Posts Tagged ‘European Central Bank’

Irish application for IMF/EU rescue package approved

November 21, 2010 Leave a comment

Brian Cowen, the Taoiseach of Ireland.

Brian Cowen, the Taoiseach of Ireland.


Sun, Nov 21, 2010

Taoiseach Brian Cowen tonight confirmed the European Union has agreed to Government request for financial aid package from the European Union and the International Monetary Fund.

European finance ministers held an emergency conference call tonight to consider a Cabinet request for aid, during which the application was approved.

Speaking at a press conference in Government Buildings in Dublin with Minister for Finance Brian Lenihan tonight, Mr Cowen said the rescue package, which will run for three years, will be tied to a restructuring of the banks and a deficit reduction plan.

The amount of funding being applied for will be decided during the negotiations, the Taoiseach said. Earlier today, Mr Lenihan said the figure would be in the “tens of billions” but would be less than €100 billion.

Mr Cowen also said Ireland’s 12.5 per cent corporation tax rate did not form part of the negotiations.

“A central element of the programme will also be to support further deep restructuring and the restoration of the long term viability and financial health of the Irish banking system,” Mr Cowen said.

The loan will be arranged through the IMF and the European Financial Stability Facility, a €440 million fund that can be accessed by EU member states in financial difficulty. Mr Lenihan said the UK and Sweden have also offered to help fund the package.

The Taoiseach said the Government will publish its four-year recovery plan for the economy early next week.  The 160-page document charts how the State will reduce its outgoings by €15 billion between now and the end of 2014.

In Brussels, EU economic and monetary affairs commissioner Olli Rehn said the finance ministers welcomed the Government’s request for aid. “Providing assistance to Ireland is warranted to safeguard the financial stability in Europe,” he said.

Mr Rehn said a team of European Commission, European Central Bank and IMF experts in Ireland would prepare the details of the assistance package by the end of the month, adding it would be a three-year loan programme. “The programme under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner,” Mr Rehn said.

In a statement tonight, Central Bank Governor Patrick Honohan said tonight’s announcements allow Ireland’s course of economic and financial policy to be set on a more secure path. “We can be reassured that the Irish banking system retains the support, not only of the Central Bank of Ireland, but of the European Institutions,” he said.

Labour Party finance spokeswoman said Joan Burton described the agreement as “the final epitaph for a Fianna Fáil Government that has plunged the country into the financial abyss and that has consistently and deliberately lied to the Irish people”.

The Cabinet met this afternoon after Mr Lenihan said he would seek its approval for a financial bailout. Following several days of negotiations with IMF, EU and ECB officials in Dublin, Mr Lenihan said he would recommend the State applies for the bailout to ensure Irish banks had enough  “firepower” to function.

He dismissed pressure on Dublin from other euro zone countries to raise low business taxes that have attracted many multinational companies to Ireland, saying changes to the 12.5 per cent corporation tax rate were off the agenda and would hamper growth.

In an interview on RTÉ Radio’s News at One, Mr Lenihan declined to be drawn on the exact size of the loan but he indicated it would be in the tens of billions. He also said it would not be a “three figure sum”.

The Minister said the interest rate charged on the loan had yet to be agreed but would be significantly lower than the rate currently available to the Government on international bond markets.

Mr Lenihan admitted for the first time the banks had become too big a problem for the country to resolve on its own. “The key issue all the time for the Government is to ensure that we do not have a collapse of the banking sector.”

He said Ireland may not fully draw down any funds it gets from the EU and IMF, which would simply serve as “a powerful demonstration of firepower behind the banks”.

Experts estimated Ireland may need €45-€90 billion, depending on whether it needs help only for its banks or to cover general Government spending too. The main concern for EU policymakers is Ireland’s problems spreading to other euro zone members with large budget deficits like Spain and Portugal, threatening a systemic crisis.

In May, the EU and IMF launched a €110 billion rescue package, the first of a euro zone country, aimed at pulling Greece back from the brink of bankruptcy. In return, Athens promised harsh austerity measures which brought large numbers of Greeks onto the streets in protest.

Yesterday, French president Nicolas Sarkozy predicted Ireland would raise its corporate tax rate but said he did not anticipate an increase would be made a condition of the international bailout. “It’s obvious that when confronted with a situation like this, there are two levers to use: spending and revenues,” Mr Sarkozy said.

