2/4/16: Tsipras: Europe's Cross of Forest Gump and Donald Trump

The tragedy of Europe is the comedy of Europe. And it is best illustrated in the case of Greece, or by Greece, where the latest debt-related scandal is telling us more about the infinite degree of European leaders' tupidity and outright lack of duty of care for their own citizens and societies than anything Kafka could have contrived.

The basis for the scandal is the following:

Act 1: IMF staff had a conference call discussing their engagement with the European Institutions in renewing the Greek bailout deal that is due to be renewed (from IMF side) in April. Now, as a precondition to this conversation we have:

• Greece is carrying to much debt after the 'breakthrough' deal 'achieved' last summer and it cannot repay all this debt. 
• IMF knows as much and said as much officially
• IMF also knows, and has publicly declared this before, that Greek debt can only be made sustainable by European authorities engaging in debt restructuring for Greece that introduces real haircuts on debt.
• Thus, IMF position going into April is to support Greek economy's objective of attaining debt relief from European 'partners'
• IMF are the good guys for Greek economy (as far as anyone in the game can be a good guy, of course).

Act 2: At the call, details of which were leaked, IMF officials discussed between themselves a possibility for the Fund taking a hardline position with respect to European Institutions in an attempt to influence them to give Greece debt relief. Which means that:

• IMF was considering strong-arming Europe into doing the right thing for Greece; and
• Greece would have benefited socially and economically if IMF were successful in what was discussed

Act 3: Enter 'Forest Gump Grafted on Donald Trump' of European politics - Greek PM Alexis Tsipras. Tsipras goes apoplectic with two things IMF conference call leak did:

• One, Tsipras is livid with the IMF discussing the tactic that could help Greek people by reducing the unsustainable debt burden they are forced to carry courtesy of the EU. The PM of an excessively indebted nation forced onto its knees by collapsed economy and debts is actively fighting against an idea of giving help to that economy.  And he is doing so despite the fact that this debt relief was his own  electoral platform! The lad is certifiable.
• Two, Tsipras if livid that someone leaked the transcript of the conversation, because, presumably in Europe, when a tree falls in a forest no one cares - out of sight = out of mind. It is the public embarrassment for a PM who barked at the IMF all along despite the fact that the IMF was all along his only friend in the entire EU-led fiasco of debasing the Greek economy. The embarrassment of being shown publicly to be damaging to his own society and economy. The lad is venal.

This latest three-acts Greek drama is beyond any comparative I can think of in modern history. If the Greek people ever wanted a PM who can throughly destroy the entire Greek society whilst shedding crocodile tears at the loss, they could not have invented a protagonist villain functional enough to match Tsipras.

Details of the drama are conveyed here: http://mobile.reuters.com/article/idUSKCN0WZ0J6.

20/2/15: Troika 3 : Greece 1. Rematch on Monday.

Eurogroup agreement on Greece 'achieved' tonight is a classic can kicking exercise in which Eurogroup and the Troika have won, Greece lost, but no one has moved an inch in real actionable terms.

Why?

• This is not an agreement to end the current programme that Greece is in, nor an agreement on a new programme to replace the current one. Instead, this is an agreement on the methodology for future negotiations over the replacement agreement. The current Master Financial Assistance Facility Agreement (MFAFA) is extended by four months. Hence, the current 'austerity programme' is still in place and has not been replaced by anything new. The extension is to allow time for developing a new agreement to bridge the current programme. This does not guarantee any of the conditions of the new agreement (e.g. 'easing of austerity' or 'reducing debt burden' or anything whatsoever) that will have to follow the current programme after June.
• Over the next two months (at the longest) here will be a review of the current programme and Greek Government proposals for amending the programme. The review will be conducted "on the basis of the conditions in the current arrangement" (see full agreement here: http://www.consilium.europa.eu/en/press/press-releases/2015/02/150220-eurogroup-statement-greece/). So no deviations from the 'basis of the conditions in the current' agreement will be allowed even in the review stage, although they might be allowed in the future agreement.
• However, the agreement also states that this review will make "best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions." In other words, the new agreement will still be required to run within the parameters allowed by the current agreement. You can read this as 'Greece has won recognition from the Eurogroup that current austerity programme needs revision'. Or you can equally read it as: within current austerity programme, there can be some flexibility, like for example, delaying austerity today, but loading more austerity risk into the future, should current delay fail to produce substantial improvement in underlying conditions.

To sum up the above: the old austerity (MOU and MFAFA) are now extended by 4 months. In exchange, Greece gets a promise that the Eurogroup and the institutions (aka Troika) will take a look at its proposals, as long as these proposals adhere to the basis of the current austerity MOU.

• Greece originally requested a 6-month extension, which would have allowed it to cover redemptions of some EUR6.7 billion worth of ECB bonds maturing in July and August, using the funds from the existent programme. They failed - the agreement extends current access to funds until June and puts Greece on the hook negotiating new bailout while staring into the double barrel of massive debt redemptions coming up. (see http://www.zerohedge.com/news/2015-02-20/why-4-and-not-6-months)

To sum up: Greece will be back to square one, but in a weaker financial position in June, unless it really plays ball before the end of the current extension. This is a major win for the Eurogroup.

• Greece committed to complete the current bailout. Worse, if it does not follow on through with the planned austerity, Greece will not receive the last tranche of funds. "Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup." So Troika is still there today as it was there yesterday and the Greeks have failed to end the current bailout. If you are inclined to say Eurogroup is not Troika, good luck: today's Eurogroup included IMF, ECB and ESM chiefs. And the Eurogroup clearly stated: "we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role." So both ECB and IMF are in place and Troika has simply been renamed into Institutions. 

To sum up: Troika is here, still. 

• On top of that, the Greeks have lost control of bank recapitalisation funds. "In view of the assessment of the institutions the Eurogroup agrees that the funds, so far available in the HFSF buffer, should be held by the EFSF, free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM." Until now, these funds were to be handled by the Hellenic Financial Stabilisation Fund (HFSF). These funds were also targeted by the Greek Government for use outside bank recapitalisations. Both are now lost positions for Greece: the funds move to EFSF, Greek Government has no say on their disbursement and they can only be used for banks recaps. 

