Lenihan on the Banks at InterTradeIreland

Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.

Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).

The policy in the 1920s, the orthodox economic doctrine of the time was that banks should be let fail and in consequence unemployment in the United States by 1931 reached 32 percent. Now, we can if we want … and it’s interesting in the ideological debate with this, there are many who argue that banks should fail and that bondholders and international finance should, if you like, take the hit of bank failure but, if you try and implement that, you get a staggering loss of confidence in the whole economic system of a country and we can see what happened when the United States let Lehman’s bank go to the wall last September. It sent shockwaves throughout the world economy and even now the banking system is only recovering from that shockwave.

So it’s clear that governments have to prevent banks failing and stabilise them, and that’s a very difficult task and course there have been public arguments about the degree of public participation that has to take place. My own view is that if you’re going to socialise the losses, you have to socialise the gains to some extent and governments have to take increasing stakes in these institutions.

Of course, the size and extent of the stake is a matter of debate. In the Republic, the government has decided that we cannot have a total or wholesale nationalisation of the banking sector because it’s essential that the banking sector can fund itself abroad and we’re not convinced that a banking sector that is wholly and 100% nationalised can .. or is in a position to attract funds from other countries in an easy way. The core issue for our banking sector in Ireland is funding the system itself.

We have however nationalised the Anglo Irish Bank and we’ve also take a 25 percent stake in Bank of Ireland and Allied Irish Bank. We’ve also decided to set up an asset management agency to clean up the balance sheets of the banks. And of course if it is the case that that triggers further losses in the capital base of those institutions then the state will have to increase its stake in those institutions.

These are very interesting comments, which are worth discussing. My thoughts on them were as follows.

First, I think it is somewhat misleading to suggest an equivalence between the opinions expressed by, for instance, Fine Gael (who I’m guessing the Minister has in mind) and the Andrew Mellon style “liquidationist” approach to failing US banks during the Great Depression. During the Great Depression, banks were allowed to go into liquidation and, without a deposit insurance fund, depositors could lose all their money. This caused widespread distrust in banks among the public and completely destabilised the banking system, with disastrous effects on the economy. As far as I know, nobody in the recent debates about Irish banking has suggested this as a model approach. As regards Fine Gael, they have never argued that the September 30 guarantee should be dishonoured, so all deposits and other short-term liabilities would be guaranteed.

Second, moving beyond Fine Gael’s plan, which many consider to be too radical in potentially inflicting losses on senior bondholders, others (including me) have still discussed the idea of letting subordinated debt holders take some of the losses, partially because some of them are not covered by the guarantee in the first place, and partially by renewing the guarantee in a more restricted way to exclude subdebt that matures after 2010. There is a world of difference between these suggestions and the full-scale liquidation of Lehman Brothers, as well as other differences related to the scale and global importance of these institutions.

Third, the Minister also discussed the government’s objection to ”total or wholesale nationalisation of the banking sector”. I don’t know anyone that is proposing this as a policy measure. National Irish Bank and Ulster Bank, for example, are active participants in the Irish banking sector and there is no question of either being put into Irish state ownership.

Fourth, it would also be useful to hear the Minister explain the full reasoning behind his position that nationalised banks would not be “in a position to attract funds from other countries in an easy way.” To many, this position is inconsistent with his position that it is crucial that the government extend the bank guarantee. The Minister believes that, without the backing of government, our privately-owned banks could not raise funds, while at the same time, he believes that if this backing is converted into the most explicit form possible (full ownership) then suddenly access to funds will be cut off. I am not the only commentator that has found this position hard to understand but it has been regularly been put forward by the Minister as a crucial point.

If I had to guess what lies behind this “raising funds” fear, it would be the following. The state is finding things a bit ropey in the sovereign debt market right now. So when the Minister and his advisors look at the gross magnitudes of interbank lending that the banks need to undertake, they get daunted and think “we’re having trouble raising a couple of billion every month, how could we possibly go out and raise far more for our nationalised banks?”

