The two external shocks of the summer were China, which historically has had second half slowdowns due to State lending front loaded to the first half, and the euro zone which became a ward of the ECB. China’s growth has slowed some, but not collapsed, and the ECB has continued its support of euro member solvency and funding capability in the short term markets.
There was no credible deposit insurance for the euro zone banks until the ECB ‘wrote the check’ by buying national govt debt in the secondary markets. It’s not the most efficient way to do things, but it does work to facilitate national govts being able to fund themselves, though mainly in the very short term markets (I still see my per capita distribution proposal as the better policy response). And that ability of the member nations to fund themselves means they can write the check for deposit insurance as needed.
The ECB also imposed ‘terms and conditions’ along with funding assistance, and as long as Ireland is in compliance, the ECB is for the most part responsible for the outcomes, so it seems logical the ECB will continue its support, perhaps changing its terms and conditions if not pleased with the outcomes. Additionally, the ECB will continue to supply liquidity directly to the banks, again, as with Ireland complying with the terms and conditions the ECB is now responsible for the outcomes.
But there is no question it is all a precarious brew, and there is no telling what might result in the ECB withdrawing support, so at this time steep yield curves for euro member nations due to credit risk make perfect sense.
Also, Europe and the rest of the world would like nothing more than to increase net exports to the US.
It’s all a golden opportunity for a decade or more of unparalleled US prosperity if we knew enough to again become the ‘engine of growth’ and implement the likes of a full payroll tax (FICA) holiday to provide Americans working for a living enough spending power to buy both everything we could produce at full employment and all the rest of the world wants to net sell us.
Unfortunately the deficit myths continue to cast a wet blanket over domestic demand as our leaders continue to let us down.
And with maybe 100 new Congressmen on the way, with most supporting a balanced budget and a balanced budget amendment which already has maybe 125 votes, there’s more than enough fiscal responsibility looming to create a true depression.
Hopefully their tax cutting agenda outweighs their balanced budget agenda.
And hopefully we get some kind of energy policy to decouple GDP growth from a spike in energy consumption.
By Patrick Allen
September 8(CNBC) — The fate of the Irish economy is back in focus for investors across the world, after the former Celtic Tiger extended guarantees to its banking industry and depositors and with the spread on Irish bonds hitting record highs.
The country is also waiting for a decision from the European Commission on the fate of Anglo Irish, the troubled bank that was nationalized two years ago; uncertainty on whether Anglo Irish will be wound down or allowed to survive has weighed on sentiment towards the country.
Ireland is an example of a Western economy adjusting to both the banking crisis and, crucially, the emergence of Asia, Amit Kara, an economist at Morgan Stanley, said.
“Ireland has taken steps to overcome the hangover from the credit boom, but a successful outcome requires the economy to become more competitive and also, and more crucially, a global economic recovery,” Kara said.
He is confident the Irish economy will be able to roll over debt in the coming weeks and sees the chance for Irish debt to outperform the likes of Spain.
“Though Ireland faces serious long-term challenges, its liquidity position is healthy and its banks should have sufficient ECB-eligible collateral to significantly offset the funding impact of upcoming debt redemptions,” Kara explained.
“Given the underperformance of recent weeks, we see scope for Irish bonds to regain some ground against Portugal and Spain in particular, once the initial round of government-guaranteed bond redemptions has taken place over the first two weeks of September,” he added.
What is on Ireland’s Books?
The Irish banking system remains hooked on European Central Bank funding and investors are also worried about the risks posed by the scale of liabilities following Ireland’s decision to guarantee the country’s lenders.