Are Ireland and Portugal out of the woods?

Ireland and Portugal have, recently, tested the water of the money markets with some success. Portugal has issued 5-year bonds and Ireland is in the process of converting its unbearable promissory notes into long-term bonds, to be sold to the private sector. So, on face value, two of the so-called ‘program’ Eurozone countries, wards of the EFSF and the troika, are returning to the markets.

But does this mean that they are out of the woods? Is there, in other words, any justification in saying that these two countries are closer today to exiting their ward-of-the-troika status than they were last July, before Mr Draghi’s pronouncement that he will do all it takes to save the Eurozone? The answer to both questions is, I am afraid, a resounding ‘No!’ To see why this is so, it helps to remind ourselves (a) what it means to be ‘out of the woods’, and (b) what Mr Draghi’s OMT program is and how it is affeting Italy and Spain and, through them, Ireland, Portugal.

To begin with, to be ‘out of the woods’ ought to mean a capacity to finance one’s state without relying on direct or indirect state financing by any of the troika’s branches. It means that Dublin, Lisbon, Rome, Madrid can run their own fiscal policy without the direct supervision of the troika and without reliance on the troika’s willful actions to secure the sustainability of that fiscal policy. It will be my claim, below, that none of the ‘fallen’ Eurozone states (Ireland, Portugal, Spain and even Italy) are nearer this ‘happy ending’ today than they were in July 2012.

A brief history of OMT, its nature and function

The bond market calm that broke out recently is entirely due to Mr Draghi’s OMT (outright monetrary transactions) program announcement last September. What was the purpose of the OMT? Put simply, to address the utter incapacity of the EFSF-ESM bailout fund to bail out Italy and Spain. After Germany’s rejection of any suggestion that the EFSF-ESM should be allowed to borrow more money, or that the ECB’s balance sheet should be used to lever up the EFSF-ESM’s funds, it became abundantly clear that, as Spain and Italy were being brutalised by money markets shorting their bonds, there was no way that their combined 3 trillion euro debt could be stabilised. It was at that point that Mr Draghi had to step in, somehow, to plug that gap and, effectively, signal to bond traders that further shorting of Italian and Spanish debt would lose them money.

Thus the OMT was born. It constituted a simple threat, by the ECB, that if need be the ECB would purchase as much short term Italian and Spanish debt from the Italian and Spanish banks as it was necessary to burn the short-sellers of Italian and Spanish bonds. Unable to mention Italy and Spain explicitly, Mr Draghi’s OMT specified that the program concerned countries that retained full access to money markets; in other words, that it did not apply to Greece, Ireland and Portugal (which left only Italy and Spain on the menu). This condition killed two birds with one stone: It signalled that which Mr Draghi wanted to signal vis-à-vis Italy and Spain (that the OMT was meant as a stop gap measure to fill in the funding hole due to the EFSF-ESM’s incapacity to bail out Italy and Spain) and, moreover, it left a window open for concocting an alternative to a new official bailout loan for Ireland and Portugal (once their first loan agreement expires).

Markets responded instantly by taking several steps back. While OMT financing was also conditional on Italy and Spain to be placed under troika supervision, under a full troika program, bond traders refrained from testing Mr Draghi’s commitment for two reasons: First, because of the Beauty Contest effect (i.e. each bond trader believed that average opinion among bond traders was that, for the time being, it does not pay to mess with Mario) and, secondly, because Mr Draghi and the EU hinted at a willingness to consider Madrid’s and Rome’s existing austerity policies as a de facto troika program, at least in the short run.

Thus, Italian and Spanish bond yields collapsed despite a colossal deterioration in the real economy’s fundamentals for both these countries. And as their bond yields fell, a rally of all bonds began throughout the Eurozone aided and abetted massively by Mrs Merkel’s decision to proclaim that Grexit was off the table, until further notice at least.


