Typechecking regression

1. 0.1 accepts this module (cut down from hashed-storage-0.5.4):

{-# LANGUAGE UndecidableInstances,
             MultiParamTypeClasses,
             KindSignatures,
             FlexibleInstances,
             FunctionalDependencies #-}

module Storage.Hashed.Monad () where

class Monad m => TreeRO m where
    withDirectory :: (MonadError e m) => Int -> m a -> m a
    expandTo :: (MonadError e m) => Int -> m Int

instance (Monad m, MonadError e m) => TreeRO (M m) where
    expandTo = undefined
    withDirectory dir _ = do
      _ <- expandTo dir
      undefined

data M (m :: * -> *) a

instance Monad m => Monad (M m) where
    (>>=) = undefined
    return = undefined

instance MonadError e m => MonadError e (M m)

class Monad m => MonadError e m | m -> e

but 7.0 branch says:

[1 of 1] Compiling Storage.Hashed.Monad ( Storage/Hashed/Monad.hs, interpreted )

Storage/Hashed/Monad.hs:17:12:
    Could not deduce (MonadError e1 m) arising from a use of `expandTo'
    from the context (Monad m, MonadError e m)
      bound by the instance declaration
      at Storage/Hashed/Monad.hs:14:10-50
    or from (MonadError e1 (M m))
      bound by the type signature for
                 withDirectory :: MonadError e1 (M m) => Int -> M m a -> M m a
      at Storage/Hashed/Monad.hs:(16,5)-(18,15)
    Possible fix:
      add (MonadError e1 m) to the context of
        the type signature for
          withDirectory :: MonadError e1 (M m) => Int -> M m a -> M m a
        or the instance declaration
    In a stmt of a 'do' expression: _ <- expandTo dir
    In the expression:
      do { _ <- expandTo dir;
           undefined }
    In an equation for `withDirectory':
        withDirectory dir _
          = do { _ <- expandTo dir;
                 undefined }
Failed, modules loaded: none.

Trac metadata

Trac field	Value
Version	7.0.1
Type	Bug
TypeOfFailure	OtherFailure
Priority	highest
Resolution	Unresolved
Component	Compiler (Type checker)
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