

    Taken together, these proposals are the biggest reform of the Economic and Monetary Union since the euro was created.

  • Comment number 43.

    39. At 4:46pm on 16 Nov 2010, armagediontimes wrote:
    #31 Richard Dingle. Try looking at some actual facts. Take Deutsche Bank - currently hiding larger losses than the entire German GDP. Have a look at the Landesbanks, and recall how the losses at Hypo Real Estate rose from $40 billion to $102 billion in the course of one weekend.


    These are not facts. Just hyperbole.

    Bank debt at the end of the day is just paper.

    The real economy is where the important issues are. The ability, for example, to pay your way in the world by making artefacts that people want (prognosis: Germany excellent. UK dire).

    I confess I am changing my position on the EU. Its original purpose, if you go right back to the beginning, was to contain Germany, keep the Genie in the bottle.

    Well Germany is getting its Mojo back and I quite like the idea of the Genie having a bit of leg room.





  • Comment number 44.

    And one of Labour's last acts in government was to commit us to prop up the euro; the proposed Irish bailout will cost us £8bn, yet nowhere is this mentioned on the BBC. However, the BBC does seem to be focusing on "the end of the world/the working class" with the coalition's welfare reforms which will save £7bn. So it's bad to save £7bn by sorting out the mess of our benefits system, but OK to spend £8bn on bailing out a currency we're not part of then?

  • Comment number 45.

    Is it simplistic to suggest that the Euro can survive without the rigid fiscal rules that currently shackle the Euro zone together? The ECB can still set a central interest rate based on the EU economy as a whole with individual countries setting a local rate based around their particular economic needs. By relaxing the central control they can survive the crisis: speculators will buy or sell Euro based on the overall value of the Eurozone, without the danger that any particular problem with any particular country is taken out of context, as is now the case.

  • Comment number 46.

    I personally can not see the demise of the euro but I can see a eurozone split on the cards. Lets say for example 3 zones 3 different interest rates and countries move between them dependant upon their economics.

    The poorer econamies would bring in investment, whilst the richer would loose investment. Thus readdressing the balance. It would have to be an almost closed shop with outside investment levied. Therefore no need for printing more money, real money would flow naturally into which ever econamy needed it

    On what as been said previously about Ir/Sp/It/Gr: Things don't just happen, there needs to be 'will' and a mechanisum to use it! So the questions should be:

    1. what mechanisums are in place?
    2. were is the 'will' comming from?
    3. who benefits?

    Off topic
    Poor old william, he's the first to get shot at, first to get the blame and now he's getting married.

  • Comment number 47.

    So run it by me again.All this dosh being passed around from place to place on bailouts....wheres it come from?whos supplying it from beyond the E.U?Who really owns our banks?Who the hell keeps supplying such huge,unfathomable sums of dosh?just curious.

  • Comment number 48.

    At the risk of upsetting your delicate feelings Stephanie and moderators may I simply say

    TO HECK WITH TO THE EU AND TO HECK WITH TO THE EUROZONE

    because this just isn't funny anymore and it certainly is messing up my firm's fragile 'economics' because folk around Europe are scared stiff and I know that because they are telling me and they've all stopped spending so quite how I am supposed to pay my taxes and er, have a 'quality of life' in the country our troops are dying for evades me.

    Frightfully sorry Beeb if this it a bit too 'in your face'.

    GC

  • Comment number 49.

    As a matter of interest it is possible to identify euro notes by the central bank that printed them. It is a code letter in fornt of the number. The codes are;

    Belgium Z
    Greece Y
    Germany X
    Spain V
    France U
    Ireland T
    Italy S
    Luxembourg *
    Netherlands P
    Austria N
    Portugal M
    Finland L
    Slovenia H
    Slovakia E
    Cyprus G
    Malta F

    * New banknotes issued by the Banque centrale du Luxembourg currently bear the code letters of the national central banks in the countries where the banknotes for Luxembourg are produced.
    Source Bundesbank

    There are rumours that euronotes from some countries are starting to be rejected in Germany. What economic effect this has I have no idea.

  • Comment number 50.

    Not being an economist, the symptoms Ireland are experiencing seem to me to be due to 10 years of cheap money due to the ECB setting interest rates (low), resulting in the Irish economy running with the "brakes off" for all that time.

    Could someone with the knowledge/time enlighten me as to whether a single currency and nationally set interest rates could be workable?

