The PIIGS Strike Back

So, as I suspected would happen, the push-back against the suicide pact continues. This week Spain managed to convince the EU that it should be allowed to loosen its deficit targets for this year a little in return for a greater push in 2013.

Eurozone finance ministers have given unemployment-ridden Spain more wiggle room in cutting its big deficit, signalling that new, tighter rules against overspending in the currency union retain some flexibility for hard-hit countries.

The ministers from the 16 other states that use the euro said Spain had to make further cuts worth 0.5% of gross domestic product, which indicates that the country is now expected to slash its government deficit to around 5.3% of GDP this year from about 8.5% last year.

That is still below the 5.8 % deficit target Spanish prime minister Mariano Rajoy announced earlier this month, but significantly softer than the 4.4% deficit the country had originally promised to its partners in the euro.

Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said it was “of the utmost importance” that Spain brought its deficit down to below 3% of GDP – and back in line with European Union rules – by 2013.

Well at least we are seeing a little reality creeping into the crisis, but an attempt to cut 3.2% of GDP in government spending against a very depressed private sector while maintaining a trade deficit still utter delusion. I would suggest that, once again, you prepare for a disappointing outcome followed by more requests for leniency because the Spanish economy has not behaved “as expected”.

At the same time that Spain has been pushing for some leeway, so has Ireland. The Irish government has been asking for an adjustment in terms of €31bn worth of promissory notes issued by the government in 2010 connected with restrucutring of Anglo Irish Bank.  The Irish government appears to have attempted to use the upcoming referendum on the fiscal compact as a leverage over Europe to get a better deal.

Given the economically delusional policies of the Europe’s central bureaucracy  I am not surprised at all by the rebuke from Olli Rehn.

“I actually wonder why this has to be asked at all, the principle in the European Union and the long European legal and historical tradition is, in Latin, pacta sunt servanda – respect your commitments and obligations.”

Which brings up the question of exactly what the Eurocrats think is the commitment and obligation of the elected government of Ireland? To set policy and deliver services to the Irish people for the betterment of their lives, or to guarantee that the international lenders of funds to commercial banks, even the unsecured ones , get their money back ?

The promissory notes are an outcome of the failed bailout of the Irish banking system that started in September 2008 when the government unconditionally guaranteed the deposits and bonds of the Irish-owned banks. Since that time the Irish taxpayer has been on the hook for their losses.

Even a brief glance at some of the associate documentation of the original deal tells you that it wascompletely one-sided deal with Irish citizens taking responsibility for the failings of European banking regulators including responsibility for financial instruments that should have been written off on day one.

Anglo is one of the financial institutions covered by the Irish Guarantee Scheme for financial institutions (“the Guarantee Scheme”), which was adopted under the Credit Institutions (Financial Support) Act, 2008 (hereafter the “Act”), and approved by the Commission under State aid Rules on 13 October, 2008.

The liabilities covered under the Guarantee Scheme were those liabilities existing at close of business on 29 September, 2008 or at any time thereafter, up to and including 29 September, 2010, in respect of the following: (i) all retail and corporate deposits (to the extent not covered by existing deposit protection schemes in the State or any other jurisdiction); (ii) interbank deposits; (iii) senior unsecured debt; (iv) asset covered securities; and (v) dated subordinated debt (Lower Tier 2), excluding any intra-group borrowing and any debt due to the European Central Bank arising from Eurosystem monetary operations.

Despite its coverage under the Guarantee Scheme, the impact of the global financial crisis on the Bank as well as difficulties that arose with regard to its corporate governance, led the Irish Government to announce on 21 December, 2008, its intention to make a capital injection of €1.5 billion into Anglo. The Commission issued State aid approval for the proposed recapitalisation on 14 January, 2009.9

For more on that point I would advise you to watch this video in which a member of the ECB, Klaus Masuch, is unable to provide a valid answer to an Irish journalist as to why this deal ever occurred.

