All of this is to come to pass……in September, 2009.
When the world will be a different, colder place! Let’s see if any of this is relevant then?

Is there a moral hazard for new debt? I don’t think so. If people act on this latest “moral hazard” then they will lend money to irish banks allowing them to lend to the Irish people. The damage would be if it caused another credit bubble. Does anyone think that is going to happen any time soon??

@Eamon Moran

The State does appear to be broke. That is a precisely why it makes sense not to allow defaults. That is factor which I see constraining the Minister.

he is wrong. Markets invest in a country on the basis of it’s ability to repay, not based on whether it has a reputation for doing the right thing.

Recently the banks busied themselves buying their own debt at vastly reduced prices.The guarantees will be extended by the government so in essence the par value of those bonds will be redeemed by the banks with a hefty 60 to 70% profit which the Irish taxpayer is paying.

My understanding is that NAMA will value assets such as development land and finished contsruction projects which are in trouble and the taxpayer will be on the hook for the difference between that valuation and the banks book price for those assets.

So the Irish taxpayer is gutted on both sides of the balance sheet .

Irish Sovereign Bonds are carrying the increased risks for the banks all along the yield curve.This is also reflected in NTMA’s strategy of high issuance of shorter securites such as Treasury Bills and shorter issue bonds of smaller amounts.Irish sovereign bonds are now trading with wider spreads than Greece.

Interesting to note is that prior to EMU the profile of investors in Irish sovereign bonds was 80% Irish as compared to 20% invested by foreigners.
Today this profile is reversed.
One wonders if the profile of Irish investors had held at 80% would more scrutiny of risks within the country (i.e. reckless bank lending) occurred.

Likewise who in Ireland would now front up to buy the majority of sovereign debt here knowing what we know now? I would think most individual and institutional investors here reckon there is now a high probability of default.So how long before those outside of Ireland also lose the faith?

Admitting that you have made a mistake is not easy.
Admitting that you have made a list of linked mistakes (the guarantee, nama, the lengthining of the guarantee) that may empovorish a couple of generations is probobly close to impossible.
Then I remembered two terms from my limited knowledge of Psychology. Dissonance and Rationalisation.
From Wikipedia
‘A powerful cause of dissonance is an idea in conflict with a fundamental element of the self-concept, such as “I am a good person” or “I made the right decision.” The anxiety that comes with the possibility of having made a bad decision can lead to rationalization, the tendency to create additional reasons or justifications to support one’s choices. A person who just spent too much money on a new car might decide that the new vehicle is much less likely to break down than his or her old car. This belief may or may not be true, but it would likely reduce dissonance and make the person feel better. Dissonance can also lead to confirmation bias, the denial of disconfirming evidence, and other ego defense mechanisms.’

Therefore with regard to the current government I think its time to call in the men in white coats and have them removed to Dundrum mental hospital.

So am I missing something? Or maybe someone who attended the InterTradeIreland All-Island Economic Forum at Farmleigh got a copy of the speech?

As for the substance of the Minister’s comments, it is patently clear now that there was a massive transfer of risk from the banks to the taxpayer over the past nine months. Irish government credit led the move in the eurozone. Of late, Ireland has possibly least benefited from a global easing of fears for banking.

Effectively this just might reflect ministerial sympathy for the equity and bondholders, less for the taxpayer. Bu what of the long term solvency of the taxpayer to bear such a burden, rather than the unfortunate circumstances of the financial creditors, and still rich debtors?

A sharing of the burden of bank losses between the taxpayer and the creditor could effectively lead to some reputational costs. They would however be limited I believe. And exaggerated by the powers that be. But why?

More than the Ministerial comments, I am astounded by the meekness of the Irish taxpayer. There may be outrage, but that does not change the financial or political reality.

Determined action to defend the public interest could do wonders for reducing the size of public debt, and the cost of its servicing. Indeed some foreign investors – those that buy Irish government bonds at least – could even welcome such action.

The upcoming constitutional referendum in October now provides an opportunity to pose questions relating to the appropriation of property by the State (and not just a token cut in the salaries of judges). Indeed that’d be a sure way of getting out the vote on Lisbon, and a step towards restoring confidence…

Lenihan and Biffo presided over the bank collapse and watched it happen. The regulator knew. All the banks knew, they took it in turns to lend to AngIB. Why trust these people?

Do we have a choice? What would force an election?
Is it worth taking 20Bn Euro so seriously? Hell, yes!

Brian P

Trying to interpret his statements in terms of a logically consistent perspective on the current market environment is an exercise in futility.

In the IT article referenced, he predicts that GDP will fall by 13% between 2008 and 2012. How does he know? Answer: he doesn’t. Its just a wild guess. It might prove accurate, or it might prove hopelessly inaccurate. It obviously depends on how soon and how quickly the global economy recovers. At present, the greatest minds in the world, of whom Lenihan is not one, are totally divided on the likely future course of the global economy. Some say that we’re now at the bottom and that the global economy will grow in the second half of 2009 and that this growth will accelerate from 2010 on. Others say its a mirage, that we’ll have a ‘W’ shaped recession, with hardly any global growth for several years. If these people don’t know, how does Lenihan know that GDP will fall by 13% between 2008 and 2012? In no other country are the Prime Minister and Minister for Finance going around claiming to know the GDP growth rates between now and 2012. In all other countries they accept that the situation is extremely uncertain and that anything (including significant GDP growth) is possible between now and 2012.

Even ESRI do not support Lenihan’s forecast. In their recent mid-term analysis, ESRI forecast a fall in GDP of about 13% between 2008 and 2010, but GDP growth of close to 6% in 2011 and 2012, which would leave cumulative growth between 2008 and 2012 at close to zero, rather than the 13% fall Lenihan is predicting.

It appears that the reason the Minister cannot afford to default on bonds for one bank is becasue the other banks are totally illiquid and are possibly insolvent. It is not because investors might think the banks are broke and lose confidence. The investors already know the banks are broke. It is because the investors might think the State was broke.

It is surely up to the State to manage that perception, i.e. the State with the help of the EU must say that it can contemplate bondholders being punished for their profligacy without fear of people thinking the state is insolvent. The state cannot convince the market for the moment because of its has a huge fiscal gap. That confidence the Minister refers to is funding 40% of public expenditure.

The State should not have to worry about bond defaults when our finances are back on an even keel and Anglo’s carcass is no longer systemic (provided all non-guaranteed sub-debt has not been repurchased by then). At that stage one would expect that some bond-holders would be left behind.