Ireland to go bust

[GGT]

Lehman looked good until it didn't. Everyone got hosed by Lehman, that's why it precipitated the financial crisis. You're calling it a gamble, when it didn't look like that at all before.

That's not true, you know.

That said, unless there was a Swiss bank run I'm not aware of, no bank depositors who just deposited cash have lost money in the developed world. Anyone who bought a specific investment program should know that there is some element of risk. That's as true today as it was two years ago and 50 years ago.

Deposits in the US are (now) FDIC guaranteed up to $250,000 per account. Why don't you talk to Americans who had US deposits before the limit was bumped up, and their bank went under during the crisis? There was quite a bit of tension, legal and otherwise, just a couple of years ago. Particularly in California.

[earthJoker]

Lehman looked good until it didn't. Everyone got hosed by Lehman, that's why it precipitated the financial crisis. You're calling it a gamble, when it didn't look like that at all before.

That said, unless there was a Swiss bank run I'm not aware of, no bank depositors who just deposited cash have lost money in the developed world. Anyone who bought a specific investment program should know that there is some element of risk. That's as true today as it was two years ago and 50 years ago.

Is that true about the Island case? I thought that actually foreign money of normal deposited cash was lost there, but I am absolutely not sure. I agree with you on the investment thing, you should always know there is a risk. But the banks are partially guilty as well if the claim that this risk doesn't exist.

In the Swiss cases it was all invest money. But just imagine if one of the big two had failed.

[GGT]

Is that true about the Island case? I thought that actually foreign money of normal deposited cash was lost there, but I am absolutely not sure. I agree with you on the investment thing, you should always know there is a risk. But the banks are partially guilty as well if the claim that this risk doesn't exist.

In the Swiss cases it was all invest money. But just imagine if one of the big two had failed.

Do you mean Iceland and IceSave? I think that was the name of the interbank that had tons of UK depositors. Not totally sure, but I recall IceSave depositors thinking they'd just found a bank with good deposit interest rates. When the bank went bust, no one knew which country guaranteed their deposits. Since Iceland was broke, UK depositors got a guarantee from parliament.

But I'm not sure how that all panned out.

[earthJoker]

OK so the UK made up for that, but I wonder what happened to savings from other countries. And sorry for the spelling, we call it Island (it's Ísland in the native language).

[GGT]

I don't know, joker. Maybe the UK depositor story only made news because they still bicker about fish with Iceland. It was a Cold War about Cod?

[Hazir]

OK so the UK made up for that, but I wonder what happened to savings from other countries. And sorry for the spelling, we call it Island (it's Ísland in the native language).

The governments of the UK and The Netherlands stepped in when the Icelandic government (illegally) dropped all non-locals from the guarantee. The UK and The Netherlands are demanding that money back from Iceland. IIRC we're talking about €4bn.

[Hazir]

Assuming that the bank still exists after the bailout and the shareholders aren't screwed outright (two fairly reasonable assumptions), you have a pretty safe bet IMO. That's unfortunately part of the moral hazard problem in the financial industry, but it has some nice corollaries for the investor who can stomach some pretty wrenching volatility in the short term.

You're even better off with the bonds of some EMU countries; high yields with virtually no risks (untill the bail out express stops of course).

[earthJoker]

Hazir, do you know if non eu clients got their money too? (no quote as written from mobile)

[wiggin]

You're even better off with the bonds of some EMU countries; high yields with virtually no risks (untill the bail out express stops of course).

The whole concept of having separate bond markets without separate monetary policies never made sense to me.

[RandBlade]

The whole concept of having separate bond markets without separate monetary policies never made sense to me.

How could you not? Until/unless there's a single federal economic policy there would have to be seperate bond markets. Do not US states issue their own bonds? I know California's in debt so surely they must have issued bonds?

[wiggin]

How could you not? Until/unless there's a single federal economic policy there would have to be seperate bond markets. Do not US states issue their own bonds? I know California's in debt so surely they must have issued bonds?

I understand that it's a necessity with the current EU system, but it's a little messy. See, sovereign debt is a lot safer than municipal/state debt because the country has control of monetary policy - if they really need to, you'll get paid, even if it's somewhat devalued currency. States and municipal governments don't have this luxury, so there's some serious default risk - IMO often worse than high quality corporate bonds (though the tax benefits often make it worthwhile anyways, at least for domestic investors). This translates into a risk premium.