To sum up: Greeks did not gain control over banks recapitalisation funds and did not gain access to these funds for the purpose of easing austerity.

• In return for the above concessions, Greece got a very wooly commitment from the Eurogroup that the New Troika "will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account". In other words, the primary surplus required for 2015 can (and probably will) be adjusted down. The problem, of course, is that this is only for 2015 and not beyond and that it is of a magnitude that will make absolutely no difference to Greece - we are talking about something of the order of 1-2 percent of GDP in just one year. 
• Reminder, Greek debt to GDP stands at around 175%. No amount of tinkering on the margins will deliver sustainability of this debt and no amount of tinkering on the margins can deliver a buffer of defense from the risk of future increase in the cost of funding the Greek debt.

To sum up: Presenting a primary deficit adjustment as a victory for the Greeks is equivalent to prescribing a course of homeopathy for the stroke patient.


Key point of the whole agreement is that it entails nothing in terms of what follows after the current bailout is completed. This - in all its principles and details - remains subject to future agreement, outside the scope of this Eurogroup meeting. In other words, Greece bought itself time to bargain about the future, Eurogroup bought itself time to get Greeks into even less comfortable financial position. And the Troika is still there.


In words of Wolfgang Schäuble: “The Greeks certainly will have a difficult time to explain the deal to their voters. As long as the programme isn’t successfully completed, there will be no payout."

In words of the Agreement: "The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely."

In words of the WSJ: "Greece’s ...government backed down from its plans to throw out the bailout program..., striking a tenuous deal with the rest of the eurozone to extend the program by four months."

In words of FT: "The decision to request an extension of the current programme is a significant U-turn for Alexis Tsipras, …who had promised in his election campaign to kill the existing bailout. …it includes no reduction of Greece’s sovereign debt levels, another campaign promise. Discussions on debt restructuring are likely as part of follow-on talks ahead of another bailout programme, which must now be agreed before June…Critically, the agreement commits Athens to the “successful completion” of the current bailout review, although it allows for Greece to negotiate its economic reform agenda."

Troika 3 : Greece 1

6/2/15: Cyprus AWOL on Troika 'Reforms'

Yes, at some point, Troika won't be able to handle all the bad news flying its way... for now, however, a new alarm at the barbwire fence of European Reformism: Cyprus is heading off the Troika Reservation:

Whatever might have made Cyprus rush for the AWOL, I'll let you discover, but judging by the foreclosure and insolvency framework reforms approved by the Troika in Ireland, one can't be too much surprised if any country would have much of faith in Troika expectations on that front. Then again, Cypriots would probably remember how EU regulators first encouraged accumulation of Greek sovereign debt in Cypriot banks, then haircut that debt, causing instant insolvency crisis across the Cypriot banks. Why would anyone listen to the same people giving advice on 'structural' reforms next, puzzles me.

25/11/2014: Irish Fiscal Council: More of Troika Speak, Less of Original Insight

The Irish Fiscal Advisory Council [an independent body of sort with some relevance of sorts, if only as a 'check' on the Government] has issued its assessment of the fiscal situation in Ireland. Just in time after the Troika review. Unsurprisingly, the Council mirrors the IMF (and the Troika analysis - covered here: http://trueeconomics.blogspot.ru/2014/11/21112014-latest-troika-report-risks-no.html.

Per Council:
"The Government will likely accomplish the important milestone of reducing the deficit to below the 3 per cent ceiling in 2015. The debt to GDP ratio is beginning to fall, albeit from a very high level. At the same time, economic recovery appears to be taking hold and risks to the Government’s balance sheet have subsided considerably as the outlook for both NAMA and the banking sector has improved." They wouldn't notice that debt/GDP ratio and deficit/GDP ratio were both helped quite a bit by the switch to new National Accounts classification in 2014. See Eurostat data here: http://trueeconomics.blogspot.ru/2014/10/21102014-of-statistics-ireland-and.html. Then again, Troika too 'missed' that point, so predictably, everything is down to the miracles of growth (see: http://trueeconomics.blogspot.ru/2014/11/23112014-half-of-irish-growth-miracle.html).

The Council shows some teeth, however, pointing the obvious: "…Budget 2015 reflects a missed opportunity to move the public finances more decisively into a zone of safety by following through on previous plans. The deficit is projected to be more than one percentage point higher in 2015 than could have been achieved if previous plans had been implemented. All else being equal, the larger deficits result in the debt level being roughly €10 billion higher in 2018 than if previous plans had been adopted."

And then there is the risk of pro-cyclicality - the new boggeyman  of European fiscal policy. In this context, "…Budget 2015 was marked by an absence of a well-specified plan for the public finances beyond 2015. Published tax revenue projections assume no change in policy despite Budget commitments to lower taxes in the coming years. Moreover, the Budget spending profiles assume unchanged expenditure after 2015, despite higher figures being set out in the Comprehensive Review of Expenditure 2015-2017 (CER 2015-2017). Expenditure ceilings have been raised again, however, the CER 2015-2017 does not adequately address how well-known expenditure pressures will be accommodated in the coming years."

Oh dear, that stuff is almost entirely Troika-speak and hardly much new. All in, this makes the Fiscal Council report if not outright redundant, at least repetitive. Which might be the point of the exercise, to keep the pressure on in hope that politically-expedient boom and bust spending and tax cutting are not making a return in Ireland ca 2015.

Good luck to all ye, hoping.

21/11/2014: The Latest Troika Report: Risks, No Buffers, Lots of Hope

The Troika did it bit… flew into Dublin on the 17th and flew out of here today. And left this as a present for all of us to enjoy…

Summary of their statement with my comments (outside quotes).

"Ireland has enjoyed a year beyond all reasonable expectations following the completion of its EU‑IMF supported program. Growth has accelerated to be highest in the euro area, job creation has continued, bond yields are at historic lows, and the fiscal deficit will again be below target. Ireland’s resolute implementation of steady and measured fiscal adjustment has been critical to this success."

