Watch the markets


             Today there will be plenty of spin around, following the E85 billion bail out agreement (Part 2) for Ireland. There is a sense of deja vu, as we had similar spin before  after the previous meeting which we were told had saved the Euro and stopped the contagion.

             We need to check the small print over the future bail outfund for Euro members after 2013, the permanent replacement for the Stabilisation Fund. Will the UK be out of this, as most Conservative MPs wish?  The government implied to us when trying to sell the Irish loan that The UK was just going to help  a near neighbour. They hinted that the UK would not be bailing out other countries later. There will be disappointment and votes against if the UK is expected to become a permanent member of the Euro rescue club when we are not members of the currency itself.

                The announcement of the new bail out fund can itself be read two ways. Governments hope it will be seen as a sign of strength, a symbol that there is a long term intention to save the Euro with big money to back it up. Critics may say it shows that the governments recognise they have not yet fixed the problem, and see the need for more bail outs stretching into the future. The way to save the Euro is not to keep lending more money to overborrowed countries or weak banks. The way to solve the problem is to stop the countries borrowing too much in the first place, and to regulate the banks so they have strong balance sheets, not weak ones.

                What the politicians say about this package matters much less than what the markets do. I do not expect the borrowing rates for Portugal, Greece and Spain to suddenly snap back into line. The Euro itself is falling this morning , which will help a little. The Irish package partly vindicates the markets. The markets said Ireland needed a bail out as it could not borrow enough at low enough rates in the normal way. The EU has now lent it more at rates well above German Euro rates. In other words the EU has accepted the idea that Euro sovereign debts have different values depending on which country we are talking about. The EU has decided that Irish sovereign debt should require an interest rate of more than twice the German level, closer to the rate the market says is right.  

               Taxpayers in the countries having to make the loans may well object to being paid less than the market rate for the risk they have to run. The Irish may well feel hard done by for having to pay a higher rate than the EU charged Greece,a rate which makes restoring sense to their public finances more difficult. No-one should feel good about this messy compromise. The questions to ask are how much more pain will the EU inflict on Euro members, and can the non members avoid being dragged into the crisis?


  1. figurewizard
    November 29, 2010

    The ‘PIGS’ as in Portugal, Ireland, Greece and Spain can only ultimately balance their books via devaluation. Perhaps a two tier Euro with the junior version circulating in these countries could allow this. They could call it the snout.

  2. Pete
    November 29, 2010

    ‘There will be disappointment and votes against if the UK is expected to become a permanent member of the Euro rescue club when we are not members of the currency itself.’

    If we ended up being members of the ‘Euro Rescue Club’ it would give the EU a new power: the right to spend our money bailing out member states. As such, I imagine it would trigger a referendum, based on the pledge made by the Tories during the election campaign.

    1. Gary
      November 29, 2010

      The UK, USA and everyone else will be drawn in because this is a banking crisis. It transends countries, currency blocks, politics. timezomes and ideologies. This is a crises of fractional reserve usury and misrepresentation by banks of their obligations. We have had these crises since at least 1345 when they last completely crashed the world.

    2. Bob
      November 29, 2010

      The government will not be holding any referendums on matters pertaining to the EU, nor will they be saying no to any direct orders from the EU. That was just a lie to prevent their supporters from switching to UKIP.
      Lib Lab and Tory are all equally committed to the EU project.
      Judge them by their actions not their words.

    3. James Matthews
      November 29, 2010

      Based on the Tory track record in fulfilling pledges on the EU?

    4. lifelogic
      November 29, 2010

      If you imagine you will get any sort or sensible referendum out of Cameron & Clegg on Europe (unless forced to at gunpoint) you are living in a dream world.

      Pledges made by the Tories and Liberals during the election campaign are being ditched faster than you can say “Cast Iron Guarantee” or “No student fee increases” or “A sensible tax and pro business policy” or “an end to British Democracy” and “no plans to increase VAT”

      Still at least we will have a Royal Wedding bank holiday and a happiness index, no M4 bus lane and only part of the mad HIP packs left so it is not all bad!

    5. APL
      November 29, 2010

      Pete: “it would give the EU a new power: the right to spend our money bailing out member states.”

      People need to understand that the EU has already usurped the right to spend british tax payers money. That we stand for it is shameful, that politicians have agreed to it is treacherous.

    6. Stuart Fairney
      November 30, 2010

      ha ha ha….. quality

    7. eddyh
      November 30, 2010

      We all know how much pledges made by thr Tories in election manifestos are worth!

  3. Bill
    November 29, 2010

    Is the UK government’s strategy all about gaining leverage with the EU? We put money into the rescue pot – money that we expect to get back at a good rate of interest – and in return we have more chance of influencing future events, including the size of our rebate and the growth of the greedy bureaucracy at the centre of the EU.

