Ireland first European country to adopt bad bank

 

As part of his budget, the Irish finance minister yesterday announced the set up of an asset management company, which should take over €80-€90bn in bad loans from the banks. The programme may not be enough as some estimate put the value of toxic assets at some €400bn, but it is the first comprehensive attempt by any European government to solve its banking crisis. The FT reports finance minister Brian Lenihan as saying that this new agency will increase the gross level of national debt, but the government hopes to bring this down through future asset sales.

The Irish budget was extremely tough. Personal income taxes go up 4 to 6 percentage points, depending no income, in a year in which the economy is forecast (by the government) to contract by 8 per cent. (Note this is not the worst forecast!). The measures are design to prevent the budget deficit from exploding. In a reference to last year’s referendum on the Lisbon Treaty, Lenihan said “economic success had fostered a false sense of invincibility”.

 

Spain’s new finance minister

It was not exactly a surprised that Pedro Solbes woudl retire this year – he has been trying to get out of politics for some time. Yesterday, Spanish PM Jose Luis Zapatero took the decision to reshuffle his cabinet by appointing Elena Salgado, previously minister of public administration, to the finance ministry. The FT reports that Zapatero had dropped Solbes, and suggested that there might have been a significant rift between Solbes and Zapatero. According to El Pais, Zapatero said the new finance minister should develop a new model for economic growth in Spain – and has a picture of the new finance minister.

 

 

Jurgen Stark criticised G20 decision on SDR

ECB executive board member Jurgen Stark criticised the G20 decision to increase the IMF’s SDRs as helicopter money. He said it was pure money creation. “It was never examined whether there indeed is a global need for additional liquidity.” He also said, according to the Wall Street Journal, “one used to take a lot of time to check something like this.”

 

French property prices could fall 5-10% in France

Les Echos has the story that French property prices are forecast to fall by 5-10% this year, based on first quarter data. The extent, according to the report, will however widely, with good location in large cities being less effected than properties in suburbs or on the countryside.

 

 

 

 

Competitive devaluations are becoming an issue in the EU

This from FT Alphaville this morning: The pound’s slide against the euro has begun to trigger concerns on the continent that the UK is seeking to gain a competitive advantage over its European Union partners, the FT reported. Sterling has fallen by more than 25 per cent on a trade-weighted basis since the autumn of 2007, raising the question as to whether Britain is letting its currency fall to help its exporters at a time when the eurozone is falling more deeply into recession.

 

Global governance: the EU as a role model

In the second part of his column series on the long-term future of global economic governance, Wolfgang Munchau says there are several aspects of the EU’s system of governance that have relevance to the management of globalisation, which is why there is no need to reinvent the wheel. The first is that when you have to move beyond ad hoc co-operation, you need clearly established rules, best delivered by international treaty, and the principle that decisions are not subject to the national veto. Such a system would make global economic governance more effective and robust. Secondly, you need some form of direct representation, which is independent of the government. In the long run, globalisation beyond the sheer exchange of manufactured goods will not be able to procede without some form of global democracy.

 

Martin Wolf on China

In his FT column, Martin Wolf argues that China’s will eventually have to change its policies as it cannot rely on the world to absorb its massive trade surpluses forever. Spending at home must rise sharply and sustainably, relative to output growth. Wolf supports governor Zhou’s remarks on the need to replace the dollar with another internatioanal reserve currency to the effect that emerging economies can run current account deficits safely. He said that issuance of SDRs would be a way to do just that without having to change the fundamental character of the global monetary system.

 

 

Are the US and the UK going to default? Willem Buiter thinks probably yes

This is from Willem Buiter: “In a number of systemically important countries, notably the US and the UK, there is a material risk of a ’sudden stop’ - an emerging-market style interruption of capital inflows to both the public and private sectors - prompted by financial market concerns about the sustainability of the fiscal-financial-monetary programmes proposed and implemented by the fiscal and monetary authorities in these countries.  For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.”

 

 

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