Good news all… albeit no mention on the effect of ESA2010 accounting rules on our deficit and debt 'performance', but still, let's bask in some sunshine, for what follows is less sunny.

"Ireland should stick with this proven approach. Why? Growth prospects in coming years are still very uncertain... Current highly favorable international financial conditions may not last as major central banks begin to shift their stance and geopolitical risks can evolve rapidly. A sound fiscal position is a critical buffer in these circumstances."

Hold on there. So there are risks. And these risks included the dreaded prospect of rising interest rates. And our risk buffers are not up to meeting them. Too bad the Government has promised giveaways already for Budget 2016.

IMF goes on: "Ireland’s economic recovery is currently strong, yet major uncertainties remain." Major uncertainties?… "The sharp rebound in 2014 is led by exports and investment and is increasingly supported by consumer spending. …The mission estimates growth at just over 4 percent in 2014, yet there are significant uncertainties owing to the large contribution of offshore manufacturing to exports. Growth is projected to ease to about 3 percent in 2015 but the range of forecasts is wide, in part reflecting risks to growth in Euro Area trading partners and to international financial conditions." Oh dear. What this means is that growth is here, but much of it is based on:

1. MNCs exports, and
2. Hoped-for domestic recovery yet to materialise in any substantial form.

And what about those pesky "financial conditions"? Well, they are allegedly "...highly favorable and lending may be picking up from subdued levels. ...yet nonperforming loans (NPLs) remain very high. Lending has been weak, in part reflecting firms’ reliance on retained earnings, but mortgage loans have recently picked up in the context of sharply rising housing prices driven by job gains, declining household uncertainties, and a weak construction supply response."

House prices driven by jobs gains? Presumably in D2/D4/D6 where the 'middle Ireland' is bidding over 500K for 3-beds. Some jobs creation boost. With the "financial conditions" being fine, except in the real economy, where they are bad, we are back in the 'things are so bad, they must improve sometime' growthology.

Key kicker is Fiscal Policy - something that Government directly controls. Here's IMF on that:
"...a budget deficit that may be over 4 percent of GDP in 2014 remains too large to put Ireland’s high debt firmly on a downward path. Moving to a balanced budget over time would also buttress Ireland’s highly open economy against the broad range of shocks to which it is exposed."

Wait, this is straight from the Fiscal Council textbook (and do note - they are going to wade in with their 'views-to-be-ignored' next week). But it is worse than the Fiscal Council 'below 3% target' - this is about balanced budget aka 'zero % target'.

"The mission estimates that Budget 2015 generates an adjustment of about ½ percent of GDP in structural terms. A somewhat faster pace of improvement would have been preferable in view of relatively strong near-term growth prospects. Hence, any revenue over-performance or additional interest savings should be used to lower the deficit in 2015."

But Budget 2015 was billed by the Government as 'sustaining the recovery' effort. Not so much, says the IMF in the above. Rather looks like 'gambling on the continued recovery' effort to me.

"In the medium term, ... the authorities’ strategy to reach balance centers on fiscal restraint as set out in the expenditure ceilings and in the Comprehensive Expenditure report 2015‑2017. The mission estimates that this entails annual structural adjustment of ¾ percent of GDP over 2016–18, which avoids undue drag on growth. Such a steady approach to consolidation will help cushion shocks and result in faster progress to balance if medium-term growth is stronger than expected, and vice versa. Fully utilizing asset disposals, notably of the banks, to hasten debt reduction will reduce interest expenses, thereby containing the cumulative consolidation required."

In other words, you thought austerity is gone? Well, think again:

1. The above says there is more needed, albeit at marginal levels, and
2. The above assumes no slippage on 'savings' achieved to-date. Which is going to be very very hard to maintain as public sector agreements of the past come to renegotiations just at the time when political cycle favours giveaways to powerful interests.

Risks to the above also include, as IMF notes "…age-related demands for public services are rising and other expenditure pressures may emerge after prolonged restraint. Further reforms will be needed to generate savings while protecting public services and investment, and progress in containing the wage bill must be preserved." I flagged the rapid rise in retired numbers in recent analysis of the QNHS data. It now looks like the IMF is concerned we are swapping spending on unemployment supports for spending on early retirement schemes for public workers.

Another perennial headache is mortgages arrears. Much of policy expanded on this and the progress is questionable at best. IMF view is:  "Banks report good progress on workouts in relation to the CBI’s targets. The low rate of redefaults to date is welcome [I wonder if the low rates of re-default are 38% rate of actual redefaults reported by the CBofI in whauch case the Troika shows some humour here], yet some cures with smaller debt service reductions may not prove to be lasting, requiring banks to better target solutions. With about half of arrears cases under legal proceedings, it is important that these proceedings, together with active follow-up by the banks, are effective in motivating borrowers to reengage in a timely manner to reach restructuring solutions where feasible. Substantial unfinished mortgage resolution work requires continued supervisory targets for coming years, with due attention to reversing the continued rise of buy-to-let loans in arrears."

So the crisis has not gone away. And the evidence on quality of resolutions is dubious. But the IMF solution is - hammer more the borrowers, even though hammering them today might backfire tomorrow. I wonder if rational expectations form a part of the IMF economics team heads?

Problem number two: arrears in SMEs loans. "Implementation of lasting solutions for distressed commercial loans is also essential. Corporate, SME, and commercial real estate loans comprise the largest share of NPLs. Supervision should ensure that banks are either encouraging appropriate progress by distressed borrowers in the execution of workout plans or are making timely loan disposals."

Basically, this says "We've given up. Nothing seems to work, so just bankrupt the lot or sell the toxic stuff for someone else to bankrupt the lot". Not good. Not good at all.

Patrick Honohan got a ringing endorsement for his efforts to cool off the property lending (that is nowhere to be seen… which is sort of like evading icebergs in the middle of the Gulf of Mexico):
"New residential mortgage lending rules proposed by the CBI are a welcome step… The introduction of loan-to-value and loan-to-income ceilings will increase the resilience of both the banking and household sectors to financial shocks…"

And the last bit - the fabled Structural Reforms. Here, IMF remains true to its previous commitments of not producing any new thinking. Just keep raising the ghosts of the past, that is construction and employment activation.