    I fail to see how we can avoid another bubble ("Ireland is still richest country in the EU", or just over-valued?) if taxes are set by the nation state but interest rates aren't. Solution: Irish taxes and spending controlled from Brussels, oh dear!

  • Comment number 51.

    Looking for a zone free of forthcoming nuptials - I settled on the BBC Parliamentary Channel. Well it was almost free of forthcoming nuptials. But this Ireland business, Ms Flanders. You and Robert Peston can still make me read about finance and that is amazing enough. But I will not comment on the wisdom of any action or inaction regarding possible further help being offered.
    But the chosen channel offered the normal insight into the views of some MoPs and I smiled when one gentleman left his well known Eurosceptic views to literally the last words of his "question" to the Chancellor of the Exchequer. I smiled indulgently as I read the same views from my other favourites in that arena in a City paper.
    To sum up the overall views - Brian Hanrahan - misquoted but hey! No offence anyone.
    "I counted them all outraged and I counted them all not backing further bailouts". Just for that - I am almost tempted to come off this fence I am sitting on and offer concrete views.
    But perhaps - better not.

  • Comment number 52.

    I would tend to agree with GC. In the metal forming industry there is, I feel, an applicable comparison. "Wrinkles cannot be ironed out after formed. They MUST be pulled out before forming"!

  • Comment number 53.

    #43 Richard Dingle. It is not hyperbole it is fact.

    Of course bank debt is just paper, all money is just paper. So, what is the point of that observation.

    Obviously it is better to make things than not to make things - who could argue. The problem is that if the ship (international monetary system) is sinking then all passengers (nation states) will also sink irrespective of any virtue or vice.

    Any euro collapse will inevitably trigger the collapse of the entire German banking system. The end of the euro, whether managed or otherwise, will also force Germany to revalue against pretty much everyone. Exports will be harmed, both because of revaluation and because former customers will be quickly revealed as being insolvent i.e. unable to pay and not credit worthy.

    The alternative for Germany is to try to prop up pretty much all of the EU for ever and all by itself. This is clearly not possible and should Germany try then it will ultimately destroy itself.

  • Comment number 54.

    #49 Bob Curtis

    ...it is possible to identify euro notes...

    Hm.. interesting. As regards universal acceptance, I know from personal experience that Scottish, or Northern (Irish) notes are only reluctantly accepted at many retail outlets in England. Maybe the Germans are copying us?

    Seriously, I should know more about the legality of legal tender, will have to do some research (on both the UK position, and Eurozone).

  • Comment number 55.

    42 - Alstod

    Eeeek! Who is this Herman Van Rompuy? Not Herman Munster in a thin disguise - look closely, there are similarities...!

    I would say that there are many, many europeans who very much enjoy their neighbouring countries company and are highly tolerant of diverse cultures *without* any interference or federalising from some EU commission/parliament nonsense!

    This guy should not be in any place of authority in the EU - I wouldn't trust him to reperesent my views any further than I could throw him, although I would very much like to find out how far that is...

  • Comment number 56.

    52. At 5:23pm on 16 Nov 2010, steve wrote:
    I would tend to agree with GC. In the metal forming industry there is, I feel, an applicable comparison. "Wrinkles cannot be ironed out after formed. They MUST be pulled out before forming"!

    Then you follow a flawed comparason, they can be if need arises and the will is there because the mechanisum exists.

  • Comment number 57.

    53. At 5:28pm on 16 Nov 2010, armagediontimes wrote:
    The alternative for Germany is to try to prop up pretty much all of the EU for ever and all by itself. This is clearly not possible and should Germany try then it will ultimately destroy itself.



    Agreed.

    Indeed. The Genie propping up its own container. Who ever heard of such a thing.

    The Euro crisis is about to resolve itself. There will be sovereign defaults and we will all move on.

    I have always regarded too fast enlargement as a greater threat to the EU than Euro implosion.

    No, the Euro will survive and important lessons will be learned. In particular renewed impetus will be given to fiscal union.

    BTW One pound still only buys 1.176 Euros; the market must have been factoring all this hubub in.

    I am glad in 2005 I got 1.45 Euros for my pound so I could go on a 3 month jolly in Euroland.

  • Comment number 58.