The problem with this line of thinking is that the ability to raise funds depends principally on one thing—solvency. The Irish government is having trouble convincing the markets about its long-term solvency. As regards the nationalised banks, those who have advocated nationalisation have always been explicit that it needs to fully recapitalise these banks, thus stabilising the situation, and keeping them perceived as a safe risk by international capital markets. Once well-capitalised, their credit ratings will be separate from that of sovereign bonds.

Finally, this speech contains the clearest statement yet that the government has decided to set a minimum price that it is going to pay for the bank assets via NAMA. On the one hand, we are told that if NAMA “triggers further losses in the capital base of those institutions then the state will have to increase its stake in those institutions”. On the other hand, we are told that “the government has decided” against nationalisation.

As the Yanks say, do the math. Losses will trigger an increased stake for the state but the state has decided against nationalisation. At least the Minister is creeping closer to being honest about the impending overpayment.

28 replies on “Lenihan on the Banks at InterTradeIreland”

A very balanced exploration!

However, ….. ! …..:

you are being too kind to Mr Bacon and to the experts in government. They have clearly not abandoned the approach at all;

you do not say what the losses will be. I have posted on this and it is clear that development is now dead for years to come. The market values must be based on current use value, as planning permissions expire after five years. Most of the land bank is agricultural land. It is worth Euro 10,000 per acre at most. This is a secular event. There are many unfinished developments that will mop up all capital available for a decade. There will be no more developments especially as the government is now competing for funds with the singularly most unsuccessful private sector for very scarce capital. Ireland is continuing to export well. The worst performance in the OECD likened to post WWII Germany, is purely as a result of the malinvestment in land. It is difficult to overstate how devastating this is and will continue to be for decades to come. I presume you do not comment because you do not wish to be accused of driving down perceptions? Perhaps you see some light in this tunnel? Please point it out! I wish to God that I could see it. These ninnies are intent it seems, on wasting a years revenue on the lucky bondholders of AngIB and the other banks. After all, if AngIB, is to get it, then the other two, being genuinely systemically relevant, will also help break this sad, badly served, country?

But yes, Karl, you pose some interesting questions that should help anyone decide against the course upon which they seem to have decided.


I’m stunned… not so much by the comments (anybody can go off on a tangent on occasions). Rather I’m stunned that the taxpayer takes recent policy actions lying down.
Are these issues just too difficult, too inane? Karl’ excellent piece “AIB Debt Buyback” only attracted a miserly 5 comments. Even Karl apologetically asks “Why in God’s name would I be doing that”. Yet good information, analysis, debate … and policy is essential on such issues. All are lacking.

So why is the government so hell-bent on supporting the *very important constituency* of bondholders?

Ultimately a political decision has to be made as to who policy will favour. I for one do not know if the prime goal is to defend the long term interests of the taxpayer or not. Maybe it is, and just the decision making is not properly informed. Or maybe other interests are being pursued.

At the very least, investigative journalism and informed and printed, informed opinion is spectacular in its absence. Even my own words for now are required to be very measured, and confined to generalities (I can’t write comments about the AIB article above, much as I’d love to). I fear the silence will only get deafening over the summer (I for one am just about to go away, and away most of the summer).

As for the substance, there was a very clear transfer of risk and liabilities from the banks to taxpayer last Sep-Oct and again in January, not just in Ireland, but globally. Irish government credit led the move in the eurozone.

Of late in Europe, there has been good narrowing of guaranteed and covered bond yield spreads against government paper. Irish names however have arguably *least* benefited of late from this global easing of banking fears. How deeply ironical that neither Irish gilts nor the guarantees are benefiting much, given the apparently supportive policies.

Why? Maybe ministerial sympathy for the equity and bond holders is just seen as needless spoiling. Questions remain as to the long term capacity of the taxpayer to bear the burden of bank losses. So while the outlook for funding is improving, the largesse shown to creditors does not help. On the contrary…

A sharing of that burden 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?