"A stronger construction supply response is needed to help contain pressures on housing prices and rents. Housing completions remain low despite a 42 percent rise in Dublin house prices from their trough, which is also contributing to rising rents. A range of factors are impeding an adequate supply response by the construction sector, potentially hindering a renewal of migration inflows. Timely implementation of the government’s Construction 2020 initiatives is therefore important. In particular, the introduction of use-it-or-lose-it planning permissions together with vacant site levies could usefully help counter reluctance to develop properties owing to expectations of further price appreciation."

This is, frankly, a loony bin of policy proposals. The market is utterly dysfunctional - funding is hard to get, land is overpriced, supply of land is effectively controlled by Nama and vultures. Construction costs are sky high due to Government own 'reforms' from the past. And the IMF is offering to make things even more costly for development? Are they for real?

On employment activation: "Efforts to strengthen employment and training services should continue.  High levels of youth and long-term unemployment pose downside risks to employment and hence to growth in the medium term. Steady progress on engaging with long-term unemployed persons is being made and the private sector provision of employment services is expected to start in the second half of 2015. The establishment of regional Education and Training Boards that will collaborate with Intreo offices to facilitate referrals of jobseekers to training is welcome. Ensuring that these new frameworks are most effective in helping the unemployed return to work will require ongoing evaluation and adaptation."


In basic terms, there is nothing new in the above. Keep going the way we've been going: more questionable quality training programmes, more forced participation, more exits from the labour force dressing up unemployment figures. Just shove the long-term unemployed under the rug and pretend there is nothing there.

In short, the Troika review is a dud: it found little new, it offered no new policies, save for making things worse for developers and builders. But it, usefully, pointed the hotheads from the Government 'spend and be merry' side in the direction of the cooler winds of risks painting our horizon in unpleasantly steely hues.

20/12/2013: Are the bondholders' bailouts off the table now?

From late 2008 on through today, myself (including on this blog) and a small number of other economists and analysts have maintained a very clear line that burning of Anglo and INBS bondholders would have been a preferred option for Ireland.

Not to speak for others, I still maintain that writing off the Government bonds held by the ECB is the only course of action open to us today and that it should be pursued.

The ex-IMF's official statements yesterday concerning the preference for burning senior unsecured bondholders in Anglo and INBS, and the claim that this option is no longer viable for Ireland,  are neither new, nor material. For three reasons:

1. Anglo and INBS bondholders should have been bailed-in in full regardless of their status. Those who held secured bonds should have been bailed-in via equity swaps after the full bailing-in of unsecured bondholders. The action would have saved Irish taxpayers tens of billions, not just billions as the ex-IMF-er claims.
2. Other banks: AIB and ptsb bondholders should have bailed-in as well.
3. ECB objections to such a course of action were exceptionally robust, but Ireland should have pursued more aggressive stance with respect to the ECB. Not quite a full exit, but possibly a combination of a threat, plus a concerted push alongside other 'peripheral' countries in the European structures to force ECB engagement.
4. It is never too late to do the right thing: the debts are still there, only in a different form. Anglo-INBS debts are now held by the Central Bank in the form of sovereign bonds, converted into the latter by the acts of the current Government. These bonds should not be repaid. There are many ways in which such non-repayment can be structured, including with cooperation of the ECB and European officials. One example would be converting the bonds into perpetual zero coupon bonds.

In other words, late admission by the ex-IMF employee of the wrongs, backed by the claim that 'nothing more can be done' are not good enough. We need real corrective action from the EU.

Report on actual statement is here: http://www.breakingnews.ie/ireland/imf-ireland-could-have-saved-billions-by-burning-anglo-bondholders-617688.html

Update: H/T to @aidanodr for the following:
http://www.independent.ie/irish-news/politics/eu-chief-barroso-no-backdated-bank-debt-deal-for-ireland-29854504.html

This pretty much sums up the EU Commission's stance on the 'seismic' banks deal 'negotiated' by the Irish Government in June 2012. It is also wrong, offensive and belligerent. Mr Barroso's comments are simply economically illiterate. Assume Ireland did cause the euro area crisis. Can anyone (Mr Barroso?) explain how the euro can be deemed sustainable if it can be destabilised by a crisis in one of the smallest nations members of the union? Alternatively, imagine the US Dollar being as vulnerable to a banking crisis in New Hampshire in a way that euro (per Mr Barroso's claims) was allegedly vulnerable to the Irish crisis?

16/12/2013: Troika Consultancies... via EUObserver

A very interesting article on the EUObserver.com today (disclosure: I contributed a comment) on the issue of professional advisory services relating to the banks and fiscal crises: "Troika consultancies: A multi-million euro business beyond scrutiny"

28/11/2013: To OMT or not to OMT?

Per Irish Times report (http://www.irishtimes.com/news/politics/ecb-warns-bailout-exit-limits-ireland-s-options-1.1608426) "In remarks to The Irish Times, ECB executive board member Jörg Asmussen said leaving the bailout without a credit line meant Dublin did not meet conditions for the bank to buy Irish debt under its bond-buying programme." He is referencing OMT programme.

We knew that. Despite the fact that just a week ago, Minister Noonan claimed that "leaving the bailout without a precautionary credit line neither rules Ireland in nor out of accessing the ECB's Outright Monetary Transactions (OMT) programme. It has been speculated that going it alone without the safety net of a credit line would ban Ireland from the ECB scheme. "There is a misunderstanding in Ireland, even at the highest level of economic thinking, about OMT," Mr Noonan told TDs yesterday." (http://www.independent.ie/business/irish/we-can-still-access-ecb-aid-noonan-29771886.html)

Ouch...

Note: I wrote about this problem two weeks ago: http://trueeconomics.blogspot.ie/2013/11/15112013-exiting-bailout-alone-goods.html. I was clearly 'misguided'...

17/11/2013: Ireland to Remain Subject to EU/ECB Oversight post-Exit

On may occasions I have stated that Ireland will remain subject of the enhanced supervision by the EU and ECB of its fiscal policies following our exit from the 'Troika bailout'.

