December 31

"We understand BoA's problem -- they are completely insolvent!" Chris Whalen, via The Daily Bail.

The end of the oil age. 2011 and beyond: a reality check. Deutsche Bank


other fare:
A stunning year in climate science reveals that human civilization is on the precipice. Climate Progress.

2011: A brave new dystopia. Chris Hedges.

December 25

as opposed to the new normal:
In defense of the "Old Always". James Montier, GMO.

Outlook 2011 and the next decade: is the smart money right on China? Dian Chu.

The opening act to the broader crisis. Scott Minerd, Guggenheim Partners.

The Fallacy of a Pain-Free Path to a Healthy Housing Market. FRB Dallas.

other fare:

Searching for Jesus in the Gospels. New Yorker.

December 24

QOTD:

"Yesterday is history. Tomorrow is a mystery. And today? Today is a gift. That's why we call it the present." ~ Babatunde Olatunji

Things I believe. John Hussman.


ECRI WLI turned positive - the first time since May. dshort.

An inflation - or lack thereof - chart show. David Altig. FRB Atlanta.

Head fake. Bruce Krasting.                           

Outlook 2011: Crude oil and gasoline, escalator up, elevator down. Dian Chu.

Garth Turner discusses how Canadian bankers are no less greedy and no more conservative than U.S. bankers were re: mortages.

December 22

Velocity of money. James Hamilton.
awesome conclusion:

"someone who insists that inflation (P) must go up just because the monetary base (M) has risen may have lost their marbles."

Pref share yield-to-call calculator. Google Docs.


other fare:
A holiday message from Ricky Gervais.

In front of your nose. George Orwell.

Best of rationality quotes.

December 19

All that glitters. Howard Marks of Oaktree, on gold.



other fare:

December 17

"Europe And US Have Learned Nothing From Japan's Lessons And Will Repeat Its Mistakes". Richard Koo.

"I Do Not Really Have One Scintilla Of Doubt That This Will All End In Tears - Again". Albert Edwards.

December 13

Living with low for long. Mark Carney, BoC.

Current turbulence in Europe is a reminder that the crisis is not over, but has merely entered a new phase. In a world awash with debt, repairing the balance sheets of banks, households and countries will take years.

For the crisis economies, the easy bit of the recovery is now finished. Temporary factors supporting growth in 2010–such as the turn in the inventory cycle and the release of pent-up demand–have largely run their course. Fiscal stimulus is turning to fiscal drag and, for some countries, rapid consolidation has become urgent. Household expenditure can be expected to recover only slowly. This all implies a gradual absorption of the large excess capacity in many advanced economies.

This is not surprising. History suggests that recessions involving financial crises tend to be deeper and have recoveries that take twice as long. In the decade following severe financial crises, growth rates tend to be one percentage point lower and unemployment rates five percentage points higher.1 The current U.S. recovery is proving no exception.

In such an environment, very low policy rates in the major advanced economies could be in place for a prolonged period–a possibility underscored by the recent extensions of unconventional monetary policies in the United States, Japan and Europe.

Big numbers from the BIS. FT Alphaville.

The eurozone is in bad need of an undertaker. Ambrose Evans-Pritchard.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany. "If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic," said Hans-Werner Sinn, head of Germany IFO institute. Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides. "I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification," he told the Handelsblatt.

Transfers to the East are still running at €60bn a year two decades after the fall of the Berlin Wall. There has been no meaningful East-West convergence for the last 15 years. To those who blithely argue that EMU is a good racket for German exporters because it locks in Germany’s competitive advantage, he retorts that a trade surplus is the flip side of a capital deficit. Germany has seen €1 trillion – or two thirds of its entire savings since 2002 – leak out to fund the EMU party, gutting investment at home. This is toxic for Germany too....

So as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it too has declined the burden, refusing to go nuclear with bond purchases. "Each country needs to be held responsible for its own debt," said Germany’s monetary avenger at the ECB, Jurgen Stark. He was joined last week by Mario Draghi, Italy’s governor and candidate for ECB chief, who said it was not the job of a central bank to carry out fiscal rescues. "We could easily cross the line and lose everything we have, lose independence, and basically violate the Treaty," he said.

Indeed. Maastricht forbids the ECB from buying the debt of eurozone states except for specific purposes of liquidity management. But this saga no longer has anything to do with liquidity. Southern Europe faces a solvency crisis.

Block those metaphors. Paul Krugman.

What we’ve been dealing with ... is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years....

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained:... spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived...