What I find weird is that most euro-denominated sovereign debt doesn't seem to have this risk premium built in - German bonds, for example, have quite low rates in general when compared to other countries that set both monetary policy and sell sovereign debt. This means that the markets (until recently) don't believe there's a significant default risk for any EMU debt. Weird.

Of course, maybe I'm just exaggerating things. Most smaller countries not on a major currency issue their debt in dollars, both to get hard currency and to reduce the currency risk to investors. They do tend to pay a default premium, though, since even though the currency is respected the country can't make more dollars to pay off a debt in extremis. That being said, countries also pay a premium just because the chance of default is higher for reasons having nothing to do with monetary policy (e.g. if you have a shitty economy/government, you're going to pay more even if you control your own monetary policy).

[Being]

How could you not? Until/unless there's a single federal economic policy there would have to be seperate bond markets. Do not US states issue their own bonds? I know California's in debt so surely they must have issued bonds?

Really, California is in debt? Well, yes it is, right along with 46 out of 50 of the United States. Picking on California has become quite the cliche hasn't it? Why don't you mention any of the states that are in worse shape than California? Like:

New York with 26.7 % debt/GDP
Colorado with 27.5%
Florida with 27.8%
Kentucky with 32.9%
Massachusetts with 28.3%
S. Carolina with 31%

All have higher debt to GDP ratios compared to California's 26.4%.

[Dreadnaught]

Is that true about the Island case? I thought that actually foreign money of normal deposited cash was lost there, but I am absolutely not sure. I agree with you on the investment thing, you should always know there is a risk. But the banks are partially guilty as well if the claim that this risk doesn't exist.

In the Swiss cases it was all invest money. But just imagine if one of the big two had failed.

Iceland didn't offer that kind of deposit security for foreigners, which is part of what justified the higher rates. But many people (especially in the UK) simply ignored that lack of security. No bank in their right mind would claim that there is no risk to a speculative investment.

A certified deposit, however, is frequently called "secure" or "protected" if it meets the criteria for deposit insurance. I'm not aware of anyone who had deposit insurance in their bank savings who were wiped out.

Really, California is in debt? Well, yes it is, right along with 46 out of 50 of the United States. Picking on California has become quite the cliche hasn't it? Why don't you mention any of the states that are in worse shape than California? Like:

New York with 26.7 % debt/GDP
Colorado with 27.5%
Florida with 27.8%
Kentucky with 32.9%
Massachusetts with 28.3%
S. Carolina with 31%

All have higher debt to GDP ratios compared to California's 26.4%.

Source?

California is picked-on because of the absolute size of its debt, the amount of debt per resident, the persistence of the debt and California's apparent unwillingness to actually do something dramatic and substantive about it.

South Carolina has high debt to GDP, but it's less of a basket case because it's fiscal situation is less dire. SC has two rainy day funds, strict limits on spending and a smaller state workforce. If I had to guess (and I'm completely guessing), I would say much of its debt is based on defined capital projects instead of taking on debt for operating expenses.

[Lewkowski]

California is also a fun target because of their absurdly high tax rates, their dysfunctional government (late budgets seem to be the norm) and the recent practice of handing out IOUs.

[Being]

Source?

http://www.usdebtclock.org/

There is a button at the upper left for state debt clocks.

California is picked-on because of the absolute size of its debt, the amount of debt per resident, the persistence of the debt and California's apparent unwillingness to actually do something dramatic and substantive about it.

South Carolina has high debt to GDP, but it's less of a basket case because it's fiscal situation is less dire. SC has two rainy day funds, strict limits on spending and a smaller state workforce. If I had to guess (and I'm completely guessing), I would say much of its debt is based on defined capital projects instead of taking on debt for operating expenses.

New York's debt per citizen is $3,200 MORE than California's and S. Carolina's is only $1,700 less than California's.

[Hazir]

Hazir, do you know if non eu clients got their money too? (no quote as written from mobile)

I just know that the British and Dutch savers got their money.