Minister Noonan this week confirmed as much: http://www.irishexaminer.com/ireland/troika-to-keep-eye-on-ireland-for-20-years-249851.html

Here's the relevant legislation governing our required compliance:

Regulation (EU) No 472/2013 of the European Parliament and of the Council
of 21 May 2013
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32013R0472:EN:NOT
pdf link: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:140:0001:0010:EN:PDF

Emphasis in bold is mine:

Article 14: Post-programme surveillance

1. A Member State shall be under post-programme surveillance as long as a minimum of 75 % of the financial assistance received from one or several other Member States, the EFSM, the ESM or the EFSF has not been repaid. The Council, on a proposal from the Commission, may extend the duration of the post-programme surveillance in the event of a persistent risk to the financial stability or fiscal sustainability of the Member State concerned. The proposal from the Commission shall be deemed to be adopted by the Council unless the Council decides, by a qualified majority, to reject it within 10 days of the Commission's adoption thereof.

2. On a request from the Commission, a Member State under post-programme surveillance shall comply with the requirements under Article 3(3) of this Regulation and shall provide the information referred to in Article 10(3) of Regulation (EU) No 473/2013.

3. The Commission shall conduct, in liaison with the ECB, regular review missions in the Member State under post-programme surveillance to assess its economic, fiscal and financial situation. Every six months, it shall communicate its assessment to the competent committee of the European Parliament, to the EFC and to the parliament of the Member State concerned and shall assess, in particular, whether corrective measures are needed...

4. The Council, acting on a proposal from the Commission, may recommend to a Member State under post-programme surveillance to adopt corrective measures. The proposal from the Commission shall be deemed to be adopted by the Council unless the Council decides, by a qualified majority, to reject it within 10 days of the Commission's adoption thereof.

Note: you can track my analysis of the 'exit' announcements following the links posted here: http://trueeconomics.blogspot.ie/2013/11/15112013-beware-of-german-kfw-bearing.html

15/11/2013: Beware of German (KfW) Bearing Gifts?..

As reported in today's press, Ireland has secured a sort-of backstop to its exit from the bailout via an agreement with Germany's state- and local authorities-owned KFW Development Bank (see: http://www.irishtimes.com/news/politics/kfw-is-a-public-bank-providing-development-loans-at-lower-interest-than-commercial-rates-1.1595460 and http://www.irishexaminer.com/ireland/bailout-a-calculated-political-gamble-that-just-might-not-pay-off-249727.html). This was blessed by Germany (http://www.independent.ie/business/irish/merkel-backs-ireland-bailout-exit-without-overdraft-29754656.html). And it may or may not qualify as a backstop for the Exchequer (see speculative analysis here: http://www.irishexaminer.com/archives/2013/1115/ireland/bailout-exit-declaration-exaggerated-half-truth-249716.html).

One can only speculate as to the possible conditionalities imposed by Angela Merkel and her potential coalition partners on Ireland under the exit deal, but here's an interesting parallel development that has been unfolding in recent weeks.

Per reports (see for example this: http://uk.reuters.com/article/2013/11/14/uk-eu-banks-idUKBRE9AD0X820131114 and this: http://uk.reuters.com/article/2013/11/15/uk-eurozone-banks-backstops-idUKBRE9AE08G20131115 and this: http://uk.reuters.com/article/2013/11/14/uk-ww-eu-banks-idUKBRE9AD15520131114 and this: http://www.irishtimes.com/business/economy/spd-rules-out-deal-on-banks-legacy-debt-1.1595352 and this: http://www.euractiv.com/euro-finance/germany-opposes-rescuing-ailing-news-531713):

1. Germany is clearly stating and re-stating its position on use of EU funds to recapitalise the banks (forward from the stress tests to be conducted). The position is 'No Way!' Wolfgang Schauble is on the record here saying "The German legal position rules out [direct bank recapitalisation from the ESM, the eurozone bailout fund,] now…That's well known. I don't know if everyone has registered that." So it is 'No! No Way! I said so many times!' stuff.
2. Euro area Fin Mins are moving toward using national (as opposed to European) funds to plug any banks deficits to be uncovered in the stress tests.
3. SPD Budget Spokesperson clearly states that his party is firmly, comprehensively against use of euro area bailout funds to retrospectively recap banks (the seismic deal of June 2012 is, in their view, not even a tiny wavelet in the tea cup).

Now, Ireland is the only country seeking retrospective recap and it is bound to have come up in the Government talks with Germans and the Troika in relation to bailout exit.

Put one and one together and you get a sinking feeling that may be retrospective recaps were the victim of the Government 'unconditional' solo flight from the Troika with KfW sweetener to comfort the pain of EUR64 billion in possible retroactive aid in play?..

Note: I am speculating here. It might be just that the Germans (KfW) decided to simply recycle their trade surpluses into another property err... investment bubble inflation in the peripheral states cause they just were so delighted with the way we paid off their bondholders. Or it might be because they are keen on burning some spare cash. Or both. Or none. If the latter, the reasons might be that it bought them cheaply something they want... How about that retroactive banks debt deal? It's pretty damn clear they want that off the table, right?

You can read my analysis of the exit here: http://trueeconomics.blogspot.ie/2013/11/15112013-exiting-bailout-alone-goods.html and see Ireland's credit risk score card here: http://trueeconomics.blogspot.ie/2013/11/15112013-ireland-some-credit-risk.html and fiscal risk assessment here: http://trueeconomics.blogspot.ie/2013/11/15112013-primary-balances-government.html.

15/11/2013: Primary Balances: Government Deficit Risks

While looking at Ireland's risk dynamics relating to our exit from the Bailout (covered here:  http://trueeconomics.blogspot.ie/2013/11/15112013-ireland-some-credit-risk.html) it is useful to think about the Government deficits ex-interest payments on debt. Here are the latest projections from the IMF:

For now, Ireland is running behind Portugal. By end of 2014, we are expected to overtake Portugal, but thereafter we are expected to remain behind Italy and Greece.