But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.... [but] the tax-cut deal is likely to deliver relatively small benefits in return for very large costs. ... Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

The actual stimulus in the plan comes from the other measures, mainly unemployment benefits and the payroll tax break. And these measures (a) won’t make more than a modest dent in unemployment and (b) will fade out quickly, with the good stuff going away at the end of 2011.

The question, then, is whether a year of modestly better performance is worth $850 billion in additional debt, plus a significantly raised probability that those tax cuts for the rich will become permanent. And I say no. The Obama team obviously disagrees. As I understand it, the administration believes that all it needs is a little more time and money, that any day now the economic engine will catch and we’ll be on the road back to prosperity.... What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away.

Reconsidering Japan and Reconsidering Paul Krugman. Truthout.

there is a commonsense aspect to this story that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without relying on roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth - growing not too fast, but not too slowly - and learning to do more with less.

Like bulls in a China shop. Bob Janjuah.

A terrible way to fix the economy: households deleveraging through defaulting on debt. rortybomb.

What to make of this? First off, I’m terrified at the idea that national wealth is roughly at the level to pay for the servicing of debt but not necessarily pay off any actual debt. Our household sector is at the point where we can make the minimum payment on our metaphoric credit card without paying any of it down, and the only other choice is to not pay it at all.

other fare:
Human extinction: not the worst case scenario. 3QD.

Civilization has bestowed our species with a distorted self-image. Many people seem to have the impression that we operate independently of nature. We are fortunate that we’ve been able to act as though we are independent for as long as we have. If we don’t adjust our way of living so that it becomes sustainable, however, nature will eventually do this for us.

December 12

Interim Update. Van Hoisington and Lacy Hunt.

Operations by the Federal Reserve, including the start of the second round of quantitative easing (QE2), have increased bank reserves by approximately $1 trillion since the latter part of 2008. Virtually all of this gain is held in excess reserves at the Federal Reserve Banks earning very close to 10 basis points. In other words, the Fed has provided substantial new reserves to the banks and they have, in turn, deposited the funds back with the Fed.

Reserves are not money unless banks turn them into loans and deposits. Loans are made based on bank capital, which continues to erode because of loan write-offs due to increasing delinquency and default.

Market still facing major risks. Comstock Partners.

Banks went into the 2008 credit crisis loaded with toxic assets, and, to a large extent, they still have them. While TARP was originally proposed by Treasury Secretary Paulson as a buyout of toxic assets, the program was almost immediately changed to a generalized bailout. The accounting rule-makers were then pressured to do away with mark-to-market accounting, thereby papering over the problem and leaving most of the toxic assets on the banks' books, where they remain today. This is one of the reasons banks are hoarding cash and are so reluctant to lend. They know what they have.

Is America following the same path as Japan? Comstock Partners.

The hidden message of the consumer credit statistical release. Gaius Marius.
lies, damn lies and statistics:

this purchase program -- which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be -- was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. (the reporting of the actual purchases is here.)

in other words, what is being included in the g.19 as an expansion of student loans (and thereby consumer credit) is really in fact a bailout of several large banks and finance companies stuck with immovable loans.

China's credit bubble on borrowed time as inflation bites. Ambrose-Evans Pritchard.

Warning - An Updated Who's Who of Awful Times to Invest. John Hussman.


other fare:
Tea'd off. Christopher Hitchens.

December 10

Europe's inevitable haircut. Barry Eichengreen.

What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis. Resolving that crisis is both easier and more difficult than is commonly supposed.

The economics is really quite simple. Greece has a budget problem. Ireland has a banking problem. Portugal has a private-debt problem. Spain has a combination of all three. But, while the specifics differ, the implications are the same: all must now endure excruciatingly painful spending cuts.

The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed.

But, since none of these countries has a national currency to devalue, they must substitute internal devaluation for external devaluation. They have to cut wages, pensions, and other costs in order to achieve the same gain in competitiveness needed to substitute external demand for internal demand.

The crisis countries have, in fact, shown remarkable resolve in implementing painful cuts. But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched.

This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks. This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression.

So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.

Default, delusion and deceit (and other ways to spring the debt trap). Roger Bootle of Capital Economics, in the Telegraph.

There are five ways of escape [from the debt trap].

First, try to muddle through and hope that years of sustained economic growth will cause the weight of these debts to fall and for the burden to go unnoticed amidst increasing prosperity, so that it is unclear who has picked up the tab. This is far and away the best solution – if you can manage it. But in the vulnerable countries GDP is struggling – or even contracting.

Second, engineer a bout of inflation to reduce the real value of the liabilities. In this way just about everyone in society will pay – but hopefully no one will notice. (Being able to devalue your currency potentially helps you achieve both the first and the second routes.) The trouble is that even if this solution were available for the eurozone as a whole, for each embattled member country it is not, as they do not have their own money.