The universal fall in bond yields was of particular importance to the Dublin government. Lest we forget, Ireland’s government has for some time been desperately seeking to show the Irish people some tangible evidence that its ‘model prisoner’ strategy was paying off. That Ireland would receive a good behaviour bond from the ECB, in particular with regard to the hated promissory notes,[1] and that, soon, it would be able to throw off the ignominious label of being a member of Bailoutistan, of being a ‘program’ country alongside disgraced, failed states like Greece. The OMT offered Ireland a great opportunity to bring an official end to its official fallen state status.

The logic was simple: Ireland’s crisis was not substantially different to Spain’s. Its sovereign debt became unsustainable when the real estate sector imploded, exposing its banks to a mountain of debts which were then transferred onto the state’s shoulders. If OMT made it possible for Spain to pretend that it retained full access to the money markets, why could Ireland not maneuver itself, with the ECB’s assistance, into a Spain-like situation: of remaining a ward of the troika after officially, at least, exiting its EFSF program?

What made this easier, in the Irish case, was the fact that some fund managers, Franklin Templeton being one of them, had already wagered a great deal of cash on Ireland managing to become a northern Spain. It is for this reason that Irish spreads had already fallen below Spain’s some time ago (since the hedge and mutual funds’ purchases of Irish debt constituted a considerable percentage of Ireland’s outstanding bonds).

So, taking advantage of the combined OMT-effect and hedge/mutual fund wagers-effect in suppressing its bond yields, the Irish government went to the ECB with an offer the ECB could not, ultimately, refuse: “We are going to offer you a splendid chance, at no cost to the ECB, to proclaim your first success in the fight to end the crisis. Just allow us to stretch our promissory notes repayments into the future, while keeping steady the intertemporal value of our payments to the creditors of our defunct banks. That way, the ECB can say that it has not concurred to the monetary financing of the Irish state while our promissory notes will be converted into long term bonds and sold to the private sector. And why will the private sector buy them now at affordable interest rates? Because if they do, Ireland can be proclaimed to have regained access to the markets, in which case Ireland is suddenly perfectly eligible for the OMT program: a member-state with full access to money markets and a pre-existing troika program. Immediately, bond traders will cease and desist from shorting Irish bonds even if we try to sell a large number of fresh ones. As for the icing of the cake, from the ECB’s perspective, the ELA will be used far, far less, allowing the ECB to claim a return to normality in that regard too.”

The ECB’s recent announcement of its agreement on the conversion of Ireland’s promissory notes into long term bonds concludes this deal: The Irish taxpayer will continue to be burdened with huge, unsustainable long term debts taken out by bankers who are now defunct and who should never been backed by the Irish state. Austerity-driven self-perpetuating recession, and the resulting stalled recovery, will remain the order of the day. The fact, however, that Ireland’s sovereign debt is unsustainable and that its largely self-inflicted austerity has failed will, from now on, be hidden behind an OMT-created façade. The troika will continue to be the effective government of Ireland and the Irish state will continue, just as it has been since September 2010, to require the direct interventions of the ECB in order to maintain its ‘market access’. All that has changed is the rhetoric, which now rewards Dublin with the Pyrrhic victory of claiming, with a little more self-confidence, that “it is not Greece”.

The sad truth behind the shadow play

Mr Draghi’s OMT has undoubtedly succeeded in addressing a sequence of political headaches:

  • How to avoid telling the German electorate that Spain, Ireland, Portugal and, eventually, Italy will need gargantuan fiscal assistance that the EFSF-ESM was incapable of providing.
  • How to break the news to them, months before the German federal election, that Ireland, Spain and Portugal, in addition to Greece, will require fiscal financing ad infinitum.
  • How to tell the Irish people that their suffering had no tangible effect.

All these questions are now answered in one, brief, liberating sentence: Ireland has escaped Bailoutistan and Spain has been prevented from entering it. Even Portugal has issued some five-year bonds! Bring on the champagne!

But as the champagne corks are liberated, and the merriment’s din fills our ears, it is worth maintaining a connection with reality. And the reality is particularly stark: There has been no progress whatsoever! Indeed, the Eurozone crisis is getting worse the calmer the bond markets seem and the more confident  the commentariat is becoming that Ireland and Portugal are out of the woods. If the resolution of the Euro Crisis was all about replacing EFSF-ESM funding with the ECB, without decoupling the banking from the debt crisis and while a vicious asymmetrical recession is eating into the heart of Europe, then of course the Crisis is over. Alas, it was never about that. And so the good ship Eurozone sails on, taking water in at an increasing rate that drowns more and more of those below the decks, while its first class passengers, pacified by a cunning captain, are downing the champagne.