    I may be misunderstanding this, but presumably the underlying policy here is: privatize the profits; nationalize the losses. If I invest £100 in a friend's business and it fails, I make a lose. What relevant moral difference is there if I am bond holder and the business I invest in is an Irish bank? Of course, the economics are different (my friend would be unwise to depend on borrowing any more money from me), but what is the moral justification? It seems that international finance operated in the interests of private capital, and is deeply irrational and corrupt. Or am I being simplistic?

  • Comment number 59.

    All my life the UK Government has fouled up the UK Economy and only within the last few years have things become stable due to the influence of the European Union. It is not surprising that there are problems in the Eurozone, but I expect them to be dealt with and the zone to be the stronger afterwards. The Eurozone is fortunate not to have had the UK problems as well.

  • Comment number 60.

    Bob Curtis wrote:

    'As a matter of interest it is possible to identify euro notes by the central bank that printed them. It is a code letter in front of the number.'

    Interesting. I have just returned from Greece. Of the 9 Euro notes I brought back, not one was issued in Greece (and 4 were German). Of the 15 coins, only 2 were Greek.

    I'm unsure what this implies!

  • Comment number 61.

    To all those who posted to say that hyper inflation is the death of a currency: You are of course correct, but we have already had a large currency printing operation (QE) and there is no sign of any hyper-inflation. 3.2% per annum is not hyper inflation but 3.2% per day is.

    #37 have you read the hyperlinks you posted (one is off line by the way). They are economic nonsense and in some respects even the facts listed are wrong - for example that only the Bank of England is allowed to issue bank notes, the writer of that piece has clearly never heard of Scotland.

    Consider this:

    FRB has been around from at least the 12th century as soon as gold merchants realised that they could lend based on IOUs redeemable by other gold merchants. (Derivatives, the other bete noir of the economic doomsayers, have been around since at least Roman times). If the system was fundamentally flawed then it would have collapsed a long time before now, yet it has not.

    Up until the 1930s sterling was part of the gold standard - in theory you could exchange your £1 for the equivalent in gold. My understanding, which could of course be wrong, was that even then it was fully accepted that this was a fiction and the theory could not be accomodated if everyone asked for their gold.

    The problem with banking in 2005-10 is not FRB but because they forgot a number of simple rules. As my grandmother used to say "everything in moderation". FRB works well as long as it is in moderation. Banks holding a buffer of 8-10% in cash and capital against their loan book has historically been enough to cope with most crisis, holding 3% buffer clearly is insufficient.

    There are only two alternatives to FRB: banks can only make loans up to value of deposits or the govt has the responsibility for determining who gets loans. The only examples we have of govt control over loans currently are communist countries and what you will find is wholesale corruption and loans granted not on the basis of economic need but political benefit. The interesting thing about restricting lending to deposits is that for corporates we are already there according to Bank of England. In Sept 2010 total cash deposits from UK corporates and people was roughly £2429bn and total lending £2591bn. Of course that excludes lending to non-UK entities and deposits from non UK entities which I am guessing substantially increases the lending in excess of borrowing, but the point is the domestic banking industry is already close to being in balance

  • Comment number 62.

    Light the blue touch paper and retire to a safe distance.

  • Comment number 63.

    I've come to this blog immediately after reading a posting on www.voxeu.org by Jacques Melitz "How to save the Euro? Lessons from the US". Too many tight arguments to put forward here - except, perhaps, his view that the EU should ditch the Stability Pact. Well worth a read for anyone really interested in ways of dealing with the EU problems, rather than promoting their own prejudices.

  • Comment number 64.

    When there is a crisis, everyone involved who has something to loose will squirm and wiggle clutching at solutions, good or bad or just plain daft.

    I suggest we are at that stage now. The smart would recognise a lost cause and take sensible actions in a controlled way. But, I suspect this may go a round or two yet. The end will not be pleasant or controlled. It will affect UK just as badly and the US aswell and there will be a degree of chaos.

    Will the euro survive? Possibly, with a lot of negotiation and we will then see which counties have populations that really want this experiment to continue.

    Solution: Resurrect EFTA, the Brits know how it should work and as far as I remember, it did quite well for its time. But we all then remain independent states.

  • Comment number 65.