Third, force those who caused the problems and gained from the years of extravagance to cough up. That would mean the bankers, property developers and politicians. This seems the fairest solution, but it is also the least likely. And, believe it or not, even they do not have enough dosh.

Fourth, slash government spending and make current and future taxpayers pick up the tab. This is the way that Ireland and Greece are trying to go. The trouble is that the situation may be so far gone that attempting a solution this way is impossible. It may even be so deflationary that it proves to be counter-productive.

The fifth way is to default. Perhaps you can make someone not involved in the process by which the government gets elected take a good part of the hit. This is where Johnny Foreigner comes in. You say: "Sorry old chaps, but that money that you thought we owed you is now 'restructured'. In the words of Monty Python, it is an ex-loan."

This is what is going to happen. Huge amounts of money are going to be lost. At the moment, the prospective losers can afford it. But coming up in the lift are Portugal, Belgium and Spain. And then Italy. This looks eerily like the build-up to the financial crisis of two years ago. Perhaps the bail-out of Ireland is the Bear Stearns moment. Spain, or Italy, could be the Lehman moment.

Eclectica Fund: Manager Commentary, December 2010. Hugh Hendry.
subtitled "There are no policy remedies for debt deflation"



other fare:
The decline and fall of the American Empire. Alfred McCoy
also on Salon, provocatively but dumbly entitled How America will collapse (by 2025), and which led a colleague of mine to say, when grabbing the article off the printer, "Oh, this has you written all over it!" Well, maybe so, but I don't believe in collapse, per se; however, its hard to argue with the notion that the debt situation is onerous, or that unfunded liabilities will be a serious challenge, or that climate change and peak oil present potentially problematic possibilities, and that geopolitics and terrorism are serious risks, and even the internal socio-political-economic atmosphere, with high unemployment and the Tea-Partiers, etc., is difficult; so there are some very ominous impediments to the continuation of American "exceptionalism", and each of those issues are ones I find of significant (not just academic?) interest, even if only to acknowledge as risks to our outlook

December 9

The European Council is once again at each others' throats. Eurointelligence.

The three stages of delusion by Dylan Grice and the London Brief by Omar Sayed, both on Europe. via Outside the Box.

Grice: Simply expanding it in its current form so that the ‘solvent core’ commits to raise yet more funds for the ‘insolvent periphery’ fails to address the risk that as more dominos fall the bailers shrink relative to the bailees (Italy and Spain combined – who’s spreads have been blowing out this week – are combined bigger than Germany). At what point does the insolvent periphery include so many countries that markets lose confidence in the solvency of the shrinking core to bail them out. Leaving aside for now the unpleasant reality that the solvent core might not actually be so solvent, perhaps the spread between ‘insolvent’ Greece and solvent France should be narrower? I wish I knew. In the absence of ECB printing, I suspect we’re going to find out.

Sayed: So in order to preserve this unholy union, what options does the EU have?   I see four: (1) the Marshall Plan II; (2) the Treaty of Versailles II; (3) the printing press option and (4) the Icelandic option.  Each has its challenges and problems.

as for me, I think that Texans and Nebraskans have no choice but to support Californians and Illini, as they're already part of a fully-integrated fiscal-monetary-social-policitical union; Germans and Dutch have a choice regarding supporting Greeks and Portugese. Without a true fiscal and political union, how can a monetary union with such disparate member states actually operate effectively over the long-term?

December 2

Default, departures or denial? Buttonwood.

The euro at mid-crisis. Kenneth Rogoff.

probably only at the mid-point of the crisis. To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. But that halcyon scenario looks increasingly improbable. The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s. For starters, there are more bailouts to come, with Portugal at the top of the list. With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden....

But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries. After all, bailouts from the EU and the IMF are only a temporizing measure: even sweetheart loans, after all, eventually must be repaid. Already facing sluggish growth before fiscal austerity set in, the so-called “PIGS” (Portugal, Ireland, Greece, and Spain) face the prospect of a “lost decade” much as Latin America experienced in the 1980’s. Latin America’s rebirth and modern growth dynamic really only began to unfold after the 1987 “Brady plan” orchestrated massive debt write-downs across the region. Surely, a similar restructuring is the most plausible scenario in Europe as well....

Here is where the latest Irish bailout is particularly disconcerting. What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. Private bondholders, people and entities who lent money to banks, are being allowed to pull out their money en masse and have it replaced by public debt. Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen? By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle.

Imminent Eurozone default: how likely? Simon Johnson.