German chancellor Angela Merkel declined to say whether she believed the tax was in jeopardy if the Government tapped an international bailout fund. “Every country that’s in need of this mechanism can use it. Everything beyond that is the decision of each individual country,” she said.

Meanwhile, Sweden said it would consider a bilateral loan to Ireland if one was requested, prime minister Fredrik Reinfeldt said. On the question of Ireland’s low corporation tax, Mr Reinfeldt said: “It’s a decision for the Irish people and government to take.”

Additional reporting: Agencies

© 2010



Letter from the Editor

November 19, 2010 Leave a comment

Logo of General Motors Corporation. Source: 20...

Logo of General Motors Corporation. Source: 2007_business_choice_bro_en.pdf (on GM website).

George Bernard Shaw once said: “I showed my appreciation of my native land in the usual Irish way: by getting out of it as soon as I possibly could.”

This week many of his fellow countrymen may have been considering joining the centuries-old diaspora from the Emerald Isle as a joint EU/IMF delegation arrived to negotiate a bail-out of its stricken banks.

At least some of the banks would die if not kept alive by cheap unlimited European Central Bank funding – the same easy money delaying the almost inevitable debt restructurings in Ireland, Greece and possibly elsewhere. It also drags the ECB firmly into the political realm and makes it easier for politicians to dodge difficult decisions – just like their dreaming Californian cousins.

Meanwhile the Fed was robustly defending its own QE2 programme designed to drive down US bond yields, but they stubbornly decided to rise instead as the latest data on mortgages showed a still-moribund housing market.

Amidst the general confusion the spectre of looming Chinese price controls to fight inflation cooled the commodities rally, but counter-intuitively may have shown evidence of a maturing market in Shanghai.

It is understandable that at such times cautious investors like Abu Dhabi’s investment vehicle sought the safety of developed markets. But despite the relative success of the largest IPO in US history for General Motors’ owners (don’t mention the taxpayers), the rulers of the Arab emirate are hardly likely to want to give up their German and Italian cars anytime soon.

There is hope for the eurozone yet.

John Casey, Lex publisher


Irish resisting EU bail-out pressure

November 15, 2010 Leave a comment

15 November 2010 Last updated at 12:20 ET

Unemployed worker protests in Dublin One worker, who has recently been made redundant, took to the streets in Dublin


The Irish Republic has insisted it does not need European Union assistance amid speculation it is under pressure to use an EU bail-out fund.

Dublin said it was in contact with “international colleagues”.

But it dismissed reports that it may approach the European Financial Stability Fund (EFSF) for up to 80bn euros (£68bn; $110bn) as “fiction”.

Meanwhile, Portugal has called on the Republic to act for the good of the eurozone, as well as its own interests.

The EU can only offer a bail-out if Dublin requests it – but there are fears that if this did not happen there would be greater contagion elsewhere.

However, a succession of Irish government ministers said there had been no suggestion of turning to Europe for help.

“The argument that Ireland is about to go banging on the door of the International Monetary Fund or needs to take an EU bail-out is simply wrong, but if it gets more legs, it could be very, very dangerous,” European Affairs Minister Dick Roche told Irish radio.

‘Vision’A spokesman for Economic and Monetary Affairs Commissioner Olli Rehn said that pressure on Dublin to take a bail-out was not coming from the European Commissioner, but from “another player”.

Continue reading the main story

“Start Quote

A bail-out would be a humiliation for a country that just a short while ago was the Celtic Tiger. Some see these days as critical for Irish fiscal independence”

End Quote

image of Gavin Hewitt Gavin Hewitt BBC Europe editor

Last week, market anxiety spread to other heavily indebted eurozone nations, including Portugal and Spain, driving up their borrowing costs.

And Portugal’s Finance Minister Teixeira dos Santos told the Financial Times there was now a high risk that Portugal would have to seek foreign financial aid.

“The risk is high because we are not facing only a national or country problem,” he told the FT. “It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country.”

Earlier, Mr Santos told the AFP newsagency he believed Ireland had “the vision to take the right decision”.

“I want to believe they will decide to do what is most appropriate together for Ireland and the euro,” he said.

The yield on Irish bonds – essentially IOUs sold by the government to fund state spending – were trading lower on Monday, suggesting a slight easing of concerns.

The yield on the bonds has soared in recent weeks, indicating that investors believed there was an increased risk of the Republic defaulting on its debt.