[Hazir]

I understand that it's a necessity with the current EU system, but it's a little messy. See, sovereign debt is a lot safer than municipal/state debt because the country has control of monetary policy - if they really need to, you'll get paid, even if it's somewhat devalued currency. States and municipal governments don't have this luxury, so there's some serious default risk - IMO often worse than high quality corporate bonds (though the tax benefits often make it worthwhile anyways, at least for domestic investors). This translates into a risk premium.

What I find weird is that most euro-denominated sovereign debt doesn't seem to have this risk premium built in - German bonds, for example, have quite low rates in general when compared to other countries that set both monetary policy and sell sovereign debt. This means that the markets (until recently) don't believe there's a significant default risk for any EMU debt. Weird.

Of course, maybe I'm just exaggerating things. Most smaller countries not on a major currency issue their debt in dollars, both to get hard currency and to reduce the currency risk to investors. They do tend to pay a default premium, though, since even though the currency is respected the country can't make more dollars to pay off a debt in extremis. That being said, countries also pay a premium just because the chance of default is higher for reasons having nothing to do with monetary policy (e.g. if you have a shitty economy/government, you're going to pay more even if you control your own monetary policy).

The reason why we have all these run-away economic crises on the fringes of the EMU is exactly what this is about. The markets (correctly it seems) assumed that EMU countries were not going to be allowed to default. That in its turn meant that they took (in the end) all bonds to be covered by the core. And that's when the crazy borrowing and spending started. People talk a lot about the 'flaws' of the EMU, but you could just as easily call this a flaw of the markets not recognizing that buying Greek bonds was a bigger risk than buying Bunds. Of course now we've reached the point where the quay is turning the ship and none of that is very relevant any longer. The markets started factoring in risk way too late (or at a moment when risk actually went down by the core propping up the fringe) and now the core is facing the reality that they will have to discipline their fringe members because the markets wouldn't.

You may or may not remember I never believed in the Growth and Stability Pact, I expected the markets to take care of that. They didn't and now the core is stepping in and the rules for the EMU/EU monetary and fiscal policies will be tightened.

I consider all talk about countries leaving the EMU nonsense; these countries would merely be putting themselves in the position of going on with a worthless new currency and their debts in a euro that probably would shoot up in value. Which is also a good reason for Germany not to want to let go of the euro.

Latvia shows that a restructuring without a devaluation is possible, and not necessarily harsher than one with devaluation i.e. leaving the euro.

[Hazir]

Iceland didn't offer that kind of deposit security for foreigners, which is part of what justified the higher rates. But many people (especially in the UK) simply ignored that lack of security. No bank in their right mind would claim that there is no risk to a speculative investment.

A certified deposit, however, is frequently called "secure" or "protected" if it meets the criteria for deposit insurance. I'm not aware of anyone who had deposit insurance in their bank savings who were wiped out. .

You are wrong. EU/EER rules applied, which most likely made the actions of the Icelandic government with regards to all foreign savers illegal (reason for the words 'most likely'; Iceland may challenge this in court). They were bound to treat all EU/EER savers in the same way as their own citizens. They didn't and that's why the UK and NL are not letting go of the demand that Iceland pays back what they advanced to their respective savers. Iceland is still on the hook for something to the tune of 4bn.

[wiggin]

Really, California is in debt? Well, yes it is, right along with 46 out of 50 of the United States. Picking on California has become quite the cliche hasn't it? Why don't you mention any of the states that are in worse shape than California? Like:

New York with 26.7 % debt/GDP
Colorado with 27.5%
Florida with 27.8%
Kentucky with 32.9%
Massachusetts with 28.3%
S. Carolina with 31%

All have higher debt to GDP ratios compared to California's 26.4%.

You're right that California's debt is nothing special and quite manageable in size compared to other states (though it is pretty large historically, as are most state debts right now). The reason California has been in the news so much is really the dysfunctional political system where fiscal remedies are effectively impossible. Most other states with debt problems have a lot of leeway in fixing the problems - spending cuts, tax rises, changing entitlement spending, etc. - but the unique California political system with these ironclad rules and 'direct democracy' makes any substantive changes pretty impossible to get through. That's why CA had to issue IOUs several times by other large indebted states didn't have to - and that's why CA will continue to have serious problems until they fix their constitution.