The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013. The markets, in this view, should and likely will calm now; there is no immediate prospect of any kind of sovereign default... But a close reading of the Eurogroup ministers’ statement from Sunday suggests quite a different interpretation... [I]t has potentially momentous consequences – as it envisages dividing future eurozone crises into two kinds. “For countries considered solvent, on the basis of the debt sustainability analysis conducted by the [European] Commission and the IMF, in liaison with the ECB, the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a country would appear to be insolvent, the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability. If debt sustainability can be reached through these measures, the ESM [European Stability Mechanism] may provide liquidity assistance.”

Translation: if it is decided your country is “insolvent”, rather than illiquid, then you have to restructure your debts. But who exactly will decide?... the bombshell: “On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.”

In other words, any one member of the eurozone can veto a country being determined merely illiquid – thus cutting them off from cheap and endless credit (from the ECB or ESM or any window to be named later). So now Germany effectively has a veto – as do other fiscally austere countries. Most likely we will witness the creation of an Austere Coalition (actually a modified Hanseatic League) of Germany, Austria, Finland, Estonia, and a few of the smaller countries.

The man with the magic words. Richard Smith.
Monday/Tuesday, panic re: Euro; Wednesday, all calm. why? Trichet soothed markets, suggesting ECB will buy PIGS debt, but also that a monetary federation, which they have, is not enough, that they "need a quasi-budget federation as well"; but is that do-able? is there political wherewithal? or, more likely, will Merkel and Weber rile markets up again? either way:

ECB funding programmes won’t fix any of that. Handouts or haircuts: the next stage of the political debate in Euroland will have to deliver a choice, and a plan

More thoughts on the ECB decision. Marc Chandler.

European officials must have known they were going to disappoint the market with the decision to simply postpone draining liquidity. The firewall around Greece failed. The firewall around Ireland has failed. The politicians have dropped the ball and the left Trichet holding the bag. Many from the periphery appeared to lobby the ECB to help out. Trichet in essence says there is little it can do and that it is really up to the governments. What Trichet announced today seems like the bare minimum of what it could do without immediately intensifying the crisis

Are the banks insolvent? Fair question, given this... Karl Denninger.

The big economic story, and why Obama isn't telling it. Robert Reich.

Albert Edwards: China's leading indicators are flashing warning light. zero hedge.

Viral! Rick Bookstaber.
discusses the age of private information, the age of too much information, and the age of viral information:

The new, viral world means more surprises and more volatility; and not because of market shocks precipitated by content, but because of the randomness in what might happen to catch on and reverberate through the internet.

other fare:
Sarah Palin wasn't the only one: Tom Flanagan, an advisor to PM Harper, in a live TV intereview, also called for the assassination of Wikileaks founder, Julian Assange. Telegraph.

December 1

QOTD:

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies. Groucho Marx.

Edward Harrison summarizes Bill Gross' latest, and offers some of his own views, including:

There are four ways to reduce real debt burdens:

• by paying down debts via accumulated savings.
• by inflating away the value of money.
• by reneging in part or full on the promise to repay by defaulting
• by reneging in part on the promise to repay through debt forgiveness

Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that. More likely, the western world’s collective public sectors will attempt to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.

And unfortunately, a collective debt reduction across a wide swathe of countries cannot occur indefinitely under smooth glide-path scenarios. This is an outcome which lowers incomes, which lowers GDP, which lowers the ability to repay. We will have a sovereign debt crisis. The weakest debtors will default and haircuts will be taken. The question still up for debate is regarding systemic risk, contagion, and economic nationalism because when the first large sovereign default occurs, that’s when systemic risk will re-emerge globally.

Ireland's reparation burdens. Barry Eichengreen.

The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

The rough politics of European adjustment. Michael Pettis.

I have no doubt that enormous amounts of scotch tape, paper clips, and chewing gum are going to be deployed quickly to hold the whole thing together, and that perhaps in a week or two we will be all throwing sighs of relief as policymakers firmly announce that Europe was put to the ultimate test and proved itself manfully. But does that mean we can stop worrying – was this really the ultimate test? No, of course not. If previous history is any guide, this crisis will re-emerge in different places every few months until it is truly resolved...

Unfortunately it is going to require a lot more than emergency liquidity loans, no matter how plentiful, to arrive at a final resolution. These loans simply paper over the financing gap until the next big refinancing exercise, and each new loan effectively shortens the duration of the debt or claims a higher level of seniority, so that the capital structure becomes increasingly risky. As the capital structure becomes riskier, it takes a smaller and smaller event to set off the next crisis.

Hangover theory and morality plays. Steve Waldman. 

