The Euro crisis – phase 2


                    Angela Merkel started the latest phase of the rolling Euro crisis. She warned that Europe’s taxpayers could not be expected to carry the whole burden of bailing out countries that had borrowed too much. She felt that the bondholders, people and institutions who had lent money to the likes of Greece and Ireland, should lose some of their money. She favoured the heavily borrowed countries scaling back the interest and or capital they repay to their lenders. She also wished to clarify and settle more of the details of the bail out funds, announced in haste during the first phase of the crisis.

                          This may have been popular with German taxpayers who are very nervous about how much they might have to contribute, but it did not go down well in the bond markets. Irish bond prices fell sharply, forcing up the interest rate Ireland will have to pay for new debt and replacement debt  when it wishes to borrow again. Other senior people in the EU realised this was hastening the crisis they were trying to avoid, and eventually put out a statement saying any reneging on the terms of debt would only apply to new debt. It would not apply to debt people,funds and banks already owned

            That was a curious way of “reassuring” people. Why would savers want to buy Irish or Greek debt in the future if it no longer has an effective  sovereign guarantee that you will be paid all your interest pr0mptly and will get your capital back on the due date? How is it reassuring to current investors to know that when Ireland or Greece comes to borrow again to repay you, they may have to offer much higher interest rate coupons because people will fear the “haircuts” in the interest and  capital to come?  You can reach the point where the interest rate they need to pay to renew their borrowings is simply not sustainable from their tax revenues.

             To many readers the idea that the bondholders should take a hit may seem attractive. After all, they could have worked out what the rest of us worked out, that some Euro area sovereign debt is high risk.   There is a simple answer to Mrs Merkel and her theory of bond cuts. If the Euro sovereign renege on their debts people’s pension funds, saving funds, and the banks will lose this money. The Euro sovereign bonds are not all owned by rich people who could afford the losses. The UK taxpayer will be one of the bigger losers, thanks to the Irish holdings in RBS, the state owned bank.

               It’s in all our interests that they find a way of avoiding reneging on debt. It is also in our interest for our government to make sure UK taxpayers do not have to subsidise Euro area governments that have borrowed too much. The answer is of course stronger economic growth and a lower proportion of GDP being borrowed by the state. The problem is, to achieve that they probably need a lower Euro as well, something Germany is none too keen on. Maybe if Mrs Merkel makes some more unfortunate remarks it will lower the Euro anyway.


  1. lifelogic
    November 16, 2010

    The structure of the EURO was always going to give a conflict with each countries democracy and the control of there own democracy, finance and fiscal policies. The fiscal control structure is what needs to be addressed.

    Surely this was intended in order that the EU could slowly extinguish them one by one. Still at least the Irish had several referendums before they gave their democracy away.

    1. lifelogic
      November 16, 2010

      I have little time for (cast iron and pointless Nottinghill windmills) Cameron, who lost the last – clearly an open goal- election due to a total lack of direction. He is however, as we saw today, quite good at those Tony Bliar type moments “she was the people’s princess” and “this is not a time for sound bites but I feel the hand of history on my shoulder”. His comments on the royal announcement yesterday were very well delivered. All the UK needs is John Redwood as the compass, Cameron as the official anouncer and a serious enforcer to ensure that Redwood’s direction is actually implimented today (perhaps a younger Norman Tebbit or better still the older one) and Danniel Hannah in charge of the EU.
      Oh and perhaps someone who speaks Welsh to sing the Welsh national anthem if required.
      But rather like the European heaven and hell joke we have German police, British cooks, Italian engineers, French administrators, Swiss lovers and Islandic or Irish Bankers (and Cameron for a sense of direction).

  2. Mick Anderson
    November 16, 2010

    the idea that the bondholders should take a hit may seem attractive

    Not really. I prefer the idea that not even a Country should borrow beyond its means, which in turn means that there is effectively minimal risk of default and a low interest rate. The bond markets are simply doing what the Governments are asking them to do, without having to suffer the insult of artificial and unrealistically low interest rates.

    The problem is that the people running up the debt (politicians) do not have to find the money to make the payments (taxpayers). Once you have broken the link between debt and repayment, there is no incentive to act responsibly. It’s just a computer game that can be started afresh when you crash.

