Category Archives: Ireland

This graph is an extract from a term paper written by three co-authors and I for Professor Guillermo Calvo. We adapted Calvo’s own ‘Sudden Stop’ framework, and applied it to peripheral Europe.

Because the GIIPS are members of a monetary union, they experience some, but not all, of the effects typically associated with ‘Sudden Stops’. There is a large, if slower, adjustment in the Current Account as the capital needed to finance it dries up. Being members of monetary union, lacking monetary policy autonomy, inflation does not soar on the back of a currency devaluation, while the Real Exchange Rate adjustment – through ‘internal devaluation’ is consequently slower. Continue reading →

Countries in economic crisis typically try to make their exports more competitive by devaluing their currencies. This option isn’t open to members of a monetary union (or those with a currency peg, like Latvia & Lithuania).

Hard-hit peripheral members of the Eurozone have been pursuing an ‘internal devaluation’ strategy, targeting an improvement in the all-important Real Exchange Rate by allowing nominal wages and prices to adjust. The graph below shows the extent to which labour costs have adjusted on Europe’s periphery since 2008, compared to Germany and the EU average.

Continue reading →

These are my initial thoughts on the promissory notes ‘deal’ announced today by Minister Noonan.

1. The cash-flow benefit is zero – we are just switching counterparties, from the EFSF etc. to Bank of Ireland (via NAMA).
2. The impact on the (General Government) Deficit appears to be negative to the tune of EUR 90m. If this is the case, then this could mean an extra 90m in austerity measures this year to meet troika targets. Although there is a certain margin for manoeuvre built into the programme, between this 90m, lower-than-projected economic growth, and perhaps significant non-payment of the household charge, this margin may be wearing thin.
3. This appears to be a great deal for the ECB (as ELA will effectively be repaid through LTRO via Bank of Ireland), for other EZ members (who will now be on the hook for 3.06bn less through the bailout – although this will ostensibly be used to help the NTMA build up a war-chest to smooth bond-market re-entry in 2013), and for Bank of Ireland (who keep the carry; borrowing at a low rate through the LTRO from the ECB, and lending to the govt. at a higher rate)… but an awful deal for Irish taxpayers.
4. This would seem to be an explicit ECB endorsement of financial repression: Ireland’s only quasi-private sector bank of any significant size is being co-opted into financing govt., albeit being paid for the privilege.
5. At a time when Irish banks are going through a rapid and painful deleveraging process, this deal will suck a further EUR 3.1bn out of their ‘real economy’ lending capacity. This will further tighten the screws on Irish firms and families struggling to get the credit they need.

As always, UCD Professor Karl Whelan is the go-to guy on all things promissory note related.

And Constantin Gurdgiev gives his thoughts here.