[1] Guarantees offered by the previous government to two failed banks, which involved annual repayments by the taxpayer to failed bankers and their creditors as cruel and unusual as the annual tribute sent to Crete by the Athenians (i.e. Athenian boys and girls to be devoured by the Minotaur).

18 thoughts on “Are Ireland and Portugal out of the woods?

  1. Pingback: Are Ireland and Portugal out of the woods? An updated version - Gearsoftimes

  2. Νέα νίκη Σαμαρά με… λιγότερα λεφτά από την ΕΕ 🙂

    Εκνευριστική έχει καταντήσει αυτή η αενάως επαναλαμβανόμενη ιστορία με τις… «νίκες» και τους «θριάμβους» που σημειώνει οπωσδήποτε ο εκάστοτε Ελληνας πρωθυπουργός κάθε -μα κάθε!- φορά που συμμετέχει σε σύνοδο κορυφής στην ΕΕ. Το ίδιο πανηγύρι φαιδρής προπαγάνδας ζούμε πάλι από την Παρασκευή, όταν οι Ευρωπαίοι ηγέτες αποφάσισαν το ύψος του επταετούς προϋπολογισμού της ΕΕ για τα έτη 2014-2020. «Είμαστε πολύ ικανοποιημένοι» δήλωσε μετά τη λήψη της απόφασης ο πρωθυπουργός Αντώνης Σαμαράς. Ειλικρινά απορούμε γιατί είναι ικανοποιημένος, αφού τα χρήματα που θα πάρει η Ελλάδα από τον προϋπολογισμό της ΕΕ την επόμενη επταετία είναι σαφώς λιγότερα από όσα πήρε την επταετία 2007-2013! Κατά τη διάρκεια της επταετίας που τελειώνει η Ελλάδα πήρε 20,4 δισ. ευρώ συνολικά από τον προϋπολογισμό και τώρα θα πάρει μόνο 16,3 δισ. Ακόμη και αν πάρει μετά το 2016 επιπλέον 2 δισ. ευρώ, τα οποία δεν είναι καθόλου διασφαλισμένα αλλά δεν αποκλείεται πραγματικά να δοθούν, η συνολική χρηματοδότηση της Ελλάδας από τον προϋπολογισμό της ΕΕ θα φτάσει στα 18,3 δισ. ευρώ, τα οποία και πάλι υστερούν της προηγούμενης περιόδου 2007-2013. «Μειώθηκε ο προϋπολογισμός της ΕΕ και παρά τη μείωση η Ελλάδα πέτυχε σπουδαία διαπραγματευτική νίκη» ισχυρίζονται κυβερνητικοί παράγοντες και μέσα ενημέρωσης φίλα προσκείμενα προς τη συγκυβέρνηση Σαμαρά, Βενιζέλου, Κουβέλη αναπαράγουν αυτούς τους ισχυρισμούς. Απευθύνονται σε ανενημέρωτους και αφελείς.