    We need a link that will concentrate the minds of those in the Treasury – I suggest making them personally liable. There is precident with Dame Shirley Porter, who was ordered to repay millions of pounds. Perhaps if Mr Brown and his accomplices had known that they would either be personally liable for trillions of pounds of debt or rot in jail for the rest of their days, they would not have been so profligate. The principle is the same; only the scale is different.

    1. Robert Eve
      November 16, 2010

      Good post!

    2. APL
      November 16, 2010

      Mick Anderson: “We need a link that will concentrate the minds of those in the Treasury ”

      Like for us, with the council tax. So too, the Lords and Commons: Joint and several liability. I will pay my council tax ( for services I have not contracted for ) and the rascals in government should be surcharged on the value of their estates and the estates of their children and childrens children ‘unto the tenth generation’.

      Like the War Crimes leglislation so the ‘joint and several liability’ should be retrospective.

      Scion of the working man, ‘Lord’ Prescott would be good for a penny or so, likewise the multi millionaire Kinnock and I bet ‘Lord’ Martin could repay a pretty sum too.

    3. FaustiesBlog
      November 16, 2010

      Excellent point.

    4. Mark
      November 17, 2010

      Some people have been attempting to research the particular case of AIB:

      Early indications are not so many pension funds, and yet a fair few wealth funds.

  3. alan jutson
    November 16, 2010

    I never forget what my late ordinary working class Mother and Father taught me.

    Always live within your means, save a little for a rainy day, and if you cannot afford it, do not buy it.

    This commonsense advice served them, and myself well. It is a shame that millions with thoughts like them, are, and have been penalised by the system for being, dare I say it, Prudent.

    Yes of course we need risk takers in business, but Governments should be solid to the core.

    You eventually reap what you sow, and now its harvest time.

    1. ken from glos
      November 16, 2010

      Correct. I have lived that way all my life and as a saver i am being penalised.

      Nice feeling having no debt or a credit card though.

    2. a-tracy
      November 16, 2010

      My parents drilled the same motto.

      I must look into my pension investment fund in more detail to discover how many high risk bonds it holds.

  4. Gary
    November 16, 2010

    it is not just Ireland, the credit default swaps of all the PIIGS are blowing out to previous highs and look like making new highs. Italy is also in dire straights and the UK has exposure to them all. Collapse is baked into all these fractional reserve fiat debt systems, by the iron cast mathematics of geometric debt pyramiding. The only lasting solution is honest debt free money creation. ie abolish the current system including the central banks.

  5. Gary
    November 16, 2010

    here is a detailed look at the current state of the debt in the EU, resplendent with charts (if you like that sort of thing) :

    The dominoes are falling

  6. Alan
    November 16, 2010

    Savers seem to be quite happy to buy sovereign debt where there is a risk that they will not be paid back and will not get the interest they were promised – they buy UK debt on this basis all the time. The UK allows its currency to devalue and the consequence is that we do not pay back the principal nor pay the interest that was implied at the time the debt is issued. So there is no real reason why Ireland or Greece could not borrow in the future if they default on their debt. As you imply that isn’t the real problem; the real problem is that bondholders, especially the banks (including as you say UK banks) that hold the debt are relying on it maintaining its value for them to be solvent.

    Whereas the UK has an established way of defaulting (by devaluation), the Eurozone has yet to establish what will happen. The consequence appears to be that bondholders assumed that they did not have to consider that default was a possibility. That appears to have been foolish; I’m glad you point out that “the rest of us worked out that some Euro area sovereign debt is high risk”. What has yet to become clear is whether it is we (“the rest of us”) who are foolish, because as taxpayers we will end up supporting those banks who did not realise that default was possible even though we did realise it was possible.

    I don’t know how the current problem can be resolved, but I do think that you and other MPs should give more attention to avoiding the banks getting us into this sort of situation in the future. I think you should address the problem of whether banks that are “too big to fail” should be allowed to exist. I hope the silence on this issue merely implies that you do not think it sensible to address this problem now, in the midst of a crisis. I hope you agree that it does need to be addressed.