    I know I am not the sharpest knife in,the block but what confuses me,the most about all this debt,is dose it exist,at all.I know sounds dodoish but if I heard right the crisis came about because of a mountain of debt no one had secured as individuals we took what the banks threw our way but that's peanuts.The real problem is banks sold the debt to each other so many times that now no one really knows,who owes who what.I know that's old hat but me being a bit dim,I can not quite work out why no bankers have ended up in jail.I mean by that,from everything I have heard and read,these bankers are so clever and wise they are worth every million they get in bonuses.If that's the case,then it follows.These really clever irreplaceable,saints of the money world.must have,been totally aware that they were lending and borrowing,MONEY THAT DID NOT EXSIST.So remembering these people are so smart they alone can save the world and risking them running off to another planet would be catastrophic.For every last one of us.So it seems to me these brilliant brainy bankers must have known exactly what they were doing,in that I mean they had to be aware(being so clever)that there was nothing in the vault,for several years.I imagine whenever bonuses were paid they had to borrow to do so.I know such saintly beings would never do anything so dishonest but if,just if they did.Hasn't fraud been perpetrated on a massive scale?If that's the case then seems to me all the Irish need to do is charge the lot of em (that's the bankers and all their backers) with fraud.seize all assets.chuck em all in clink,on remand.should only take a quarter of a century or so,for the lawyers to get there millions out of the joke economy.To get back to the reason for my dumb question dose any debt exist,at all?See my confusion comes if you examine the fraud argument.Did all these banks knowingly lend and borrow against worthless assets,using money that did not exist,then no debt exists.OK wishful thinking but really isn't it time,the fraud question was examined?

  • Comment number 66.

    Economics seems to resemble late medieval theology in that the more intense and internal the debate the less it seems to speak to the actual real world behind the numbers.

    While the economists are debating the latest Purchasing manager index numbers, of RPI numbers, or consumer confidence numbers; the real world is going on...but no doubt a month or two after the Euro goes two tier they'll tell us why the numbers indicated not only that it has happened...but why, with hindsight, we can see it was inevitable.

  • Comment number 67.

    #62. FedupwithGovt wrote:

    "Light the blue touch paper and retire to a safe distance."

    Problem - there is no safe place - the UK will be swept away in the destruction.

  • Comment number 68.

    Bailing out Irish banks supports their wealthy shareholders at the expense of lower income folk. That's a conscious choice by the Irish government that seems to have been accepted by their supine elected representatives. It's time for them to do what they were elected for: to represent the interests of the people.
    A wiser Irish government would let those banks go bankrupt - as the UK's Labour Government let Northern Rock go bankrupt - and then pick up the debts without compensating the greedy shareholders for even a fraction of a penny.
    It's still possible. Ireland's government can defy its wealthy supporters and do the decent thing. Let all those banks go down the drain. Then step in to save small depositors by taking their banks into its national ownership.
    By those means, the Irish Government would be simply following UK practice. It's peoples' gaurantees would ensure the survival of those banks. As they recovered their poise, the banks can be sold off in slices for the benefit of the people. And only the people. As the labour government arranged for the UK.

  • Comment number 69.

    #43 Richard Dingle,

    "Bank debt at the end of the day is just paper.

    The real economy is where the important issues are. The ability, for example, to pay your way in the world by making artefacts that people want (prognosis: Germany excellent. UK dire).

    I confess I am changing my position on the EU. Its original purpose, if you go right back to the beginning, was to contain Germany, keep the Genie in the bottle.

    Well Germany is getting its Mojo back and I quite like the idea of the Genie having a bit of leg room."


    This is one situation where you are completely wrong. In the Social Market Model, the banks are an element of the firm. A financial union if you like. Therefore if the bank fails (due to unsustainable external exposure) it takes the firm with it.

    For once, the UK shareholding model actually works in the firms advantage. If the banks fail they do necessarily take the firm with them.

  • Comment number 70.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 71.

    The city speculators have never liked the single currency, its not in there interests to like it. They made millions out of currency speculation, moving cash around all the different currencies.
    Some could argue they have orchestrated its failure to get back to business as normal. The big issue is how much more cash are we going to throw at these private entities, my view is its time to let them fail all over the world and cleanse the global banking system of all these poorly managed businesses. Civil unrest will be the net result if they carry on doing what they are doing, its ok to bail out banks but we cannot help families stay in there homes.

  • Comment number 72.

    55. At 5:39pm on 16 Nov 2010, edge540 wrote:
    42 - Alstod

    Eeeek! Who is this Herman Van Rompuy? Not Herman Munster in a thin disguise - look closely, there are similarities...!


    Have you taken a wrong turning. The CBBC blog is somewhere else.

    You have a point though, Van R has about as much charisma as a damp paper bag.