    Προσπαθούν ταυτόχρονα να εξαπατήσουν τους πολίτες, αποκρύπτοντας εντέχνως στοιχεία. Οντως μειώθηκε για πρώτη φορά στην ιστορία της ΕΟΚ και της ΕΕ ο προϋπολογισμός της. Πόσο όμως; Βάσει των στοιχείων της αξιόπιστης γερμανικής εφημερίδας «Φράνκφουρτερ Αλγκεμάινε» ο τρέχων προϋπολογισμός 2007-2013 ανήλθε στα 995 δισ. ευρώ, ενώ την Παρασκευή οι ηγέτες της ΕΕ αποφάσισαν να μειωθεί στα 960 δισ. ευρώ για την επόμενη περίοδο 2014-2020. Μείωση 35 δισ. – δηλαδή 3,5%. Οταν τα χρήματα που θα πάρει η Ελλάδα μειώνονται από 20,4 δισ. στα 16,3 δισ., αυτό συνιστά μείωση… 20%! Οταν λοιπόν ο μεν προϋπολογισμός της ΕΕ μειώνεται κατά 3,5%, οι δε πόροι προς την Ελλάδα κατά 20%, πώς είναι δυνατόν να δηλώνει ικανοποιημένος ο πρωθυπουργός; Ακόμη και στην περίπτωση που μετά το 2016 η Ελλάδα πάρει και τα πρόσθετα 2 δισ. λόγω συνεχιζόμενης άθλιας δημοσιονομικής κατάστασης, και πάλι η μείωση από τα 20,4 δισ. στα 18,3 (δηλαδή 16,3 δισ. ευρώ σίγουρα και 2 πιθανά) δισ. αποτελεί μείωση 10% – δηλαδή τριπλάσια από τη μείωση του προϋπολογισμού της ΕΕ!

    Προς τι λοιπόν η «ικανοποίηση» του Σαμαρά, αν όχι προς παραπλάνηση τεχνηέντως του ελληνικού λαού; Αλλο πράγμα αν έλεγε με ειλικρίνεια: «Ευτυχώς γλιτώσαμε, αποφύγαμε την υιοθέτηση της άθλιας πρότασης της Κομισιόν η οποία ήθελε να περικοπούν οι πόροι προς την Ελλάδα κατά… 50%! Περιορίσαμε τη μείωση στο 20% και υπό προϋποθέσεις ακόμη και στο 10%». Πέρα όμως από τα θλιβερά προπαγανδιστικά κόλπα της συγκυβέρνησης ΝΔ, ΠΑΣΟΚ, ΔΗΜΑΡ, υπάρχουν όντως σοβαρά θέματα με αυτή τη σύνοδο της ΕΕ που αξίζει να σχολιαστούν. Εν πρώτοις η συμβολική μείωση του προϋπολογισμού της ΕΕ για πρώτη φορά στην ιστορία της – και μάλιστα την ώρα της μεγαλύτερης κρίσης που έχει αντιμετωπίσει ποτέ. Την ώρα δηλαδή που οι χώρες που δοκιμάζονται περισσότερο από την κρίση έχουν ανάγκη όσο ποτέ άλλοτε την έμπρακτη οικονομική βοήθεια από την ΕΕ, η Γερμανία μειώνει τον προϋπολογισμό της ΕΕ! Και όχι μόνο αυτό, μειώνει πολύ περισσότερο ποσοστιαία τα ποσά που κατευθύνονται προς τις χώρες που έχουν χτυπηθεί σκληρότερα από την κρίση!

    Η γερμανική στάση αποκτά πολύ μεγαλύτερη βαρύτητα, αν συνδυαστεί με το γεγονός ότι ακριβώς αυτή την περίοδο το Βερολίνο είναι εκείνο που προωθεί την ιδέα μεγαλύτερης πολιτικής ενοποίησης της ΕΕ. Αν λάβει κανείς υπόψη του ότι ο προϋπολογισμός της ΕΕ ανέρχεται μόλις στο… 1% (!) του ΑΕΠ των χωρών-μελών της, πρέπει να τον ζώσουν τα φίδια για τις προθέσεις της Γερμανίας: Τι είδους πολιτική ενοποίηση εννοεί το Βερολίνο, χρηματοδοτούμενη με λιγότερο από το 1% του ΑΕΠ της ΕΕ και μάλιστα με τάσεις μείωσης πλέον; Εννοεί δηλαδή «πολιτική ενοποίηση» κατά το πρότυπο της απώλειας της εθνικής κυριαρχίας των χωρών-μελών της Ευρωζώνης που έχουν υπαχθεί σε καθεστώς Μνημονίου και των οποίων δυστυχούν οι λαοί και διασύρεται η κρατική τους υπόσταση και καταπατείται η εθνική τους αξιοπρέπεια; Αυτό είναι Τέταρτο Ράιχ, δεν είναι η ευρωπαϊκή ολοκλήρωση που επιθυμεί μεγάλο μέρος των Ευρωπαίων πολιτών.