‘Concerns’ Continue reading the main story

What went wrong in the Irish Republic

The 1990s were good for Ireland’s economy, with low unemployment, high economic growth and strong exports creating the Celtic Tiger economy, with lots of multi-national companies setting up to take advantage of low tax rates.
At the beginning of 1999, Ireland adopted the euro as its currency, which meant its interest rates were set by the European Central Bank and suddenly borrowing money became much cheaper.
Cheap and easy lending and rising immigration fuelled a construction and house price boom. The government began to rely more on property-related taxes while the banks borrowed from abroad to fund the housing boom.
All this left Ireland ill-equipped to deal with the credit crunch. The construction sector was hit hard, house prices collapsed, the banks had a desperate funding crisis and the government was receiving much too little tax revenue.
The economy has shrunk and the government has bailed out the banks. A series of cost-cutting budgets have cut spending, benefits and public sector wages and raised taxes. But there are still doubts about future government funding.
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Ireland’s difficulties will be discussed by EU finance ministers in Brussels on Tuesday.

However, the BBC’s Europe editor Gavin Hewitt said that high-level talks had already begun, involving European Commission President Jose Manuel Barroso and his economy commissioner Olli Rehn.

“Some EU officials believe it would be better for the Republic to accept a bail-out package now rather than to allow uncertainty to continue,” Gavin Hewitt said.

Brussels fears that any delay risks repeating the Greek crisis that earlier this year threatened the entire eurozone, he added.

A commission spokesman confirmed that it regarded the Irish finance position as serious, but denied that the government was being put under pressure to accept help.

“Yes, we are in close contact with the Irish authorities, yes there are concerns in the euro area about the financial stability of the euro area as a whole, once again,” said Amadeu Tardio.

“But to say that there are strong pressures to push Ireland to any kind of scheme of this kind is an exaggeration,” he added.

Bank plan

Continue reading the main story

“Start Quote

There would not be a banking system in Ireland – and therefore not an economy in any conventional sense – if it weren’t for the generosity of the European Central Bank in providing loans to Irish banks that the markets won’t provide”

End Quote

image of Robert Peston Robert Peston Business editor, BBC News

Some reports suggest that the Irish Republic could seek help for its banking sector alone, rather than asking for help at a government level.

This, say observers, would save them the embarrassment of being rescued by the EU and avoid greater involvement by Brussels in economic decisions.

The Irish Republic’s trade and business minister Batt O’Keefe said the Republic must show it could “stand alone”.

“It’s been a very hard-won sovereignty for this country and this government is not going to give over that sovereignty to anyone.”

However the EFSF cannot be used to lend directly to banks, said European Central Bank vice president Vitor Constancio.

“The facility lends to governments and then the governments of course may use the money to that purpose in similar lines that exist for Greece,” he said.

“The same could be done for Ireland.”

The Irish government has all but nationalised the country’s banking system, which had lent recklessly to property developers at a cost of 45bn euros.

‘Stand alone’The government has consistently stated its determination to restore stability to the public finances and stressed that it was “fully funded” until 2011.

Meanwhile concerns persist about the state of the Greek economy, which received an EU bail-out worth up to 110bn euros.

European and IMF officials will be in the country this week to decide whether to release the final tranche of the money.

But over the weekend, Greek Prime Minister George Papandreou signalled it may have to ask for permission to delay its repayments.

The scale of the problems still facing Greece were further underlined by the latest official European figures which showed that its budget deficit in 2009 was markedly higher than previously stated.

Cuts impactSince 2008, the Irish Republic has suffered a dramatic collapse of its property market.

House values have fallen between 50% and 60% and bad debts – mainly in the form of loans to developers – have built up in the country’s main banks, bringing them to the verge of collapse.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014.

Its current deficit is an unprecedented 32% of gross domestic product, if the cost of bad debts in the Irish banking system is included.

The Irish government, which has a flimsy majority in parliament, is expected to publish another draconian budget on 7 December.

This will impose spending cuts or tax rises totalling 6bn euros to bring the deficit down to between 9.5-9.75% next year.

Investors fear the budget cuts are likely to worsen the country’s already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

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    Ireland Goes Bust, Irish Bank Run

    November 13, 2010 1 comment

    Economics / Credit Crisis 2010 Nov 12, 2010 – 02:35 AM

    By: Mike_Whitney


    Best Financial Markets Analysis ArticleThere was a bank run in Ireland on Wednesday. LCH Clearnet, a London based clearinghouse, surprised the markets by announcing it would increase margin requirements on Irish debt by 15 percent. That’s all it took to send investors fleeing for the exits. Yields on Irish bonds spiked sharply as banks tried to close positions or raise the capital needed to meet the new requirements. The Irish 10-year bond soared to 8.9 percent by day’s end, more than 6 percentage points higher than “risk free” German sovereign debt. The ECB will have to intervene. Ireland is on its way to default.