Determined action to defend the public interest would do wonders for reinforcing confidence in the ability of the authorities to limit the size of public debt. Indeed some foreign investors – those that buy Irish government bonds at least – could even welcome such action. That would also facilitate funding in the longer term, although the policymakers seem to believe otherwise.

More than the Ministerial comments, I am astounded by the meekness of the Irish taxpayer. There may be outrage. But outrage is just hot wind. That does not change the financial or political reality.

In the absence of much hope that policy will change anytime soon, the upcoming constitutional referendum provides an opportunity to pose a question relating to the appropriation of property by the State (going far beyond a token cut in the salaries of judges or Bord Snip medicine). Indeed that’d be a sure way of getting out the vote on Lisbon… and a step towards restoring confidence generally…

What surprised me from watching the video was how in command of the subject the Minister was. He seemed to talk mostly without referring to a script. Not many Irish politicians can do that. Impressive!

@KL: It seems to me that you might be getting the wrong end of almost every stick here. Your posts are becoming increasingly unbalanced, which is a shame, and this one is near the bottom of the heap. You write that “others (including me) have still discussed the idea of letting subordinated debt holders take some of the losses.” But what makes you think the Minister wants to protect sub debt holders? If I remember rightly the Minister welcomed Anglo’s announcement that it would buy back sub debt at a significant discount. Presumably the bondholders that he is referring to are senior bondholders (hence the reference to Lehman Bros, where unusally senior bondholders got trashed.). Isn’t the willingness to put pain on senior bondholders one of the main things that distinguishes the Govt and Fine Gael approaches? I’d side with the Govt on this: threatening to toast senior bondholders and depositors could be a disaster.

You say you don’t know anyone that is proposing “wholesale nationalisation”. Isn’t this exactly what the Labour Party have called for – a pre-emptive nationalisation of the entire Irish banking system? They want to do an Anglo on the entire system. I doubt either Labour or the Minister in his speech had in mind Irish subsidiaries of foreign banks.

On the funding of banks, many posters with real world experience of banking have previously posted on this blog that funds from other countries would probably be harder to get if banks were nationalised. So the Minister may well be right. Anglo is a case in point. For a guy who likes to dissect statements, I notice you selectively ignore the statement in the latest Anglo accounts that something like 1.5bn euros had to be repaid because of change-of-ownership conditions in bonds. Any thoughts on whether other banks have bonds with similar clauses?

Your point about the government extending the bank guarantee is completely wrong. The budget last April said clearly that the extension is only for senior bonds up to 5 years, in line with other EU countries. Where has the Govt announced that other liabilities will be extended?

Lastly, you seem to have confused yourself (or are deliberately trying to confuse others) on the questions of NAMA payments for assets. The Minister seems clear to me, “if it is the case that that triggers further losses in the capital base of those institutions then the state will have to increase its stake in those institutions.” My take on what he said is that he’d rather not have 100 per cent ownership of the big two banks. That is also Patrick Honohan’s view, if I remember rightly. Even a bit of private ownership that keeps the banks listed on stock exchanges is helpful. But the Govt do appear to be ruling out a pre-emptive, Anglo-type nationalisation, which Labour favour. Fair enough. Tells us nothing about NAMA prices.

I’m afraid at this stage you’re hearing only what you want to hear. That’s no good.