Not exactly a risk-free sailing there for the so-called 'best student in class'... Still, we are heading to posting our first crisis-period primary surplus.

15/11/2013: Exiting the Bailout Alone: 'Goods', 'Bads' and Risks

So Ireland is exiting the bailout without a precautionary line of credit. The news is big. And the news is small.

Small on positives, albeit tangible:

1. Markets got more certainty that any pricing will be a signal - absent a back stop, pricing signalled by the bonds markets is more likely to be the true pricing of debt. Caveat: NTMA's EUR 20 billion+ credit pile-up is likely to still muddle the waters. At last for a while, we are pre-funded.
2. The markets were told by the Government that, like the FF/GP Coalition before them, the current shower can make statements. Whether they can live up to them (see 'bad' points below) is another game.
3. We avoided the unknown to us 'conditionalities' that attached to the pre-cautionary line of credit - be it Precautionary Conditioned Credit Line (PCCL) or the more strict Enhanced Conditions Credit Line (ECCL) (see points below as to the cost of this avoidance).
4. IMF will be gone from the Government Buildings (although it still will be monitoring our performance from the sidelines with bi-annual reviews and the EU 'partners' will still be visiting the Merrion Street).

Small and potentially large negatives, many not yet tangible:

1. Reforms reversals pressures are bound to set in: with elections coming up, trade unions and other lobbyists (yes, that's right - the all are lobbyists) will be pressuring the Government to cut back on 'austerity'. In other words, we are going to see the return of the 'Galway Races' in a slightly less in-your-face form. Taxpayers be warned - fiscal discipline can start drifting even more toward tax extraction away from spending cuts.
2. Reforms fatigue is likely to follow: Irish Government to-date has failed to deal forcefully with the issues of domestic reforms. Interest groups and powerful vested interests they represent are lining up on the starting line to make sure they will continue extract protection from the State in exercising their market power. Consumers be warned - semi-states and protected professions will continue ripping us off.
3. Risks to the fiscal, financial sector and macroeconomic conditions are not going away. Just spot the decline in our goods exports: January-September cumulative exports are down from EUR70.12 billion to EUR65.41 billion year on year. The timing for our exit is fine, but the risks are still there.
4. Creeping up of the longer-term borrowing rates can take place, both in-line with expectations for the future rates policy by the ECB and in pricing in any risks to the macro and fiscal sides.
5. Stepping outside the tent with Troika reduces the pressure that the IMF can apply on our 'partners' in supporting any retrospective banks debt deal.
6. IMF leaving the oversight system (the latter won't go away per 2-6 packs legislation we have signed up to) means we are seeing the back of our only 'protector' in the Troika. Good luck expecting the EU and ECB taking the side of the Irish economy on fiscal and structural reforms policies.
7. Having exited without PCCL or ECCL, we do not qualify for the OMT - the famed and fabled 'silver bullet' from the ECB that was supposed to act as the fail-proof measure for risk management and crisis blowout prevention.

What can we - consumers and taxpayers - expect (these are uncertainty-laden assessments, based on current track record of the Government and internal coalition politics, so they are subject to possible change):

1. Higher costs of semi-states' services to ordinary punters as the protected sectors remain protected and are used increasingly to shore up public finances;
2. Higher costs of financial services as banks ramp up their power vis-a-vis the Government;
3. Higher taxes and charges as reforms policy drifts lifelessly from spending cuts to revenue raising;
4. Higher cost of debt roll-overs in the longer run as markets price in fully the level of debt we carry;
5. Lower competitiveness in the long run and more reliance on the old favourites (property, Government spending and consumption) to drive growth.

May we have good luck avoiding the above 'bads' and risks and enjoying the above 'goods'...

Update: The best headline of the affair award goes to Bloomberg: http://www.bloomberg.com/news/2013-11-15/irish-go-commando-as-noonan-draws-line-under-crisis-euro-credit.html

15/5/2013: Straight from 1984... The Department of Stabilisation...

Fir the fun of reading between the lines, follow my italics:

"IMF Executive Board Approves €1 Billion Arrangement Under Extended Fund Facility for Cyprus

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 891 million (about €1 billion, or US$1.33 billion; 563 percent of the country’s quota) arrangement under the Extended Fund Facility  (EFF) for Cyprus in support of the authorities’ economic adjustment program. [Given that Greece has more than double time to 'repay' its 'facilities' and Cyprus is likely to face an economic collapse worse than that experienced in Greece, good luck betting on that 3-year window not staying open less than a decade] The approval allows for the immediate disbursement of SDR 74.25 million (about €86 million, or US$110.7 million).

The EFF arrangement is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilize the country’s financial system [completely destabilised by the Troika arranging 'stabilisation' of the Greek economy], achieve fiscal sustainability [by pushing the GDP down by close to 13% in 2013 and likely another 15% by the end of the 'stabilisation' period], and support the recovery of economic activity [devastated by the Greek 'rescue' by the Troika and botched 'rescue' of Cyprus] to preserve the welfare of the population [who now need welfare as their jobs and savings are being vaporised by the economic 'stabilisation' measures of the Troika]."

30/4/2013: The latest from the island nuked by the Troika 'rescuers'

Cypriot Parliament has narrowly (29:27 votes) approved the EU 'rescue' package agreement that covers EUR 17 billion in funds, according to the majority of the media analysts. Alas, the devil of the package is in the details.

Cyprus is not (repeat - not) getting EUR 17 billion in funds. Instead the package lists the following sources of funding:
- EUR 1.2 billion to be raised via losses on junior bonds in Popular and BoC
- The “bailin” of uninsured depositors (deposits in excess of EUR 100K) and senior bondholders is set to yield €8.3 billion
- EUR 10 billion loan from the euro zone and the IMF of which the IMF will provide EUR 1 billion (http://www.imf.org/external/np/sec/pr/2013/pr13103.htm)
- EUR 1 billion from rolling over domestically-held government bonds, plus EUR 100 million from extending Russian bilateral loan
- EUR 0.4 billion from gold sales by the Cypriot central bank and EUR 0.5 billion from privatizations

Grand total is, therefore, EUR 1.2 + 8.3 + 10 + 1.1 + 0.9 = EUR 21.5 billion.