    But I am told he is an intelligent decent human being unlike a certain Tony B (his rival for the position) who is not very nice at all.

  • Comment number 73.

    I generally spend about 3 or 4 months of the year in Ireland and usually do a fair bit of travelling outside of the main cities. It was apparent from 2005 / 2006 and until the economy hit the wall that an unfeasible number of houses were being built, unfeasible in the sense that there seemed to be more houses than people that could possibly live in them. Even beautiful little villages were having ugly estates grafted on the side. The only possible explanation for this was speculation and by that I mean people, including bankers, playing a numbers game. The thought process that I heard echoed up and down the land goes something like this; borrow x, hold for a few months, sell and make back 3x.

    It is tragic when the average punter screws up his life and home in getting this calculation wrong but it is excusable. However it is inexcusable for a person, whether in government or banking, whose job is the management of finance to make such an error.

    The numbers game is all about spreadsheets and getting big numbers into them. After all big numbers in spreadsheets generally mean percentages siphoned off to bonus bankers. For the politicians big numbers offer the opportunity to coin a phrase, for example the “Celtic Tiger”. Such phrases are most useful along the road to re-election.

    The big numbers game in Ireland fostered, perpetuated and exponentially grew a crony capitalism between the financial and political communities. It is an aspect to Irish life that “even the dogs on the street know about”.

    Still nobody has been convicted for corruption or negligence and until they are the lesson will not be learned that money is for socially useful purposes like a house to live in, fuel to keep warm and food to eat. It needs to be earned rather than borrowed.

  • Comment number 74.

    69. At 7:45pm on 16 Nov 2010, foredeckdave wrote:
    This is one situation where you are completely wrong.


    LOL. According to you I am always wrong. This tends to preface most of your ripostes.

    Your post did not make sense. Was there a typo. Maybe it was this ' If the banks fail they do necessarily take the firm with them'. As far as I know German firms have a 'shareholding model'.

    Exciting times.

    Time to re-model the EU with an inner core that accepts the Social Market Economy as a pre-requisite for membership.

    What an absurd situation. German economic success makes it impossible (via a high Euro rate) for less successful economies to grow. So amassingly, German exports do well because the Euro is low but they make it hard for other countries in the Zone by keeping the Euro to high.

    Hmmm. Can't have it both ways.

  • Comment number 75.

    Off topic.

    There is not a single channel BBC included that are not consumed by stories of some bloke with big teeth who has found his mare.

  • Comment number 76.

    Profligate PIIGS.? French banks have been buying Italian banks to plug the huge debts that they have mde while Italian banks have been much more cautious in their lending.

  • Comment number 77.

    The EU stability fund is there to buy EUzone govt debt at reasonable rates, which are unaffected by
    a)short-selling,
    b)rating agencies
    c)hostile speculators

    This allows govts to issue debt at rates that make sense within the EUzone and not at rates that serve the interests of those wishing to make gains from the failure of the EUzone.

    The EU stability fund permits resale of those bonds in order to absorb the liquidity that was created by the purchase.

    In short, this allows the EU to circumvent hostile speculators and fund national EUzone debt at rates it chooses. There is no possibility of a govt default unless the EUzone chooses to let the nation do so.

    If the Irish and others are holding public debates about such events as national default, never mind such fantasy stories as EUzone breakup, it is for one reason only: to devalue the Euro.

    Look: the US injected xhundred billion into the USA, got a minor blip in stock markets and a minor divestment from the the USD, and then immediately afterwards Obama was at the G20 promising cooperation on currencies. There would be no competitive devaluation.

    This is fine, just that the EU has to have it's own little speculative devaluation too, before the G20 agreements take effect...

  • Comment number 78.