    This is what a 21st century bank run looks like. Terms suddenly change in the repo market, where banks get their funding, and the whole system begins to teeter. It’s a structural problem in the so-called shadow banking system for which there’s no remedy. Conventional banks exchange bonds with shadow banks for short-term loans agreeing to repurchase (repo) them at a later date. But when investors get nervous about the solvency of the bank, the collateral gets a haircut which makes it more expensive to fund operations. That sends bond yields skyrocketing increasing the liklihood of default. In this case, the debt-overhang from a burst development bubble is bearing down on the Irish government threatening to bankrupt the country. Ireland is in dire straights. Here’s an excerpt from an article in this week’s Irish Times which sums it up:

    “Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

    With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.” (“If you thought the bank bailout was bad, wait until the mortgage defaults hit home”, Morgan Kelley, Irish Times)

    So, the Irish government could have let the bankers and bondholders suffer the losses, but decided to bail them out and pass the debts along to the taxpayers instead. Sound familiar? Only, in this case, the obligations exceed the country’s ability to pay. Austerity measures alone will not fix the problem. Eventually, the debt will have to be restructured and the losses written down. Here’s another clip from Kelly’s article:

    “As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s (bank) losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them….

    Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.

    Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been hemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.”

    Ireland has enough cash to get through the middle of next year, but then what? The bad news has rekindled fears of contagion among the PIIGS. Greece is a basketcase and Portugal’s bond yields have spiked in recent weeks. Portugal’s 10-year bond hit 7.33% by Wednesday’s close. The euro plunged to $1.37 even though the Fed is trying to weaken the dollar by pumping another $600 billion into the financial system. Troubles on the periphery are escalating quickly dragging the 16-nation union into another crisis. This is from the Wall Street Journal:

    “For a decade, Ireland was the EU’s superstar. A skilled work force, high productivity and low corporate taxes drew foreign investment. The Irish, once the poor of Europe, became richer than everyone but the Luxemburgers. Fatefully, they put their newfound wealth in property.

    As the European Central Bank held interest rates low, Ireland saw easy credit for construction loans and mortgages. Developers turned docklands into office towers and sheep pastures into subdivisions. In 2006, builders put up 93,419 homes, three times the rate a decade earlier….

    The party ended in 2008, when the property bubble popped and the global economy tipped into recession…by September, Irish banks were struggling to borrow quick cash for daily expenses. The government thought they faced a classic liquidity squeeze. Ireland—whose hands-off regulator had assigned just three examiners to two major banks—didn’t recognize the deeper problem: Banks had made too many bad loans, whose defaults would leave the lenders insolvent.” (“Ireland’s Fate Tied to Doomed Banks”, Charles Forelle and David Enrich, Wall Street Journal)

    The Irish government hurriedly put together a new agency, the National Asset Management Agency (NAMA), to buy to toxic bank loans at steep discounts., but the banks books were in much worse condition than anyone realized, more than €70 billion in bad loans altogether. By absorbing the debts, the government is condemning its people to a decade of grinding poverty and a deficit that’s 32% of GDP, a record for any country in the EU.

    On Thursday, at the G-20 conference in Seoul, European Commission President José Manuel Barroso, said that he was following developments in Ireland closely and that he would be ready to act if necessary. The EU has set up a €440bn bail-out fund (The European Financial Stability Fund) that can be activated in the event of an emergency, although critics say that the fund is more aspirational than a reality. The crisis in Ireland will test whether the countries that made commitments to the fund will keep-up their end of the bargain or not. If they refuse, the EU project will begin to splinter and break apart.

    Ireland will surely need a bailout, although not just yet. For a while the ECB can maintain the illusion of solvency by funneling liquidity to banks via its emergency facilities. That way, bondholders in Germany and France get their pound of flesh before the ship begins to take on water. All the risk-takers and speculators will be “made whole” again before the full-force before the debts are shifted onto Irish workers. Here’s how Kelly sums it up:

    “Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.”