Per preliminary MOU, Cyprus 'programme' has three core pillars:

"The first pillar aims to restore the health of the financial system and minimize the contingent liabilities from the banks to the state." This includes haircuts on depositors and bondholders in the first stage - as confirmed in the today's approval vote. In later stages, this involves "a substantial reduction in the size of the banking system in relation to the economy as well as in restructuring and recapitalization of one of the banks."

“The second pillar entails an ambitious and well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups. In addition to the fiscal consolidation already underway—estimated at about 5 percent of GDP— an additional 2 percent of GDP in measures will be implemented during the program period, including by raising the corporate income tax rate from 10 to 12 ½ percent and the tax rate on interest income from 15 to 30 percent. An additional 4½ percent of GDP in measures will be needed over the medium term to achieve a 4 percent of GDP primary surplus by 2018, which is required to put debt on a firmly downward path. There will be protection for the most vulnerable groups. The social welfare system will be reviewed to streamline administration costs, minimize the overlap of existing programs, and improve their targeting to ensure that public resources reach those in need."

The third pillar, per usual IMF waffle, involves 'structural reforms'. “To complement the fiscal consolidation efforts, the program will undertake substantial structural reforms aimed to improve the effectiveness of the public sector. The state’s capacity to collect revenues will be strengthened with the implementation of a comprehensive reform agenda to modernize and harmonize procedures, improve internal coordination, and exploit economies of scale. Public financial management reforms will include the implementation of a medium-term budget framework and the adoption of a law on fiscal responsibility. In addition, to enhance the efficiency of the economy and reduce public debt, viable state-owned enterprises will be privatized. Finally, based on an assessment of needs, the program will supplement the recent reform of the pension system with additional measures to ensure its long-run sustainability.

In short, Cyprus gets the usual Troika 'Package +' of big-bang commitments delivery of which will be measured as common not by achieved sustainability or risk metrics, but by passed legislation and enacted legal changes (paper ahead of real impact). And the '+' bit refers to the total wrecking of the Cypriot economy under the reforms of the banking sector and international financial services sector, plus tax hikes which will assure that if there is any oil / gas off-shore, Cypriots will be out with shovels and snorkelling masks to dig every hydrocarbon molecule out to repay these debts.

19/4/2013: Mountains to climb, canyons to wade across

Nice visual from Pictet gang, sizing up two banking systems:

That was pre-'rescue' of Cypriot economy from itself by the 'benevolent' Troika Partners...

Recall, the package deal includes scaling back Cypriot banks to ca x3 GDP, or cutting the sector back to just about where it was in mid-2012 for Iceland, given the magnitude of GDP contraction from 2012 levels that this would require. It will be the case of roughly 'Look to your left, look to your right - either both of the bank clerks next to you are gone, or you are gone with one of them in tow'.

Updated:

And another visual from Pictet folks:

25/10/2012: My notes for the interview on Troika review

Here is transcript of my interview on today's radio programme covering the Troika review of Ireland - warning: unedited material. Italics denote quotes from the Troika statement.

Unfortunately, Ireland's recovery will not be achieved or even started by the exit from Troika funding program. For a number of reasons, conveniently omitted by Minister Noonan, but some of these are hinted at in the Troika assessment:

1) Real recovery will require dealing with private (household) debts. This is not happening and Troika review, as well as increasingly frustrated tone coming from our own Central Bank clearly show that. 

Once Ireland exits the bailout, we will have to fund our Exchequer debt repayments and reduced deficits via borrowing in the private markets. It might be that we will be able to fund ourselves at lower cost than currently, but the cost is likely to be still above that obtainable via ESM or Troika. This means more resources will be sucked out of the weak economy, further reducing the pace of private economy deleveraging. In other words, exit from the bailout will likely make it harder for the economy to recover.

2) Real recovery will require economic activity to start picking up in terms of private domestic investment, household spending, expanded activities by our own firms, not MNCs in exporting. All of this requires credit, it also requires disposable income.  Again, this will be only hindered by Ireland 'exiting' Troika funding.

3) Recovery in the  fiscal space will require lower, not higher, costs of funding for the Exchequer debt roll-overs and paydowns of Troika debts. As above, exit from the bailout will likely assure that this cost will be rising, not falling.

4) Recovery in the economy will require the Exchequer restructuring, significantly, some of the banks-related debts carried by the State. Most notably - the likes of the promissory notes - and this is clearly not going to be consistent with the Exchequer borrowing in the markets, at least not while we restructure the banks-related debt. It is better for Ireland to stay within the ESM and deliver on restructuring, and only after that aim to gradually exit the programme.

5) Lastly, recovery on exit from the program will require more aggressive reforms and stringent adherence to the fiscal discipline established. Alas, once we exit the program, the Government will lose its ONLY functional trump card in dealing with the Trade Unions. The Bogey Man of the Troika will be gone and the Social Partners will most likely exert pressure on the Government to borrow beyond its means to compensate them for the hardships of the Troika period. We can be at a risk of undoing overnight the precious little progress we've achieved to-date.

So, overall, I do not think this economy is going to recover once we exit the bailout. In fact, I think the entire logic of this argument as advanced by Minister Noonan is backwards. We should only exit the bailout once the economy is sufficiently strong to sustain orderly transition from subsidized funding to real world funding. Exiting Troika arrangements will not free Ireland from painful adjustments needed, but will likely risk derailing what has been achieved so far.

On Troika review specifics:

Banks remain well-capitalised and downsizing has progressed well, yet further efforts are needed to address their profitability and asset quality challenges.

Irish banks are well capitalized solely because there are no substantial writedowns of mortgages being undertaken in the banking sector. Meanwhile, mortgages arrears are snowballing, implying that the current levels of capitalization are unlikely to be sustained in the short term future. In other words, Troika praise here is simply a PR exercise.

Real GDP growth has slowed to a projected rate of ½ percent in 2012. Prospects for growth in 2013 are for modest pick up to just over 1 percent as domestic demand declines moderately...