    If the Euro is doing so badly, how come the euro appreciated vis-à-vis the American dollar (1.3655 - $1.3560 level).
    It's being said that the Euro reclaimed some lost ground because Ireland is in talks with European Central Bank, European Union, and International Monetary Fund regarding some sort of financial bailout. But the Irish Government itself has maintained and is mainting that it has sufficient capital to get through June 2011 (which is true).
    Eurozone finance ministers are convening in Brussels and further details are expected during the North American session.
    Why, I wonder, the North American serssion.
    Leaving Ireland for a second, the Portuguese Finance Minister, dos Santos warned “there is a risk of contagion” but added Portugal has thus far been able to “finance itself” in the markets.
    Meanwhile, New York Fed President, Dudley said critics of the Fed’s recent Q.E. 2 do not comprehend that the Fed can have a larger balance sheet “and not have a long-term inflation problem,” adding the Fed is “very confident” to exit (policy) when the time comes.”
    Fed Vice Chairman, Yellen said the Fed is not looking to PUSH THE VALUE OF THE US DOLLAR DOWN down while Dudley said the dollar “is not really the objective of the policy.” Ya sure!
    The euro moved higher vis-à-vis the yen as the single currency (¥113.35 -¥112.75 level).
    In Chinese news, the US dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6386 in the over-the-counter market, down from CNY 6.6439. Chinese Premier Wen Jiabao reported his cabinet is drafting anti-inflation policies to combat the fastest inflation the country has seen in two years. Many economists believe People’s Bank of China will be forced to raise interest rates within weeks following such sharp acceleration in inflation. People’s Bank of China Governor Zhou reported China is under “pressure” from capital inflows. PBoC lifted some banks’ reserve requirements twice in one day last week.
    Bank of England Governor King reported inflation is likely to remain above the central bank’s 2.0% inflation target “for a year or so” and added the BoE is ready to adjust policy “in either direction.” BoE reported it expects to make secured commercial paper purchases shortly. Bank of England Monetary Policy Committee member Weale reported “…for the time being, the right course of action is to leave policy unchanged…I certainly worry about the effect of inflationary expectations of introducing additional monetary stimulus in such circumstances.” BoE warned inflation may accelerate above its 2% target range and this reduced speculation the central bank may increase its £200 billion asset purchase program. The report noted Monetary Policy Committee members are having a “vigorous debate” over the risks of inflation.
    Meanwhile the Euro appreciated vis-à-vis the British pound as the single currency (£0.8515 - £0.8455 level).
    So, I simply have to ask, which country is in trouble here, Ireland, China, Portugal, the UK...?
    The US Q.E. 2 is playing heck with just about every country, exactly as planned. There is crisis and it is spelled the United States of America.
    What was said I wonder during the North American session.

  • Comment number 79.

    BluesBerry wrote

    "So, I simply have to ask, which country is in trouble here, Ireland, China, Portugal, the UK...?"

    The PIIGS are in trouble and with them, the Eurozone.

    BluesBerry wrote "But the Irish Government itself has maintained and is maintaining that it has sufficient capital to get through June 2011 (which is true)".

    Yes, but what then? By the time next June comes along Ireland will need to refinance those loans. How will they do that and at what cost? And in the meantime the level of Irish debt and the cost of servicing an ever growing level of debt will have grown.

    Would you want to buy Irish bonds? Would you get your money back?


  • Comment number 80.

    ThoughtCrime wrote:
    we might even be able to make the trains run on time.

    -------------------------------------------------------------------------
    I would not bet on it.

  • Comment number 81.

    #74 RD,

    You know exactly what the intent of my post was. German firms have long-term relationships with their banks. The tie between the bank and the firm is much more formal and regulated than it is in the UK. The consequences of a bank failing would be more immediate and probably fatal in Germany whereas whilst serious in the UK may not be fatal. Now if you know differently then say so.

  • Comment number 82.

    18 GRIMUPNORTH77:

    'It would seem this has tipped them over the edge because they could not climb back from it fast enough.

    And the fate of the UK next year following..'

    Growth forecasts circa 1.4 % and suspicions difficult to acheive, and 2.5 % needed. Chances of high side look remote.

    Significant moderation in activity in place on some international auctions sites which I monitor, and discounting becoming more common. Well known leading supermarket is not going to recruit staff for Xmas, punters can queue. Lower price tag stuff shifting to some people who used to be high enders. A certain unease seems to be creeping in. Still plenty of money about particularly in certain groups but not enough relaxed customers to make anything bouyant generally.

    To have growth you have to have people to buy and the banks continue in their lockdown on the economy. People dont buy houses in reality, they just take on the liability, banks buy them, without the banks the market freezes. When credit is difficult and borrowers wary things generally cannot pick up even on the low ticket stuff.

    Trick or treat will be here some time I fear. Always people with money though.

  • Comment number 83.

    'The alternative for Germany is to try to prop up pretty much all of the EU for ever'

    Surely Germany has an historical responsibility to do just that!

  • Comment number 84.