Making matters worse, the Anglo Irish bank was nationalised in January 2009  after it was realised that recapitalisation was impossible given the mounting liabilities stemming from the collapsed Irish housing market and the GFC. As we have seen so many time before, it also emerged that the banks books were dodgy and contained assets which were in fact circular obligations between itself and another Irish bank, Permanant TSB. You can read more about this incident here.

Over the period of next 18 months the true losses of the banking system became apparent and by September 2010 emergency lending against the ECB by the Irish banking system had reached €120bn and Irish government support had risen to over 30% of GDP. As a fallout government sector debt exploded, while the economy collapsed leading to a huge rise in yields. In September the Irish government, under extreme pressure from the ECB and EU re-newed the banking guarantee, which meant by October 2010 the Irish government 10 year bond yields surpassed 7% and the government was forced to seek a bailout.

In November 2010, the EU/IMF granted Ireland a €85 billion fund under the usual austerity terms which meant cuts to welfare spending, a rise in the Value Added Tax rate, and cuts to public services. Ultimately this has meant more strain on the economy of Ireland and therefore its people.



It is quite obvious that Ireland continues to suffer considerable economic strain due to its agreement to bailout the European banking system, yet Europe doesn’t seem to want to return the favour. What makes Olli Rehn’s comments even more surreal is that even in the face of obviously failing austerity policy, Ireland wasn’t actually asking to default on the deal. It was simply asking for a change in terms to match those that were previously been granted to other periphery nations under emergency programs, such as Greece.

Ireland is requesting that the promissory notes be replaced with longer term EFSF bonds, which would both lower its interest payments and also provide collateralised liquidity via the ECB. These requests aren’t much different to what has been granted to Greece its 2nd bailout, yet it is very obvious that Ireland has done far more to attempt to support Europe than Greece ever did.

As we continue to see with Greece, even in the face of years of mounting evidence to the contrary, the European financial elite continue to believe that demanding nations pay ever mounting debts while taking away their ability to do so is sound financial policy. If I was voting in the Irish Referendum I would tick the NO box.

Latest posts by __ADAM__ (see all)


  1. This is the making of a revolution and not just in Ireland. With the History of Europe one can only imagine where it all leads.
    One thing I simpy cant understand is why in the face of this obvious disaster people are still so bullish.
    Europe is going to suffer an epic financial meltdown maybe not this month or this year but the way they are going it is assured and it seems even our own Treasury department thought the EU would blow up late last year. But hey thats a problem for another time you can still negatively gear a one bedroom $300k flat in the docklands its the way to prosperity

    • as a positive atleast the Eurozone recognise they have a problem no matter what measures they employ, better then the head in the sand routine of the anglosphere.. then again its hard to ignore riots in the streets.

      Default on the debt, reset, or turn the banks into utilities and watch a mass exodus of ‘talent’ leave the finance sector

  2. Another great piece DE – and I especially like the clip. That banker put less effort into addressing the question than our politicians – and that’s saying something.

    The lesson for periphary EU nations from all this appears to be that there is no incentive to seek to meet the ECB targets, as the more you do, the bigger the stick, and the less you do, the bigger the carrot.

    Perhaps in future we’ll start to see Ireland taking steps to act in its own national interest rather than continuing to do all it possibly can to appease the unappeasable ECB.

  3. The amazing thing is that the EU holds up Ireland as the posterboy for austerity. The difference is that clearly Spain is big enough to give the Troika the proverbial finger and Ireland is not.

    You have to wonder at the political machinations going on in the background because so much of what actualy happens in the Eurozone in relation to the PIIGS defies any sort of rational finacial sense or fairness.

  4. What can you say. If the bankers see any resistance they do what they’ve done in Greece and Italy. What to take a bet on another GS ex-banker being parachuted into Portugal/Spain?