Austrian-ish “hangover theory” claims, plausibly, that if for some reason the economy has been geared to production that was feasible and highly valued in previous periods, but which now is no longer feasible or highly valued, there will be a slump in production.... There is no school of economic thought I know of that suggests increased prosperity and consumption in and of themselves require a painful purge. The claim is that some patterns of economic activity create the appearance of prosperity and enable temporary consumption that cannot be sustained, and that moving from a period during which such patterns obtain to a more “sustainable pattern of specialization and trade” involves adjustments that are difficult.... 

It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

European Leaders Should Focus on the Banks, Not the Sovereigns. Peter Atwater.

The market is saying “when” not “if” any more. To stop the spreading contagion, European leaders need to stop focusing on the sovereigns and start focusing on the banks. As we have already seen, troubled sovereign nations can be kept alive for an extended period of time, but banks can’t. But rather than growing sovereign double leverage even further -- in which a troubled nation, like Ireland, borrows from the EU to put equity capital into its banks -- if the EU is serious about stopping the growing banking contagion, it is going to have to consider its own pan-European TARP/FDIC program for Europe’s largest banks. And whether Europe has the stomach for that we’ll soon find out. But until Europe divorces banking strength from sovereign strength, they will both go down together.

Bankers gone wild... in Ireland AND Germany. Marshall Auerback.

Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.....

All of the rescue plans that have been introduced in Ireland or Greece thus far rest on the assumption that, with more time, the eurozone’s problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But the fiscal austerity being offered as the “medicine” is turning out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

‘Insolvent’ Portugal Needs Loans Soon, Buiter Says. Bloomberg.

“Despite the recent drama, we believe we have only seen the opening act, with the rest of the plot still evolving,” Buiter wrote. “Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent.”

Why the Irish crisis is such a huge test for the eurozone. Martin Wolf, FT.

So what, against this background, needs to be done by individual countries and the eurozone? Not what was done in Ireland, is one answer. The Irish banking system is worse than too big to fail; it is too big to save. The first duty of the state is to save itself, not to load its taxpayers with obligations to rescue careless lenders. If the eurozone is not a “transfer union”, that has to work both ways: taxpayers of one state should not rescue those of others from having to save their banks from their follies.

The Irish state should have saved itself by drastic restructuring of bank liabilities. Bank debt simply cannot be public debt. If bank debt is to be such debt, bankers should be viewed as civil servants and banks as government departments. Surely, creditors must take the hit, instead.

That leaves the sovereigns. What is needed here, as eurozone leaders recognise, is a combination of generous funding with restructuring: the former is to reverse self-fulfilling panics; the latter is to recognise the realities of insolvency. Managing this combination would be very tricky.

Endgame. Eurointelligence.

The EU’s credibility is sinking with each agreement. We are now fast approach default time... We at Eurointelligence consider a default of Greece, Ireland, and Portugal a done deal. The question is only now whether Spain can scrape through.

Can the eurozone afford its banks? Robert Peston, BBC.

For Europe's very biggest banks, the ratio of their assets to their equity capital is 50% greater than for the UK's banks and 100% in excess of the so-called leverage ratio of big US banks, according to Bank of England calculations. Or to put it another way, Europe's giant banks appear to be taking far bigger financial risks than US and UK banks in relation to the reserves they retain as protection against potential losses.

So here's the big question. O'Neill may well be right that a reformed, integrated eurozone could cope with the aggregated sovereign debts of its members. But it is altogether another question whether even Germany could afford to underwrite the liabilities of the eurozone's monster banks, if creditors started to seriously question whether those banks have sufficient capital.

If Ireland doesn't take the bailout. Gonzalo Lira.

the problem in Ireland really isn’t so much the state’s deficits—rather, it’s the state’s guarantees of the Irish banks. That is what led to this mess. Yes, the Irish public sector is bloated, but it’s the banks that are busting the fiscal budget.

The Irish government allowed the banks to grow too big for too long, and to get mixed up in too many dicey deals—and so when the crisis hit in 2008, instead of letting them fail, Brian Cowen and his Fiana Fáil government backstopped those banks.

Much like in the United States in 2008, the Irish confused an insolvency issue with a liquidity issue. They thought their banks were having a cash crunch, when really, they were broke.

Cowen is reaping what he sowed: Even if the 2008 crisis had been a cash crunch and not an insolvency issue, Cowen never should have backstopped those banks—not when their combined liabilities were twice the GDP of Ireland...

Right now, the Irish people know that they are footing the bill so that British, German and American banks don’t suffer for having been foolish enough to be caught with Irish bank bonds. Rightfully, the Irish people are pissed.