  3. Page 1 in the leftist “Junge Welt” in Germany (Merkel-critics from day one of the Crisis) today was about the irish demonstrations “It’s not our debt”.
    JW reports that 100 000 in Ireland protested against the neolib-ways (60 000 in Dublin, 15 000 in Cork, many in several parts of the country) and the so-called “saving of the banks”.
    Several positions of the unions, different leftist parties and of the irish government are explained. Sadly enough in german, but I trust other countries will have similar stories-

    In Germany we still get a lot of wrong or misleading informations, but there are a few pearls. Just thought I’dd add it to this superb explanations of Yanis here.

    Of course our official TV and many big media have nothing to say about the protest of 100 000, (and mind, that was before the Pope resigned, no excuses here.)
    Reports like this from all over Europe could (well, of course) be seen as anti-Merkel… Not that our neoliberals, the “social” democrats or our neoconservative green party would disagree with Merkel. It is and stays – horrible.

  4. Yanni,

    The question is not if they are out-of-the-woods.

    The question is if they can still kick the can.

    Ireland can, Portugal maybe, Greece No!

    • It is really a stupid idea, sice we now have an inflow of large numbers of Portuguese, Spanis and Greek hookers…

    • Was that an attempt EUdSSR to inflame Greece?

      That you have too many southern European hookers?

      This is precisely a tastement of your miserable condition. That you are low quality people bent on exploitation.

    • It wa snot an attempt to inflame anyone. I was just pointing out that due to the lack of opportunities in the South for young people, lots of them are going North and selling what they have to offer.

      I have no issue with immigration (if not into social systems) Competition enhances quality and lowers prices, also for hooker. It is a good thing!

  5. Pingback: Are Ireland and Portugal out of the woods? | FIRINNEMEDIA.COM

  6. Excellent analysis. Do you consider the rise of the euro following the OMT announcement an unfortunate byproduct? Because it certainly cannot mean anything good for Italy and France.

    • Agreed. Yanis is right that there has been no progress. It really is depressing to see all these half-baked economists coming on tv stating that “there are signs of an imminent recovery” and suchlike. I just saw one such Spaniard with the temerity to claim this.

    • The FED, ECB and so on kept the rates very, very low since several years, and look what good it did for the masses. In effect the central banks are dispossessing the savers thanks to negative real interest rates, considering the inflation rate.

      Plus, there is a “curious faith that low interest rates and lots of liquidity sloshing around the bank system with magically lead employers to hire more workers”.

      This faith is strange since there is no evidence at all that employment increases thanks to cheap central bank money. There were long periods with much higher credit costs – and much higher employment rates.

    • @VSS

      IF low interest rates can stimulate demand then businesses will obviously decide to hire more people as their production needs will increase.With that said, at times when the private sector is attempting to deleverage just like now, its unlikely that low interest rates will have such effect

      Still, if this “faith” seems weird to you, i have to wonder why the demand destruction that your own country advocates (and imposes on others after having imposed it upon itself) doesnt sound counter-intuitive regarding employment?If low interest rates dont make sense then how does THIS make sense?

      Let me guess…you cut labor costs thus you have a pool of cheap workers ready to be hired.Later on businesses try to take advantage of this cheap labor and start hiring like there’s no tomorrow, am i right?
      Only thing your supply sider friends are not telling us is who is this cheap labor, going to sell its output to? Y’all seem to forget that Europe is one of the 2-3 major global markets..

    • @VSS
      While your comments regarding past central bank practices may be considered true, cheap money is now absolutely essential if only for the sole reason that even mildly expensive money would be disastrous. For example a lower ECB rate would automatically relieve even by a little bit businesses and consumers that have to finance loans tied to it. That would be a great benefit in a time of recession even if it does not immediately lead to new job positions. It is quite inexplicable why we have not yet seen a rate of 0,5 or even 0,25 by the ECB. It could do a lot to offset the deflationary effects that most Eurozone countries under a fiscal adjustment program face.

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