    Poor old Ireland, suckered into borrowing money they couldn't afford and now the wolves are a'blowing at the empty housing estates looking for their pound of flesh.
    Ireland should ask the UK to move back to Sterling and dump the Euro in the Med where it belongs.
    The British Isles could then become The North Atlantic Archipelago and we could build a new Empire together again.

  • Comment number 85.

    81. At 9:30pm on 16 Nov 2010, foredeckdave wrote:
    #74 RD,

    You know exactly what the intent of my post was. German firms have long-term relationships with their banks. The tie between the bank and the firm is much more formal and regulated than it is in the UK. The consequences of a bank failing would be more immediate and probably fatal in Germany whereas whilst serious in the UK may not be fatal. Now if you know differently then say so.


    That I accept as the arrangement.

    But why would it be fatal. It would be an issue for a UK firm or a German firm or an individual for that matter if a bank failed in the context of owing those entities money.

    I suspect you are referring to the arrangement where banks in Germany have long term investments in firms and were the bank to fail that bank's crediors would come after the firm. All that would happen is some other entity would stand in the banks place. The last thing they would do is put the firm out of business.

    In the UK the banks dominate the economy and systemic failure would be more serious. For a start tax revenues would fall through the floor. The Treasury is over dependent on tax revenues from the City.

    We have reached a point where we need orchestrated defaults and 'haircuts' to bring debt levels down to a manageable level.

    It won't be pretty for anyone but it can't be delayed.

  • Comment number 86.

    83. At 9:47pm on 16 Nov 2010, chazzacant wrote:
    'The alternative for Germany is to try to prop up pretty much all of the EU for ever'

    Surely Germany has an historical responsibility to do just that!



    Why.

  • Comment number 87.

    79 busby2:

    'Would you want to buy Irish bonds? Would you get your money back?'

    Thats the nub of it. Capital at risk, not earnings.

  • Comment number 88.

    81 fdd

    'You know exactly what the intent of my post was'

    How can you be sure anybody understands what anybody says, let alone just one person.

    As far a firms and banks. Most businesses will fail if they are denied continuation of credit lines. Most failures are nothing to do with profitability, they are to do with cashflow. Doesnt matter where they are. As soon as a business is of a reasonable size it will have an accountant involved in its running. As soon as an accountant is involved they will seek to extract liquidity to boost share dividend to boost share value so share options rise in value. That is why so many are looking to go to low wage areas, with finances stretched as tight as a drum that is one way to boost. That is part of why a recent government initative is to try to press banks to increase credit lines to businesses.

    Credit is credit and cut credit is cut. The horizon can then be short particularly if quarter day declarations are near.

  • Comment number 89.

    #85 Richard Dingle,

    Richard,

    I truly hope that no firm in any EU country fails because of a fiancial crisis that is not of their making and is out of their control.

    None of us really know how this is going to play out. If the Euro survives or not, I don't think that the EU will collapse.

    I try not to engage in conspiracy theories but I am tempted to think that the US financial institutions are more than willing to see the focus of attention passed to Europe and some of the pressure taken off them. I am also sure that they will not engage in any assistance package on anything like favourable terms.

    We all know of the problems faced by Ireland, Greece, Spain and Portugal but I have a feeling (not backed by any insider info) that the real problem for the ECB and the EU is really Italy

  • Comment number 90.

    #88 NBW,

    From his reply it looks as though Richard did!

  • Comment number 91.

    Let the euro sink, and the EU with it. The whole European project was put together with no democratic mandate and is riddled with corruption and waste. Short term pain, yes, but in the longer term better for every European nation. Even now, cutting out the costs of funding the EU would help our deficit.

  • Comment number 92.

    #88. Not Buzz Windrip Précis: I don't like accountants!

    Now 'Not' blaming the accountants is blaming the messenger. The market forces businesses to reduce costs and to maximise profits - see almost any economics text book. All accountants do is to try their best to add up the figures 'correctly' - what ever 'correctly' means!

    Cashflow is important and it can cause liquidity problems that must be addressed and in a hostile risk averse banking environment this can cause business to cease to be able to continue trading. However the cash-flow problem is often the symptom of failing to tackle core unprofitability. Business need to be able to make money if they can't they have no reason to stay in business. Profitability horizons often differ between the inside and the outside of a business.

  • Comment number 93.

    #85. Richard Dingle
    #81. foredeckdave

    German Banks and Businesses. If I recall correctly this close relationship was a deliberate feature of the Marshall Plan and of the federal nature of regional banking in the post war German State - (I think!) This is also why the German states have(had?) a close relationship with their local businesses.