I'm relatively bullish on CA as a state, if only because it's a pretty dynamic place that has shown a great deal of economic resiliency - first redefining itself from a major aerospace/defense giant to an electronics/software powerhouse, now repositioning itself in some green energies and other interesting avenues. But much of those advantages and adaptability can be ruined by an ossified political system.

The reason why we have all these run-away economic crises on the fringes of the EMU is exactly what this is about. The markets (correctly it seems) assumed that EMU countries were not going to be allowed to default. That in its turn meant that they took (in the end) all bonds to be covered by the core. And that's when the crazy borrowing and spending started. People talk a lot about the 'flaws' of the EMU, but you could just as easily call this a flaw of the markets not recognizing that buying Greek bonds was a bigger risk than buying Bunds. Of course now we've reached the point where the quay is turning the ship and none of that is very relevant any longer. The markets started factoring in risk way too late (or at a moment when risk actually went down by the core propping up the fringe) and now the core is facing the reality that they will have to discipline their fringe members because the markets wouldn't.

You may or may not remember I never believed in the Growth and Stability Pact, I expected the markets to take care of that. They didn't and now the core is stepping in and the rules for the EMU/EU monetary and fiscal policies will be tightened.

I consider all talk about countries leaving the EMU nonsense; these countries would merely be putting themselves in the position of going on with a worthless new currency and their debts in a euro that probably would shoot up in value. Which is also a good reason for Germany not to want to let go of the euro.

Latvia shows that a restructuring without a devaluation is possible, and not necessarily harsher than one with devaluation i.e. leaving the euro.

Okay, this is what I don't get - here you're openly acknowledging that the setup of the EMU as it is currently had some serious flaws that greatly contributed to the problems facing the states at the periphery - Greece would have had a much milder and sooner bond crisis without easy euros, and Ireland would have clamped down on runaway growth and asset bubbles much earlier than the ECB did - yet you refuse to acknowledge that this means the EMU has some responsibility to these states, especially when they had a responsible debt and growth policy beforehand.

We can argue back and forth about what the best solution to the problem is (a tighter, more coordinated EMU, countries leaving the euro, something else) but I just don't get your attitude towards Ireland.

[Being]

Most other states with debt problems have a lot of leeway in fixing the problems - spending cuts, tax rises, changing entitlement spending, etc. - but the unique California political system with these ironclad rules and 'direct democracy' makes any substantive changes pretty impossible to get through. That's why CA had to issue IOUs several times by other large indebted states didn't have to - and that's why CA will continue to have serious problems until they fix their constitution.

California's direct democracy just remedied the one big problem we had that made it impossible to get budgets passed on time. We have joined the majority of states in NOT requiring 2/3 majority of legislature to pass state budget. You won't be seeing IOUs in California again. And I'll reiterate, that is because of our direct democracy; politicians fought tooth-and-nail to kill that initiative.

[LittleFuzzy]

California's direct democracy just remedied the one big problem we had that made it impossible to get budgets passed on time. We have joined the majority of states in NOT requiring 2/3 majority of legislature to pass state budget. You won't be seeing IOUs in California again. And I'll reiterate, that is because of our direct democracy; politicians fought tooth-and-nail to kill that initiative.

A hell of a lot of politicians supported the initiative, from the Governor-elect and State Treasurer to the Heads of both the Assembly and the State Senate and on down. It was mostly supported and opposed on partisan lines, the Democrats were for it *because it meant they didn't have to keep finding Republican support to get the budget through* and the GOP was against it *same reason* The STUPID rule was put in place by our direct democracy process too. And passing a budget was only part of the problem. Something like 50% of the "discretionary" budget is effectively non-discretionary because it's been earmarked by direct democracy initiatives. And of course we still have some mildly restrictive tax rules, like how we assess property taxes, and the continuing supermajority requirement on all taxes.