    DE one other issue is if Europeans want to sort this out they need to vote, and in my experience they don’t. Living there, and being used to the must vote of Australian politics I found it odd they they didn’t vote, but complained bitterly about the EU. I used to shame my office colleagues to go and vote.

    From Exame Expresso:

    “On a day when the risk of coming into compliance decreased to Ireland (which remains in 4th place in the “club”), Spain (which remains in 9th place), Italy (that due to this decline today came from 10th place ), Belgium, France and Austria, the probability for the Portuguese debt rose – was an exception in the negative. The risk of default of Portugal closed today at 66.02%, more than one percentage point above the closing Tuesday at 64.33%, according to data from CMA DataVision.”

  5. SkoptimistMEMBER

    If I am not mistaken, and I am happy to stand corrected, Ireland was the first nation in the GFC to guarantee their banks and in essence (and in practice) nationalize them.
    In doing so the Irish government signed on for all of the debts owed by these institutions. The guy in the clip more or less said that had they acted differently the outcome may have been different (and the Irish tax payer may have been better off).
    It seems a bit harsh to blame European officials for the decisions of the Irish government. After all, who signed on to the deal in the first place?.

    • Did they sign willingly or were told to? I’d be amazed it they took this step without a rather large push on consequences by some EU official or CS rep.

      Also, if you look what the people of Ireland were told about the bond holders being pension fund based, and you know the truth now, then I don’t think this is a simple case of Irish politics acting on it’s own.

      • SkoptimistMEMBER

        Were told to?. By whom?.
        I suspect that they were stuck between a rock and a hard place and chose the path they thought would involve the least pain. They may well have made the wrong choice, but in the end it was their choice.

    • I think whats upsetting the Irish the most is that they (the tax payers) had to bail out a bank that was ALREADY bankrupt/defunct/toast whatever you call it and there was no turning back for the defunct bank. So basically the money was wasted when it could have been used to keep the Irish economy in better shape, The Irish were also screwed when kind wasnt returned.(Maybe because they were so small.)

  6. Until the Irish taxpayers develop the backbone to riot like the Greeks have they’ll continue to be bent over by the ECB.

  7. The same is happening in the Netherlands. The minority government managed to get support for its EU policies from the social-democrats until two days ago.

    The pact requires The Netherlands to cut-back an additional €13 billion on top of €18 billion in previous years. The social-democrats who are currently in a leadership election have said to deny support as such cut-backs will do serious harm to the economy.

    Obviously the Prime Minister is trying to keep it all together as The Netherlands has been banging the responsible finance drum in Europe and he will loose face over it after being so vocal.

    • And this is one reason why that Marijuana will not be banned in the Netherlands as the country needs the money that the drug tourists bring in.

  8. One of the primary reasons for the bailout was to face off a run on the Irish banks. The true extent of the debts at Anglo were unknown at the time as was the extent of the property crash.

    Whether it is yes or no in the upcoming referendum, Ireland has no good choices. They had the Germans/French by the balls around the time of the bailout and chose not to squeeze. Instead they tried to be the good students of the class and hope for a reward. Now with the LTRO in full swing, the deck is not stacked in Ireland’s favor as much and unless Ireland threaten outright default, it business as usual on
    the austerity front.

    Where are those fighting Irish? They are not amongst the Irish political classes that’s for sure. All I can say is I’m glad I emigrated to this amazing lucky country but it’s with a heavy heart.

  9. In the same vein as the video above I thought Christine Laggarde’s effort of explaining the Euro crisis on the 7.30 report was very average at best. Yes it is complicated but surely after 2 years and all the intellectual “fire power” that has been applied someone should be able to explain how it will work. She also went on to say Greece needs to get more competitive and made the comparison to the minimum wage in Greece v’s Portigul (her pronunciation) and Latvia. I am not sure they are the economic power houses I would be aiming to become. What is the point of competing against economic minnows like this. There is plenty of cheap labour out there already, China for example. I don’t get it.