In the post of the 17th November, Greece 2: This time it’s Ireland, we looked at the problems of the Irish economy in servicing its debts and whether it would need a bailout. Well, despite protesting that such a bailout would not be necessary, in the end events overtook the Irish government. International loss of confidence forced the government to accept a bailout package. After a weekend of talks, a deal was reached on 28 November between the Irish government, the ECB, the IMF, the European Commission and individual governments.
The deal involves loans totalling €85 billion. Of this, €35 billion will go towards supporting the Irish banking system. The remaining €50 billion will go to supporting government spending. The loans will carry an average interest rate of 5.8%, which is more than the 5.2% on the bailout loans to Greece, but considerably below the rates that Ireland would have to pay on the open market. Being loans, rather than grants, they only delay the problems of dealing with Ireland’s large debt, which has been rising rapidly and is predicted to be around 80% of GDP for 2010 (see Annex Table 62 in OECD Economic Outlook Statistical Annex). They thus provide Ireland with liquidity while it implements policies to reduce its debt.
Ireland itself has contributed €17.5 billion to the loan fund; of the rest, €22.5 billion will come from the IMF, while the European Union and bilateral European lenders, including the UK, Sweden and Denmark, have pledged a total of €45.0 billion, including £3.25 billion from the UK.
One of the main purposes of the loans is to reduce the likelihood of speculation against other relatively highly indebted countries in the EU, such as Portugal, Spain and Italy. The hope is that, by granting Ireland loans, the message would be that similar support would be made available to other countries as necessary. ‘Contagion’ would thereby be halted.
Podcasts and webcasts
Ireland’s €85bn bailout is best deal available, says PM Guardian webcast (29/11/10)
Interview with Jim O’Neill BBC News (29/11/10)
Irish deal ‘better than market rate’BBC Today Programme, Ajai Chopra (29/11/10)
Ireland bailout ‘doesn’t stop pressure building’ BBC Today Programme, Tony Creszenzi and Brian Hayes (29/11/10)
Articles
EU/IMF Irish bailout – the details FT Alphaville, Neil Hume (28/11/10)
Ireland rescue is not a game changer Financial Times, Mohamed El-Erian (29/11/10)
IMF insists Ireland got a ‘good deal’ Irish Times (29/11/10)
Can the eurozone afford its banks? BBC News blogs: Peston’s Picks, Robert Peston (29/11/10)
Irish bailout leaves markets nervous for good reason CNN Business 360, Peter Morici (30/11/10)
Eurozone debt crisis deepens Times of Malta (30/11/10)
Will the Irish crisis spread to Italy? Vox, Paolo Manasse and Giulio Trigilia (29/11/10)
Questions
- Distinguish between liquidity and solvency solutions to sovereign debt problems.
- Is Ireland’s debt problem purely a sovereign one? Explain.
- What will determine whether the bailout for Ireland will halt contagion to other countries?
- Why might the implementation of an austerity package make the sovereign debt problem worse in the short to medium run?
- Will the Irish crisis spread to Italy?
Everyone knows about ‘Google’ – a search engine. But, if you’ve happened to google ‘Google’ recently, you’ll be aware that it is being investigated by the European Commission, following claims by other search engines that it is abusing its dominant position.
It is not against the law to have a monopoly, but anti-trust legislation does make it illegal to abuse that dominant position. Those making the complaints argue that Google manipulates its search results and puts competing services further down the page whenever you search for something. The investigation has been launched following:
“complaints by search service providers about unfavourable treatment of their services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services.”
Google operates two services: unpaid results and ads. The investigation will aim to see whether the method that Google uses to generate unpaid results is to the detriment of its competitors. The following articles look at this issue.
EU to launch Google search investigation Guardian, Mark Sweney (30/11/10)
EU launches antitrust probe into alleged Google abuse BBC News (30/11/10)
EU launches investigation into allegations that Google abuses its dominance of internet search Telegraph, Rupert Neate (30/11/10)
Google faces European Competition Inquiry BBC News (24/02/10)
EU launches Google investigation after complaints Reuters (30/11/10)
Questions
- What are the characteristics of a monopoly? Why is it argued to be against the consumer’s interest?
- To what extent does Google have a monopoly over internet searches?
- What is the purpose of the investigation into Google? If Google is found guilty of ‘abusing its dominant position’, what action could be taken?
- Why is competition argued to be a good thing? Could the EU’s investigation actually not be in the interests of the public?
There has been a 38% increase in profit margins made by energy companies in the last 2 months and it is this which has prompted an investigation by Ofgem, the electricity and gas market regulator in the UK. Alistair Buchanan, Ofgem’s chief executive, said:
“With Britain facing an investment bill of £20bn over the next 10 years, consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers.”
Three of the big six suppliers have recently announced price rises and the fast-track review by Ofgem will consider whether consumers should be better protected. Scottish Power has increased gas prices by 2% and electricity prices by nearly 9%, meaning some customers may pay an extra £138 per year. British Gas is also planning on raising prices from December 10th, with gas and electricity bills expected to increase by 7%. Scottish and Southern Energy said it will increase domestic gas tariffs by 9.4%. EDF has promised a price freeze – at least until after the winter and nPower and E.ON are yet to announce their plans, but we can expect some form of a price rise.
While the review won’t make any difference to customer bills in the short term, Ofgem does have the power to make some changes to the way the companies are run. It is also expected that Ofgem will ask for more legislative support from the government and the Competition Commission. Although there are several suppliers in the energy market, each has market power and their dominance is preventing new firms from entering. As Adam Scorer, Director of Reputation and Impact at Consumer Focus, said:
“They do not feel the hot breath of competition on their necks.”