    Reply: I have often written about the big banks and set out remedies.

  7. Paul B
    November 16, 2010

    “The Euro sovereign bonds are not all owned by rich people who could afford the losses. The UK taxpayer will be one of the bigger losers, thanks to the Irish holdings in RBS, the state owned bank.”

    Either way the taxpayer is on the hook.

    If the debtor country defaults, then you say this is bad news for the tax payer.

    If the government guarantees the debt then the tax payer is ultimately still liable in order to fund it (through tax increases and inflation (as a result of a debased currency and/or printing money)).

    This may be an over simplistic view, but as a taxpayer I want the bondholders to take some of the pain too. Why should we always end up carrying then can?

    After all, we’re all in this together aren’t we?

  8. Sally C.
    November 16, 2010

    We were talking about the terrible state of Ireland’s finances over a year ago on this site, well before Stephen Hester’s appointment as head of RBS. Surely, one of his first acts in that role should have been to get rid of any Irish debt held by RBS?

  9. anthony scholefield
    November 16, 2010

    As Alan points out this is an odd post from John Redwood.

    All independent government bonds get devalued and revalued every minute because of cuurncy fluctuation ,what has got to be so specal about eurozone debt that the bondholders should be given a taxpayer guarantee.

    The fact is that much of the Irish banks’assets were malinvestments where the asset price is now worth far more than the cost of the factors used to create them. This loss has to be recognized and apportioned. For some reason John Redwood seems to think that the British taxpayer who was not involved in this in any way should bear some of the loss. Is this sane?

    A very strong Irish President once said that thelimitr of civilization are where the bailiff ceases to operate.

    Reply: I do not understand your post. I have made iot clear I do not want any UK taxpayers money spent on a “rescue” of Euroland countries at risk.

  10. waramess
    November 16, 2010

    Have to be careful about this “Pension Plans will suffer” thingy. Boardering a bit on the loony left wing side of the argument. When GEC went bust the pension plans lost out but the argument for saving them was not a legitimate one-except for the Left.
    If Ireland cannot pay then they will need to reschedule and if it becomes apparent that a haircut is necessary then a haircut it will be, not because of Angela but because that is how the free market ought to work.
    If Pension Plans and Savings Plans lose out then they will need to be a bit more careful next time.
    It is not in our interest to either find a way to prevent Ireland renaging on their debt or in providing financial support to prevent it; in both the short and long term it will cost us more to bail them out notwithstanding the folly of Britains banks in becoming so heavily involved in property lending to the Republic

  11. lola
    November 16, 2010

    Sovereign Debt looks to me like the ultimate, as in last, bubble. A bubble driven by the cod Keynesianism favoured by western governments. It’s the last in the line of bubbles, the penultimate being the recent and not lamented real estate bubble, driven by these same unsound money policies. Whateverway you look at it the end game is dire. Either we will have the required blow out and a short and very nasty reckoning or we will stagnate and morph into increasing totalitarianism as the failed politicos, their lacky bureaucrats and pathetic central bankers fight desperately to retain a shred of the reputations. This unholy trinity can see that the truth is their doom. Good.

    1. Acorn
      November 16, 2010

      Lola; I am getting the impression you are a tad angry? I don’t see a “blow out”. I do see five to ten years of debt reduction by households and a return to saving up for things. That will mean an extended period of deflation. Various entities will bubble and pop along the way, including a few countries. Government debt will still be investment grade.

      I see a lot of make do and mend at the household level; not good for manufacturers of cars washing machines etc. If you run a business that has the government as your main customer; prospects are poor. If your business depends on government subsidies; even worse. Not the time to be getting into wind turbines and solar panels etc; forget low carbon for a decade. As they say on Starships at times of crisis; switch all energy (money) banks to life support systems.

  12. StrongholdBarricades
    November 16, 2010

    I see even the BBC is now saying that the UK is in hock to the Irish for about £6 billion.

    Since the Irish have such a large stock of “defaulted” housing, would it not simply be easier to transfer this “bond” into “buying” one of the failed Irish Banks?