  4. EJT
    November 29, 2010

    “They hinted that the UK would not be bailing out other countries later.”

    Ah. The mythical “Next Time”. Siempre Mañana.

  5. English Pensioner
    November 29, 2010

    Anyone who believes we will ever have a referendum on the EU will also be seeing the PIGS fly! This government, exactly like the last, will do exactly as Brussels (and indirectly Berlin) tell us what to do. So much for winning the war.

  6. Str0ngh0ldBarricades
    November 29, 2010

    The Markets have now “done” Greece and Ireland, at least for now.

    They were warming up Spain and Portugal last week,

    Surely the only question left will be amongst the spreadbetters about which of the PIIGS is next, as I understand that even Mr Beliscone is not immune from the current mutterings of the market.

    It is still a one way bet, with the European Bank paying the market’s profits

    …and the markets must now decide how to approach sovereign debt with the caveat of possible defaults from 2015

  7. michael read
    November 29, 2010

    “The way to solve the problem is to stop the countries borrowing too much in the first place, and to regulate the banks so they have strong balance sheets, not weak ones.”

    We’re back here again.

    But we are where we are, not there. Now policy should undoubtedly follow your prescription – better capital ratios, better lending principles, sale of assets.

    But if the Irish banks sold their property holdings and crystallised their debts and losses, British banks – Lloyds and RBS – would be off to the knackers’ and our economy would be sucked into the vortex.

    Have you any idea how much pain this causes me? The realisation that my tax is supporting a banker on a multi-million pound bonus.

  8. lola
    November 29, 2010

    “The Euro itself is falling this morning , which will help a little” That’ll cheer up German exporters. Mind you it will ensure a longer period of (accepting instructions ed) for Ireland (to Germany?)

    1. lola
      November 29, 2010

      I do love your edits, Ed. I really try to use the most precise language I can. Unfortuneately the truth is often unpalatable. Alright, I know it’s my ‘truth’ and that science shows us that the search for ultimate truth is infinite, but you know what I mean…..

  9. waramess
    November 29, 2010

    Politicians may insist that the Irish interest rates are but a temporary reaction to the risk inherent in lending to markets other than Germany but they should reflect for a moment on the implications which are not difficult to deduce.

    It is one thing for the markets to set different levels of risk on Euro members but quite another for the EU itself to do so.

    In accepting the idea that different markets demand different rates of interest, the EU is undermining the whole concept of the Euro.

    Where now for the so called single currency?

  10. electro-kevin
    November 29, 2010

    Watch the meerkats ?

    How could we not, Mr Redwood ? They make for entertaining and compulsive viewing.

  11. Denis Cooper
    November 29, 2010

    The various components of these bail-outs are quite confusing.

    The official “Statement by the Eurogroup and ECOFIN Ministers” is here:

    “The financial package of the programme will cover financing needs up to € 85 billion, including € 10 billion for immediate recapitalisation measures, € 25 billion on a contingency basis for banking system supports and € 50 billion covering budget financing needs. Half of the banking support measures (€ 17½ billion) will be financed by an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Fund. The remainder of the overall package should be shared equally amongst: (i) the European Financial Stabilisation Mechanism (EFSM), (ii) the European Financial Stability Facility (EFSF) together with bilateral loans from the UK, Denmark and Sweden, and (iii) the IMF (€ 22½ billion each).”

    The first thing to note is that the Irish government has apparently handed over control of at least part of its cash buffer and of the investments of the National Pension Reserve Fund, up to a total of €17½ billion of public money and investments, in exchange for being lent money which it only needs because it has guaranteed full repayment of private investors holding bonds issued by private banks based in Ireland.

    Clearly the Irish people potentially stand to lose out from their pension reserve fund being committed for this purpose, and it’s worth considering who will benefit from the full repayment of the bonds. It’s often said that default on these bonds would hit pension funds in this country, affecting millions of people, but according to this almost all the losses on Anglo Irish bonds would be borne by a small number of very wealthy individuals around the world:

    The European Financial Stabilisation Mechanism was described here in May:

    and then it was said to include the European Financial Stability Facility, when that came into being; and it’s all “based on Art. 122.2 of the Treaty” with decisions made by QMV; and none of it is a “bail-out” under Article 125 even though the governments of other member states, and the EU as a whole, are clearly assuming and making themselves liable for the commitments of a near-insolvent Irish government when they provide €50 billion explicitly for its “budget financing needs”, ie so that it can continue to pay its bills; and if that were not true, why should it be necessary to invoke Article 122.2 in an attempt to over-ride Article 125?

    As the Mechanism in the narrower sense involves the EU Commission borrowing money to lend on to distressed member states there seems no way that the UK can now avoid further involvement in that, and likewise in the IMF component of any other bail-outs.

