Euro crisis – Act II: the consequences of an Irish default

 by Holger Zemanek

The Irish bailout shows that Greece was just the first act of the ongoing euro crisis. It is now almost certain that Ireland will accept an EU/IMF rescue package to calm down financial markets. In this second act of this euro area tragedy, however, the UK is likely to be a leading player as well. Indeed, the British government offered direct rescue funds to Ireland as British banks hold many Irish government bonds. The already troubled and largely state-owned RBS is a major lender to Ireland.

Of course, the Irish case is very different from the Greek one. Greece had accumulated huge public debt, cheated with official deficit data and had increased wages much above what was justified by productivity. While the latter is also true for Ireland, its government actually significantly reduced public debt until the financial crisis started. Yet, at the same time, Irish banks had accumulated unsustainable private receivables financed by foreign debt. During the crisis, the Irish government nationalised these “toxic” banking assets. Government debt rocketed as a result and this is the key reason for the second act of the euro area crisis.  

Now it would appear that the Irish bank assets are to be “supranationalised” at European level. Euro-area taxpayers and also British taxpayers will bear the risk and perhaps the costs. And there are at least two further problems with the quasi-bailout. Firstly, a rescue package for Ireland will potentially increase moral hazard for (not only) Irish banks but also for governments throughout Europe. Secondly, the political resolve in Ireland to undertake radical reform programmes and severe budget cuts may in practice be weakened by the rescue funds. This could weaken the necessary structural adjustment and threaten the Irish recovery.

However, there is a more important point. If Greece and Ireland are unable to repay the rescue package and guarantees become payable, public debt in the rescue-providing countries will increase. Then Irish and Greek debt will have to be paid back in the “donor” countries by spending cuts, tax increases or higher inflation. Not only will the banks and lenders to Ireland or Greece have to bear the costs but all taxpayers in the UK or Germany. A European transfer union would be established through the back-door.

The third act of the tragedy is already looming with Portugal as the next candidate for default.

ZIRP Failed in Japan, So They're Doing It Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

World Cup: South Korea 2 – 0 Greece

Goals in either half from Lee Jung-soo and Manchester United ace Park Ji-sing, helped South Korea to a comfortable 2 – 0 win over Greece earlier today in Port Elizabeth.




It was a very poor performance from the 2004 European Championship winners, but that should taking nothing away from South Korea, whose neat and adventurous play was fully rewarded.



Lee Jung-soo gave his side the lead in the first ten minutes when he tapped the ball home following a well-whipped in free kick taken by Ki-Sung-yueng.



Then just after the half-time interval, South Korea doubled their lead when Park Ji-sung raced through one-on-one after Greece defender Loukas Vyntra sloppily gave the ball away in his own half of the field.



The Manchester United midfielder made no mistake and easily placed the ball past goalkeeper Alexandros Tzorvas, which sealed a confidence-boosting opening win.



It was not until towards the end of the match when Greece showed some pressure and created numerous half chances – but it was too little too late.



They now must beat Nigeria on Thursday to have any chance of reaching the last 16 round of the competition.

by Nigel Slater