    We could then hive off the “bad Debts” underwritten by the irish Govt, and push what remains into either Lloyds or RBS unless HSBC & Barclays want to stump up the money to make it go private.

    The Celtic Tiger I understand is having issues from Euroland about its current Corporation Tax rate which is seen as so advantageous to many FTSE companies. Is the UK yet in a position to benefit from this commercially restricting upon the Irish opportunity?

  13. Gary
    November 16, 2010

    But Mick Anderson,

    In a debt based fiat money system perpetual borrowing simply and absolutely HAS to take place. Stop the borrowing and it collapses. Because when money is created by someone borrowing money, the amount created is for the principal only, the principal + the interest has to be repaid, and there is no way to pay the interest unless you create more money and the only way that you can do that is to borrow more. ie this is a PERMANANTLY inflating system , and must inflate by at at least the cost of borrowing to avoid collapse. This is why it pyramids geometrically, the geometric ratio part is the interest rate of borrowing.

    But, as you know inflation is a tax(theft) from the saver to the lender and creator of money, in this case by monopoly decree the banks. The legal tender laws force people , by threat of imprisonment to only transact and use this money created out of thin air as a debt by the banks. Under a free market where people can choose their money , they would never choose a currency that they cannot save without losing. The banks in turn gain automatic receipts from the savers through this inflation, ontop of whatever other monopoly business they get in this system. The bankers have first option to convert the paper gains into hard commodities and gold.

    It is a pyramid scheme. And if you or I started one of these we would go to jail. It is legalised through parliament colluding with the banker lobby and enacting specific laws protecting the monopoly. That it is never taught at school or anywhere else, is quite unbelievable, but maybe if people really understood it, they would not stand for it.

    1. Mick Anderson
      November 17, 2010

      That’s a bit of a dark view, Gary.

      I accept that some borrowing is inevitable, but it doesn’t have to be paid off with more borrowed money. You have an original input to give – your labour. The pay you receive for your work can be used to make repayments if you are in debt. The time that has been spent to earn this money belonged to nobody but you – we’re not in an Orwellian world yet – and you can use it to repay what others have advanced to you.

      Inflation does work against savings, and it’s something that fiat money can lead to. It can also support deflation, so clearly isn’t an inevitable result of the system. You have the option to do nothing and just sit on what you have accrued, or you can go out and (try to) make that money work for you, again, using a bit of your time.

      Fractional reserve banking seems to have lead to an uncontrolled circulation of money – the same money just moving ever-faster. However, it’s not compulsory to join in by borrowing yourself. It might be your choice, but you also have the choice to save before buying something. I don’t believe it’s exactly a pyramid scheme, because money moves down as well as up.

      Government can avoid borrowing by restricting spending to what it receives in tax receipts. In practice, they can’t do this all the time, but they should keep to a level that averages out over the complete monitary cycle. It’s one of Mr Browns golden rules, although once he had “abolished boom and bust” it obviously didn’t apply to him any more.

  14. Steve S
    November 16, 2010

    From Germany’s point of view, the Euro must be saved at all costs, so why is Mrs Merkel’s trying to sink it below the waterline? The answer is that the worse the crisis, the more beneficial it will be for the now visible Federal Europe. Ireland will be the first to cede economic sovereignty to the Beast. If we’d joined the crazy Euro project, we’d already be being run by Europe, so there but for the grace of God go we.

    1. Mark
      November 16, 2010

      According to the BBC, Herman Van Rompuy said that if the euro failed, so too would the EU.

      Dames et Messieurs, Faites vos jeux! Rien ne va plus! Noir, Impair, Le Tier inferior – treize! Mal Chance!

  15. sm
    November 16, 2010

    Waiting for bad debts to come good! Great.(The Zombies hobble on). They must be allowed to leave the Eurozone with a pathway back if desired.

    Sounds like all uk banks should be forbidden from making dividends or bonuses or increasing overall payroll until they are properly capitalized to take these hits!
    They could use this for loans to business if they are still able to judge risks.

    They should be encouraged/ mandated to seek new capital en masse or be let go!
    Once the dust settles we may have hopefully some solvent bankers. Who have not been contaminated by ‘implicit’ taxpayer guarantees.