[Being]

A hell of a lot of politicians supported the initiative, from the Governor-elect and State Treasurer to the Heads of both the Assembly and the State Senate and on down. It was mostly supported and opposed on partisan lines, the Democrats were for it *because it meant they didn't have to keep finding Republican support to get the budget through* and the GOP was against it *same reason* The STUPID rule was put in place by our direct democracy process too. And passing a budget was only part of the problem. Something like 50% of the "discretionary" budget is effectively non-discretionary because it's been earmarked by direct democracy initiatives. And of course we still have some mildly restrictive tax rules, like how we assess property taxes, and the continuing supermajority requirement on all taxes.

Does that mean you believe we'll still be seeing IOUs?

[LittleFuzzy]

Does that mean you believe we'll still be seeing IOUs?

It means I would not rule out seeing IOU's again over the next few years, that we're still a symbol of fiscal non-management, and that your defense of our direct democracy in a fiscal context is insane

[Hazir]

You're right that California's debt is nothing special and quite manageable in size compared to other states (though it is pretty large historically, as are most state debts right now). The reason California has been in the news so much is really the dysfunctional political system where fiscal remedies are effectively impossible. Most other states with debt problems have a lot of leeway in fixing the problems - spending cuts, tax rises, changing entitlement spending, etc. - but the unique California political system with these ironclad rules and 'direct democracy' makes any substantive changes pretty impossible to get through. That's why CA had to issue IOUs several times by other large indebted states didn't have to - and that's why CA will continue to have serious problems until they fix their constitution.

I'm relatively bullish on CA as a state, if only because it's a pretty dynamic place that has shown a great deal of economic resiliency - first redefining itself from a major aerospace/defense giant to an electronics/software powerhouse, now repositioning itself in some green energies and other interesting avenues. But much of those advantages and adaptability can be ruined by an ossified political system.


Okay, this is what I don't get - here you're openly acknowledging that the setup of the EMU as it is currently had some serious flaws that greatly contributed to the problems facing the states at the periphery - Greece would have had a much milder and sooner bond crisis without easy euros, and Ireland would have clamped down on runaway growth and asset bubbles much earlier than the ECB did - yet you refuse to acknowledge that this means the EMU has some responsibility to these states, especially when they had a responsible debt and growth policy beforehand.

We can argue back and forth about what the best solution to the problem is (a tighter, more coordinated EMU, countries leaving the euro, something else) but I just don't get your attitude towards Ireland.

The attitude towards Ireland; all you need to do to understand it is to look at the way their government made the mess bigger and bigger while they could have tried to prevent it. Then when the roof was falling down already they were acting as if everything was fine, making the bail-out a bigger problem than it could have been.

The fact that the EMU makes this type of runaway situation possible doesn't mean that those who are in charge of a national economy can't do anything to not make it happen. Of course the Greeks were beyond the Pale because they added blatant lies to the toxic mix, but the Irish weren't all that much better. And then they started blabbering about the absolute need to save a low tax rate. Really? After 10 years of mismanagement all of a sudden they know how to save Ireland once they've bagged €80 billion or other people's money?

As for the 'flaws' in the EMU make up, actually these are fixing themselves now that the bond markets seem to come to their senses about risk evaluation. Too bad the rest of us aren't certain if we can afford the fall out of the fix up at this very moment.

[RandBlade]

To raise the corporation tax rate would be economic vandalism.

[Hazir]

To raise the corporation tax rate would be economic vandalism.

It's a non-issue.

[RandBlade]

It's a non-issue.

Because it won't happen.

[Being]

It means I would not rule out seeing IOU's again over the next few years, that we're still a symbol of fiscal non-management, and that your defense of our direct democracy in a fiscal context is insane

Therefore, you also believe that taking redistricting away from the legislature is insane? My point is that neither of these things would have happened if it was left up to the legislators. It's a lot like the way the two party system remains intact and useless at the same time.

[Hazir]

Because it won't happen.

No, it's a non-issue because

1. it's hardly bringing Ireland any real business
2. the tax collected is dwarfed by any other consideration, which made it all the more stupid the Irish government was willing to risk financial ruin of the state and Irish banksector for it.
3. just because a PM on his way out acts like the gates of hell will open once it's scrapped doesn't mean it will be quite as popular with his successor. Chances are that his successor will be the one scrapping it, without any pressure from outside.

[earthJoker]

I agree on Hazir on this one. The current politics will hardly continue after the next voting.