    We (the UK) didn't benefit from this beneficial post war reorganisation because we (apparently!) won the war and in consequence had an existing functioning banking infrastructure. We finished the war owing the USA vast sums of money instead!

  • Comment number 94.

    #91. Rabbitkiller précis: I hate the EU and all foreigners.

    Your response comes into the category of 'shoot self'. All your recipe will do is transfer vast sums of money and power to bankers from the rest of us, making all of us far far poorer and more enslaved to the banker - do you work for a bank? Please try to think through the implications of your statements!

  • Comment number 95.

    Everyone negotiating about Ireland is looking in three directions; saving the euro and possibly the EU, and secondly at their home political situation; finally they will be trying to assess the bond and stock market market reactions. All likely rescue plans will be received badly by the people in countries giving any support. The net result is quite likely to a mishmash of compromise as politicians, who are not necessarily well versed in economics [even if they understood mainstream economic theory, they would still get it wrong] seek compromise, where compromise is likely to be the worst of all worlds.

    Is the euro going to sink anyway, no matter what they do? I believe the worst case scenario of failure by all the PIIGS could not be stopped with all the resources of the rest [inc UK ]. The TV were talking about trying to stop contagion, its already happened, even if it is a slow burning fuse. Its a fine judgement to know when to cut your losses and say "OK bond holders, you've lost your money". Then what happens?

  • Comment number 96.

    92. At 11:10pm on 16 Nov 2010, John_from_Hendon wrote:
    -----------------------

    Business will put up with short periods of low income or even losses if they believe that profitability can return. With 4 years of cuts [harsher than any anyone has seen before] the CEOs will have very cloudy crytsal balls. They will surely cutback just to survive. Are there any signs of significant investment across the board? In some niche areas, OK; but not across the economy. It all points to tough times and the current policies resulting in the destruction of productive capacity being wrong.

  • Comment number 97.

    89. At 11:03pm on 16 Nov 2010, foredeckdave wrote:
    We all know of the problems faced by Ireland, Greece, Spain and Portugal but I have a feeling (not backed by any insider info) that the real problem for the ECB and the EU is really Italy


    Interesting point.

    Italy has been perceived as a basket case for so long will anyone notice.

    Will we know what is going on anyway seeing that wedding mania has taken over.

  • Comment number 98.

    No exit, no bail-outs, and no default.

    Sounds perfectly reasonable to this blogger and not at all flawed.

    Why should Washington allow almost bust California to withdraw from the dollar, or be bailed-out or default?

    Of course, Stephanie refers to Eurozone but from the Euro perspective, we will probably see similar action being taken as per Washington re: California (or any other State in this kind of trouble).

    Behind the scenes, bail-outs are probably occuring, in the USA and Europe but the over-riding goal for Europeans must be the preservation and then recovery of the Eurozone - or the whole Euro project will indeed be in serious difficulties.

  • Comment number 99.

    It is my recollection that when other failed states - typically non first world - have petitioned the IMF et al for assistance in times past, help has only been granted under the most stringent (sometimes draconian) of conditions. Terms often involved the wholesale destruction of the home economy, as far as the indigenous population were concerend, in favour of developing export markets to generate cash to settle debts with first world banks etc. Invaraibly, no mercy was shown as the IMF et al lectured the recacitrant governemnt over its failings, and milked the country dry in order to settle its debts.

    Is it likely that the IMF et al have developed a conscience, and decided that destroying an economy to settle debts is immoral, or that a different set of rules apply when the debtor is a first world country? Don't get me wrong, a more measured approach, as outlined in the final paragraph in the above analysis, is to be applauded. My final question is this - will such an enlightened approach be adopted in future when the debtor is a thirld world country, and the creditor banks in the first world are demanding their pound of flesh?

  • Comment number 100.

    #93 JFH,

    Thanks for that input John. It's no longer a question of how we got here. It's vital now that we seriously address how we get out. It goes far wider than deficits and we are not engaging in any form of debate (well at least the politicos, bankers and business leaders aren't)

    You took me back more than a few years with your earlier reference to the Theory of the Firm, "firms exist to maximise their profits". With the growth of graduate internships ot looks like some of them are well on the way to succeeding! Next they'll be charging us for working for them (that has to be the pinacle of profit maximisation) :)

 

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