So if I get this right: GDP will grow 0.5% in 2012 and 1.0% in 2013. GNP will shrink in 2012 and 2013 as well. Which means the real economy in Ireland - the one you and I and the listeners to this station are inhabiting will be shrinking 6 years in a row. That's 'strong performance'? In real terms we had GNP of 162bn in 2007, it fell to 127 billion in 2011 and is now, as IMF suggests will fall even further - close to 122-124bn or lower by the end of 2013. This is the much-lauded recovery we are bragging about?!

The authorities are ramping up reforms to restore the health of the Irish financial sector so that it can help support economic recovery. Intensified efforts are required to deal decisively with mortgage arrears and further reduce bank operating costs.

What are these reforms? Anyone noticed ANY progress in the banking sector? Especially on dealing with mortgages? I didn't. May be Minister Noonan can show us some couples who had their debt problems resolved? Not delayed, not shelved, but actually resolved. 

22/1/2012: 'Markets are crazy', says market economy Ireland

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.


PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

19/01/2012: One Question, please...

In the spirit of asking our Troika overlords questions around the time of their serial reviews of Ireland's Programme, here's mine:
"Given that since the previous review, Irish economy has posted

1. A full quarter of GDP & GNP contraction
2. Missed targets on fiscal side covered up by vague reforms papers publications and capital spending cuts, plus 'temporary' tax measures
3. Rampant tax increases & state costs rises, covered up by deflation in the private sector economy
4. Stuck sky-high unemployment, with massive contractions in labour force and emigration
5. Another botched 'austerity' budget with hope-for revenue measures substituted for reforms of spending
6. Repayment of billions in bust banks bonds
7. Continued lack of recovery in its banking sector

What part of (1)-(7) above constitutes 'successful completion' of the review?"

2/12/2011: Euro crisis: wrong medicine for a misdiagnosed patient

There's been much talk about the fiscal union and ECB money printing as the two exercises that can resolve the euro area crises. The problem is that all the well-wishers who find solace in these ideas are missing the very iceberg that is about to sink the  Eurotanic.
 (image courtesy of the ZeroHedge.com):

Let's start from the top. Euro area's problem is a simple one:

• There is too much debt - public and private - as detailed here, and
• There is too little growth - including potential growth - as detailed here.

Oh, and in case you think that discipline is a cure to debt, here's the austerity-impacted expected Government debt changes in 2010-2013, courtesy of the OECD:

In other words, it's not the lack of monetary easing or fiscal discipline, stupid. It's the lack of dynamism in European economy.

Let me explain this in the context of Euro area policies proposals.

• The EU, including member states Governments, believes that causality of the crisis follows as: Loss of market confidence leads to increased funding cost of debt, which in turn causes debt to become unsustainable, which in turn leads to the need for austerity and thus reduces growth rates in the Euro area economies.
• My view is that low growth historically combined with high expectations in terms of social benefits have resulted over the decades in a build up of debt, which was not sustainable even absent the economic recession. Economic recession caused the tipping point in debt sustainability beyond which markets lost confidence in European fundamentals both within the crisis environment, but also, crucially, beyond cyclical recession. My data on structural deficits (linked above) proves the last point.

So while Europe believes that its core malaise is lack of confidence from the markets, I believe that Europe's real disease is lack of growth and resulting high debt levels. Confidence is but a symptom of the disease. 

You can police fiscal neighborhood as much as you want (and some policing is desperately needed), but you can't turn European economy from growth slum to growth engine by doing so. You can also let ECB buy all of the debt of the Euro area members, but short of the ECB then burning the Government bonds on a massively inflationary pyre, you can't do away with the debt overhang. Neither the Euro-bonds (opposed by Germany) nor warehousing these debts on the ECB balance sheet (opposed by Germany & the ECB) will do the trick. Only long-term growth can. And in that department, Europe has no track record to stand on.

Take Italy as an example. Charts below illustrate the country plight today and into 2016. I use two projections scenarios - the mid-range one is from the IMF WEO for September 2011, the adverse one is incorporating OECD forecasts of November 2011, plus the cost of funding Italian debt increasing by 100bps on the current average (quite benign assumption, given that it has increased, per latest auctions by ca 300bps plus).

As chart below shows, Italy is facing a gargantuan-sized funding problem in 2012-2016. Note that the time horizon chosen for the assessment of fiscal sustainability is significant here. You can take two assumptions - the implicit assumption behind the Euro area policy approach that the entire problem of 'lack of markets confidence' in the peripheral states can be resolved fully by 2013, allowing the peripheral countries access to funding markets at costs close to those before the crisis some time around 2013-2014. Or you can make the assumption I am more comfortable with that such access to funding markets for PIIGS is structurally restricted by their debt levels and growth fundamentals. In which case, that date of regaining reasonable access to the funding is pushed well past 2015-2016.

Government deficits form a significant part of the above debt problem in Italy (see below), but what is more important is that even with rosy austerity=success model deployed by the IMF, the rate of decline in Italian public debt envisioned in 2013-2016 is abysmally small (again, see chart below). This rate of decline is driven not by the lack of austerity (deficits are relatively benign), but by the lack of economic growth that deflates debt/GDP and deficit/GDP ratios and contributed to nominal reductions in both debt and deficits.

But the proverbial rabbit hole goes deeper, in the case of Italy. IMF projections - made before September 2011 - were based on rather robust euro area-wide growth of the first quarter of 2011. Since then two things have happened: 

1. There is a massive slowdown in growth in Italy and across the euro area (see here), and
2. Cost of funding Italian debt has risen dramatically (see the second chart below).

These two factors, imperfectly reflected in the forecasts yield my estimation for Italian fiscal sustainability parameters under the 'adverse' scenario.

The above shows why, in the case of Italy, none of the solutions to the crisis presented to-date will work. Alas, pretty much the same applies to all other peripheral countries, including Ireland.

Which means that the latest round of euro area policies activism from Merkozy is simply equivalent to administering wrong medicine in greater doses to the misdiagnosed patient. What can possibly go wrong here?