    By Mike Whitney


    Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

    © 2010 Copyright Mike Whitney – All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Mike Whitney Archive

    © 2005-2010 – The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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    Irish Republic announces record budget cuts

    November 4, 2010 Leave a comment

    4 November 2010 Last updated at 13:56 ET

    A homeless man sits on O'Connell Bridge in the centre of Dublin The Irish Republic faced one of the deepest recessions in the eurozone

    The Irish government has outlined when it will make 15bn euros ($21.3bn; £13.1bn) of budget cuts designed to reduce the country’s deficit.

    In what it called “a significant frontloading”, the government said it would cut 6bn euros in 2011 to try and reduce the deficit to 9.25%-9.5% GDP.

    By 2014, the government wants to reduce the deficit to 3% of GDP.

    It said savings would be made through spending cuts and tax rises and would impact the living standards of all.

    Further details of these measures will be released in the government’s Four-Year Plan, published later this month.

    Finance Minister Brian Lenihan said the cuts underlined the “strength of our resolve to show that the country is serious about tackling our public finance difficulties.

    “But our spending and revenues must be more closely aligned. This is the only way to ensure the future well being of our society.”

    Analysts said the announcement contained few surprises, and that markets were waiting for further details on the spending cuts and tax rises before passing judgement on whether the cuts were realistic.

    “I think committing to front-load the cuts sends a good signal to the markets that Ireland is serious about fiscal consolidation,” said Oliver Hogan at the Centre of Economics and Business Research.

    “I think they’re on the right track in terms of what has to be done but they may find it has more of a detrimental effect [on growth] than they’re expecting.”

    A number of countries have announced measures to reduce budget deficits that rose dramatically during the economic downturn, most notably Greece and the UK.

    Investor concernsEarlier on Thursday, yields on Irish 10-year bonds reached a new high of 7.69%.

    The move reflected increasing scepticism about the Republic’s ability to tackle its problems without outside help.

    The Irish Finance Ministry has released its budget early to try to soothe investor concerns as Irish borrowing costs have hit a new high every day so far this week.

    The Irish deficit is predicted to be the equivalent of 32% of the country’s economic output this year.

    It has been pushed up by the cost of government bail-outs of Irish banks. At the end of September, Prime Minister Brian Cowen revealed that taxpayers’ total bill for bailing out the banks could reach 50bn euros.

    Mr Cowen has vowed to reduce the deficit to below 3% of gross domestic GDP by 2014.

    ‘Huge amount’European Central Bank (ECB) president Jean-Claude Trichet earlier said he thought the figure was a sensible target.

    “The 15bn… are not in our view insufficient but of course you have to be alert permanently and stand ready to do all that is needed,” Mr Trichet told a news conference, shortly after the ECB had announced it was holding interest rates in the eurozone at 1%.

    “The market observers, savers, investors are looking with great, great attention to what the minister and the government will say in a few hours,” Mr Trichet said.

    Ken Wattrett, chief European economist at BNP Paribas, said the government faced a difficult dilemma.

    “[15bn euros] is a huge amount – what we’re talking about there is something in the region of 10% of GDP in addition to all the measures that have already been delivered,” he told the BBC.

    “The intention for 2011 is to frontload quite a lot of that adjustment, probably in the region of 4% of GDP.

    “[The government] needs to deliver these cuts to stabilise its public finances and win its credibility back, but at the same time it will probably push its economy into a deeper recession.”

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    IMF admits that the West is stuck in near-depression

    October 4, 2010 Leave a comment

    If you strip away the political correctness, Chapter Three of the IMF’s World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.

    By Ambrose Evans-Pritchard
    Published: 8:00PM BST 03 Oct 2010


    Spain, trapped in EMU at overvalued exchange rates, had a general strike last week

    Spain, trapped in EMU at overvalued exchange rates, had a general strike last week

    The IMF report – “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” – implicitly argues that austerity will do more damage than so far admitted.

    Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

    “Not all countries can reduce the value of their currency and increase net exports at the same time,” it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a “death spiral”.

    The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

    “A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes.” Exactly.

    Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

    But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour’ devaluations without attracting much notice. We were not then in our New World Order of “currency wars”.

    Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

    Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF’s schema, this implies a 3pc loss in growth. Since there wasn’t any growth to speak off, this means contraction.

    Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. “Economic policy will be maintained,” she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc.

    Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter.

    The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

    We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.

    The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.

    Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

    The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal “carry trade” for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

    One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU’s €440bn rescue fund. That is courting fate.

    Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?

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