    I still think a case for retrospective legislation within a set of principles to be used to restrain governments from getting into this position.

  16. Socrato
    November 16, 2010

    From a UK PLC perspective – why is RBS still holding such high risk debt on their books? I have said here before many times that steps needed to be taken to limit the risk of such exposure to UK taxpayers. This should have been done by selling (reducing) the positions or hedging them up. They have had over a year and a half to prepare for such eventualities. Which goes straight to the point of the matter. If taxpayers are to assume liability for RBS’s balance sheet – who is protecting our position? Certainly not the risk managers at RBS who have proved their inability to manage their own assets. What safe guards are in place currently? It sounds to me like none/very little. If we are all in this together, why haven’t prudent steps being taken? Its not like the government doesn’t know what the dangers are, as they are attending European economic meetings at the highest levels. Those responsible at UK Financial Holdings should have been pressuring those at RBS to limit the risk to the taxpayer. Should we have another firestorm it is clear to me where the responsibility lies. I hope this does not turn out to be another example of dereliction of duty.

  17. Martin
    November 16, 2010

    Would Ireland have exactly the same problem if it had stayed linked to Sterling as it did in the old days? (No control over interest rates etc)

    The present Irish problem is the banks which went crazy during a property boom. It was not the fault of Germany or the ECB that the Irish didn’t regulate their banks properly. As a result the Irish Banks would be in a mess whether the currency was the Punt, Pound or Euro.

    Why is devaluation always seen as a “solution”. Our own BoE is writing another letter of failure to the Chancellor. Borrowers have had two years plus of negative interest rates to sort themselves out.

    The BofE should be ashamed of itself. I have more chance of a real return on money at a bookmakers than I do with a deposit account at a UK bank! (Ten to one against at the bookies, no chance at the bank!)

    Time for a return to an interest rate of inflation plus 2%?

  18. FaustiesBlog
    November 16, 2010

    This dilemma shows just how dangerous it is for governments to provide the banks with a safety net.

    Clearly, those banks which lent to Greece and Ireland did not do so with due diligence; it was surely up to them to ensure that any default on loans given were covered by collateral.

    We, the people, did not agree to put our country into debt – most of us vociferously opposed government borrowing. Yet nobody listened to us and now we as taxpayers are to be on the hook for these very dodgy deals.

    Those banks should have been allowed to go bust – no bailouts.

    I can’t see this situation changing, despite what the government says – it will do the banks’ bidding and guarantee all their dubious lending.

    Would anyone care to wager?

  19. Steve Cox
    November 16, 2010

    Reading your article, John, it all seems to boil down to just one thing – the only way out of this intractable mess in Euroland is for Greece, Ireland and Portugal to leave the Euro voluntarily, possibly followed by Spain and Italy. This latter parody of economic virtue should, of course, never have been allowed into the Euro in the first place, but the rules were conveniently bent by the Brussels elite to suit their own purposes. Could it be that the other Club Med countries saw this as a licence from the EU to behave as wantonly as they pleased?

    Anyway, leaving the Euro will give the problem nations (are they still that, or now merely vassal states?) the interest and exchange rate flexibility to allow them to work through their problems. Of course, Brussels will never permit this, in which case it will probably be Germany taking an undeserved “haircut” as the Euro is heavily devalued and/or inflation skyrockets. Something is going to have to give at some stage, and it will be interesting to see what.

  20. A.Sedgwick
    November 16, 2010

    I can only hope that we are witnessing the fall phase of the EU Empire.

  21. Denis Cooper
    November 16, 2010

    Why, I ask, are we helping to save what is essentially a political construct, the eurozone, which is clearly antagonistic to our long term national interests?

    Just as I ask why Major ever agreed to the EU issuing its own currency, and moreover agreed that henceforth all new EU member states would become legally obliged to eventually adopt it?

    Why didn’t he just say “no”, rather than “yes, but I have to be able to convince my party that we won’t necessarily join it, or at least not straightaway”?

    He must have realised that we could be left in an increasingly untenable position, as the only EU member state which had remained outside the euro, until eventually one government or another succumbed.