Articles
Energy firms facing gas and electricity price review BBC News (26/11/10)
Energy firms face new Ofgem enquiry over price rises and increased profits Telegraph, Andrew Hough (26/11/10)
Ofgem promises review as energy firms boost profit margins 38% Guardian, Jill Treanor (26/11/10)
Fuel bills: turning up the heat Guardian (27/11/10)
Energy firms face profit rise probe The Press Association (26/11/10)
Scepticism greets energy price probe Financial Times, David Blair (26/11/10)
UK utilities face review after recent price hikes Reuters (26/11/10)
UK to review retail energy market after price rises Bloomberg, Business Week, Kari Lundgren (26/11/10)
Has the toothless energy regulator learnt how to bite? Independent on Sunday, Julian Knight (28/11/10)
How to beat the energy price rise Telegraph (20/11/10)
Ofgem must mean business this time Herald (27/11/10)
Ofgem Press Release
Ofgem to review the effectiveness of the retail energy market to see if further action is needed to protect consumers Ofgem (26/11/10)
Questions
- What type of market structure is the UK energy market?
- The BBC News article talks about barriers preventing new competitors from entering the market. What types of barriers exist in this sector?
- What is a profit margin?
- What is likely to be the impact on family income following such price rises? Illustrate this on a diagram.
- Britain faces a £200 billion bill to invest in updating the energy network. What sort of updates are being referred to?
- What power do regulators such as Ofgem actually have? Why won’t they be able to change the amount that consumers pay?
The owner-occupied housing market has seen widespread coverage. With house prices falling throughout the recession and problems accessing mortgages for many people, it is this sector of housing that has received most attention. However, it is rental homes that we’ll be considering here and a new strategy being adopted by landlords. As access to mortgages dried up, people instead turned to renting. Demand for rental properties began to increase, such that competition between potential tenants increased significantly. Not only has there been a substantial increase in rents – up by some 35%, but it has also led to a new ‘sealed bid’ strategy.
A strategy that is often used for purchasing houses is where potential buyers submit sealed bids and it is this approach which is now spreading to the rental sector, as demand and competition for properties increases. Potential tenants are required to submit a sealed bid, containing the amount that they are willing to pay to rent out the property and all this must be done within a deadline. Whoever submits the highest bid ‘wins’ the property and hence tenants are encouraged to submit a bid at or close to the maximum they are willing to pay. Landlords insist that they are not trying to force tenants to pay more, but that it is simply the most effective way of letting properties that are short in supply, but face significant demand. As the BBC News article states:
‘It seems that with the current state of the housing market, sealed bids will be here to stay – as long as many would-be renters are chasing a dwindling supply of good rental homes.’
Rental ‘gazumping on the up as demand rises Metro, Tariq Tahir (8/11/10)
’Bidding war’ for homes to rent BBC News, Nigel Cassidy (20/11/10)
Rental market’s now so hot tenants are having to make sealed bids Mail Online, Sebastien O Kelly (8/11/10)
Is the buy-to-let market on its way back? Seek4Media (20/11/10)
Gazumping on the rise as London rental soars Gulf Times, London Evening Standard (8/11/10)
Questions
- Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
- Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
- To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?
- How could this sealed bid strategy be an example of price discrimination?
- What is likely to happen to your consumer surplus if you have to submit a sealed bid?
The Paris Club is the name given to the grouping of 19 rich countries which meets in Paris monthly to consider the cancellation or rescheduling of official loans to poor countries (see Sloman Economics 7th edition, pages 784–5). For many of the 40 heavily indebted poor countries (HIPCs), this debt relief has been substantial, with 36 of the HIPCs receiving full or partial cancellation of their debts (see Sloman Economics7th edition, pages 788–90).
On 17 November it was the turn of the Democratic Republic of the Congo. The Paris Club cancelled 97.6% of the debt owed to its members by the DRC – $7.35 billion. As the Paris Club press statement says:
The representatives of the Paris Club creditor countries and Brazil met with the representatives of the Government of the Democratic Republic of the Congo (DRC) on 17 November 2010 and agreed on a reduction of the debt following the DRC having reached its Completion Point under the enhanced initiative for the Heavily Indebted Poor Countries (enhanced HIPC Initiative) on 1 July 2010.
As a contribution to restoring the DRC’s debt sustainability, the Paris Club creditors will provide a cancellation of USD 7350 million, fulfilling all their commitments under the enhanced HIPC initiative.
However, the Paris Club did have some reservations. These are explored in the articles below.
Articles
Paris Club cancels more than half of DR Congo’s debt International Business Times, Palash R. Ghosh (19/11/10)
Creditors agree Congo debt write-off, flag worries Reuters, Brian Love and Katrina Manson (18/11/10)
Paris Club and Brazil Cancel $7.35 Billion of Congo’s Debt Bloomberg Businessweek, Michael J. Kavanagh (18/11/10)
DR Congo gets US$ 7bn debt cancellation afrol News (18/11/10)
Paris Club Press Release
DRC Paris Club (17/11/10)
Questions
- Explain the process whereby HIPCs receive debt relief.
- What were the reservations expressed by the Paris Club in granting debt relief to the DRC?
- To what extent is there a moral hazard in granting debt relief? Explain.
- What can Paris Club members do to reduce the moral hazard?
- Find out what other debt relief has been given by the Paris Club to HIPCs over the past few months and whether concerns were expressed in those cases.