  12. Denis Cooper
    November 29, 2010

    “The markets said Ireland needed a bail out as it could not borrow enough at low enough rates in the normal way.”

    One reading of Article 124 TFEU is that Irish government should only ever borrow in the normal way, even if when it goes to the markets in the normal way it can only borrow enough at high interest rates or possibly it cannot borrow at all at any interest rate, because otherwise it must be enjoying “privileged access to financial institutions” and any measure to establish such privileged access is prohibited.

    Plus, there are several other provisions which commit the EU and its institutions including the ECB, and its member states, to act in accordance with

    “the principle of an open market economy with free competition” –

    Articles 119, 120 and 127 TFEU, and Article 2 of the attached Protocol (No 4) on the Statute of the European System of Central Banks and the European Central Bank –

    “favouring an efficient allocation of resources” –

    Articles 120 and 127, and Article 2 of that Protocol again.

    That is the choice which has been made by the member states and enshrined in their legally binding treaties, and if on occasion that leads to difficulties with the markets then that is something which has to be addressed in the context of those treaties, within the constraints of those treaties, and without breaking those treaties.

    If that now seems to be the wrong choice then the answer must be for the member states to amend their treaties through the procedure laid down in Article 48 TEU, not to connive at arbitrary breaches of the treaties, breaches which are illegal not only under EU law but also under the national law of each of its member states.

    I also note Article 7 of that Protocol (No 4), on the independence of the ECB:

    “In accordance with Article 130 of the Treaty on the Functioning of the European Union, when exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.”

    and Article 18:

    “18.1. In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may …

    – conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral.”

    It may be asked whether bonds issued by the governments of Greece, Ireland and several other EU member states can still be regarded as “adequate” collateral for loans except at a massive discount, and whether the ECB would be prepared to make such loans if its independence, supposedly guaranteed by Article 7, had not been seriously compromised.

  13. Jose
    November 29, 2010

    I don’t mind us lending money and making a return on it.
    I do mind being forced to lend money however by being members of an EU club. If we weren’t within the EU and we could make money out of this ‘crisis’ then fine.
    I suspect we have no choice but to ‘help’!

  14. crowbait
    November 29, 2010

    Cabaret song from Berlin in the 20’s.

    ”the right dismays,the left betrays,

    the country’s broke,

    and guess who pays”

  15. Freeborn John
    November 29, 2010

    It is not only the markets that need watching but the federalist fellow-travellers in the Conservative party. Why is Liam Fox now reversing the manifesto commitment to pull out of the European Defence Agency? Why has the government agreed in the last few days to the intrdocuction of qualified majority voting in the EU on movement of funds between EU budget lines items?

  16. Sally C.
    November 29, 2010

    Apparently, along with the Irish bailout, the Eurozone finance ministers also agreed on Sunday to a six year loan repayment extension for Greece on the basis that Greece will also pay 5.8% like Ireland. Personally, I would call that a restructuring of Greek debt only six months after the original terms were set. It is also hard to escape the conclusion that this debt will never actually be paid back.

    1. Stuart Fairney
      November 30, 2010

      None of the sovereign European debt will ever be paid in reality. Thus increases in the money supply to boost “liquidity” thus devaluing the debt, the politicians otherwise mysterious belief that year on year borrowing of 3% is okay and the endemic inflation which steals from us all. Why else would the target rate of inflation be 2% not zero? Permanently rising prices and permanent debt is good for politicians but disastrous for the rest of us.

      Von Mises explains this all quite elegantly

  17. edgeplate
    November 29, 2010

    Non-Euro members are already involved in the crisis through debt and the commitments already entered into.

    The question is rather whether our governments will resist being further drawn it. They could do, but it would require considerable political will. UK government behaviour to date leaves little room for optimism that they will find such will.

    If they allow us to be further drawn in, we’ll be further drawn in. If they don’t, they’ll worsen the immediate crisis. It would be better for the UK if they stood their ground, but maybe not better for them.

    Whichever way, it’s hard to see this ending with happy results for anyone, in the next few years at least.

  18. Steve Cox
    November 30, 2010

    The USA continues to struggle with its anaemic recovery, delivering little in the way of positive news. Somewhat surprisingly, British economic news continues to be relatively bright, especially in comparison to the USA. Yet in the last month Sterling has fallen by almost 5% against the dollar. Why? The only reason I can think of (apart from the fickleness of currency traders) is that we are indeed being dragged down by the unfortunate antics of our largest trading partner, the EU. Anybody feeling a touch of schadenfreude over the Eurozone’s problems should realise that a disaster for the Euro is likely to be almost as much of a disaster for the UK.

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