    And just as I ask why Cameron is now prepared to use our money for what are illegal bailouts of other EU member states – flagrantly illegal under the EU treaties, which still have the “no bailout” clauses which were deliberately inserted into the Maastricht Treaty to prevent this kind of thing ever happening, as we were assured at the time – and why he is prepared to wave through whatever treaty amendments Merkel and Sarkozy may want to consolidate the euro bloc, without demanding anything in return?

    For example, that the treaty amendments must relieve member states which are not yet in the eurozone of any obligation to join it, and must create a mechanism for member states which are already in the eurozone to leave it, and must include a provision that the UK would NEVER be allowed to join the euro even if a future UK government wanted to do so.

  22. Will Richardson
    November 16, 2010

    First. Joining the Euro and giving up a sovereign fiat money floating exchange rate currency is madness.

    Second. Not using the power of the above to create rather than borrow one’s own currency when there’s mass unemployment and underused resources is also madness.

    Isn’t it strange how Greece can still afford to buy German submarines and Germany’s top two arms exporting destinations are…Greece and Turkey, despite Turkey’s defence spending per GNP falling?

  23. John Moss
    November 16, 2010

    I understand Ireland needs no debt refinanced for several months and its current requirments are met?

    Would it make sense in that scenario for the Euro disaster fund to simply state that they will refinance Ireland if the market does not do so – and at a reasonable rate?

    The result would be confidence, a reduction in market rates for the Irish and, even if the taxpayers of Europe did have to step in to fund the refinancing in some months time, a loan, not a grant?

  24. Rob Hay
    November 16, 2010

    Any bonds, gilts, shares, savings accounts carry the risk of default. They are all merely a promise to pay back an amount denominated in some fiat currency which is itself merely a promise to pay back an amount of cash unsecured by anything except confidence. In essence you are placing a bet and if you invest in any of them you should be prepared to lose your money, either quickly by default or slightly slower by inflation (the UK’s current preferred route).
    I prefer gold as it has no debt, no risk of default and depends on nobody keeping their promises. It pays no interest but retains it’s value unlike fiat currencies which need to earn interest just to keep pace with central banks incessant devaluations. Remember the pound has lost more than half it’s value since 1987.

    Reply: There have been long periods when it has not kept its value. You also need a safe or bank vault to keep it.

  25. Steve Tierney
    November 16, 2010

    If you borrow money – common decency requires that you pay it back. That doesn’t change because its a country instead of an individual.

    If you borrow money and DONT pay it back – don’t come looking for another loan any time soon. Well, not at any sensible rate of interest anyway.

  26. Kenneth
    November 17, 2010

    We have trouble stretching the £pound across the UK.
    California (arguably) should have its own currency (as should some other U.S. states)….so I cannot see how anyone thought that one currency could stretch across the Europe …..unless, of course, the idea was to create some sort of hippy happy communist eu quango commune where the rich give to the poor until we all became equal and everybody took their turn to buy the coffee and croissants

  27. PeeJay
    November 17, 2010

    The idea that bondholders should take the hit is just left wing sentimentalism.

  28. davidb
    November 17, 2010

    The thought crossed my mind reading another post a few weeks ago. Which currency is it that the Euro is to devalue relative too in order to regain competitiveness?

    The US dollar is a basket case because of debt and QE. The pound devaluation is doing nothing for our trade account, we are still in deficit. The Chinese resist revaluation upwards, and have the reserves to defend their position. So where is the competitive devaluation to be found? In any event, both Ireland and Germany are exporting strongly despite the strength of the Euro.

    This “crisis” is back to the banking problem again. I was greatly uneasy at the time of the bale out, and grow more convinced as this unfolds, that there is a catastrophe here. The market should have been allowed to reign. The depositors alone should have been guaranteed their funds and the banks should have been allowed to go bust in an orderly fashion. The Irish problem stems not so much from their government as from their support for Allied Irish Bank. Why is so much effort being made to nationalise the losses of these companies – who still have the cheek to demand bonuses.

    If Ireland comes through this they may well have the economy Mr Durkin proposed last week. Little government provision of services, low taxes and a free market. It may well be hubris to write them off prematurely.

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