TBH , I think the silence is deafening for a number of reasons
a) a perception that the govt will do what it will do regardless of any advice, evidence, suggestions, musings, or comment. Karls analysis above is most depressing , given that for example the canard of international funding has been cooking for months, and the lack of comprehension of finance as to the difference between capital and liquidity funding is something that they really should know by now.
b) an inability of vested interests to accept that analysis from say posters on this site is usually conducted in between the bits “day job” and thus critiques of lack of the sort of detail normally associated with due diligence (yes, KD thats you…), which if repeated often enough causes one to wonder “why bother” and drives one back to the day job.
c) IMHO a severe lack of the shoe dropping in the society. Many and many a time I have heard “sure its not that bad” or “well, if we cut X” where x is some relativly minor payment to some group (usually immigrants ) or other suggestions that prove the lack of appreciation of how deep in the doo-doo we are fiscally
d) a micawberesque approach by the social partners.
e) least some potentially influential voices have reclused themselves for reasons best asked of them.
f) the soundbite nature of media – i have probably been on more tv and radio in the last 6-9 mths than most commentators on the site and its very very very hard to compress a balanced view on bond spreads or bank capitalisation options into 45seconds. When one does an interview one talks for 5m and 45-60s are selected by the editor. Similarily in the press 800-1000 words are not a whole pile when one is dealing with a generalist audience that needs to be hooked and then “played” in terms of the argument one is placing. This can be done but its an art form and therefore hit and miss
g) a severe lack of knowledge of matters economic and financial in the media.
h) a suspicion by all that everyone has an agenda : i have been accused of talkign down the banks as I am advising short selling, using the media to advance a hidden political agenda, using the media to supplement the losses from the pension levy ! etc etc. The existnce of analysis that is independent and analytical and the placing into the public arena of advice and suggestions which may even run counter to ones own shortterm fiscal interests or personal political viewpoints seems to be too hard for vested interests to swallow.

Like yourself Ciaran I am off on vacation – im 100% certain that when I return in august things will be worse.

@Pat Lynch
Thanks for the Sunday morning snark!
A few responses:

1. “what makes you think the Minister wants to protect sub debt holders?” Well, let’s start with the fact that the majority of the subordinated debt of the banks is covered by the government’s guarantee. Does that count at all? Only perpetual undated sub debt, which has equity-like features, was left out of the guarantee. And the prices of the unguaranteed subdebt soared in recent months due to the Minister’s assurances that NAMA will protect equity holders (so reducing the likelihood of sub debt holders losing any money.) Also, as I described here — http://www.irisheconomy.ie/index.php/2009/06/26/aib-debt-buyback/ — if the AIB example is anything to go by, the debt swaps the Minister approves of involve getting unguaranteed investors inside the guarantee with higher coupon bonds.

2. On “wholesale nationalisation” you admit that Labour don’t have Irish subsidiaries of foreign banks in mind, so how can you say they are in favour of “wholesale nationalisation”? Do only Irish-owned banks count as part of our banking system (to the extent that we actually know or care that the majority of Irish bank shares are owned by people living here)?

3. On funding the banks, I note that you, like many other recent commenters, want to use a single recent Irish datapoint, Anglo Irish Bank, to build a general theory. Anglo’s status as a wild west bandit bank makes it very hard to generalise from its experience—who know what kind of strange relationship the old management had with various large depositors, relationships which clearly came to an end with nationalisation? As for selectively ignoring this fact, I can hardly get on here and blog about every single page of every bank report. There are plenty of examples of nationalised banks (both now and in the past) and as long as they are well-capitalised, they can get access to funds. One must remember also that those who boast of their “real work experience of banking” may have a particular vested interest. (BTW, I did pick up a thing or two about the real world of banking during 11 years at the Fed and CB here.)

4. “Your point about the government extending the bank guarantee is completely wrong. The budget last April said clearly that the extension is only for senior bonds up to 5 years, in line with other EU countries. Where has the Govt announced that other liabilities will be extended?” Read here. http://www.irisheconomy.ie/index.php/2009/06/17/financial-measures-miscellaneous-procisions-bill-2009/ The government has passed a bill allowing the full guarantee to be extended.

5. “Tells us nothing about NAMA prices.” Pat, if you think there is no connection between the price NAMA pays and the ownership structure that subsequently emerges, then I think you’re on your own there. Even the Minister’s statement disagrees with you.

6. As regards Mister Lenihan, I agree he is an impressive public speaker and a very intelligent man. But intelligent people can disagree about things, you know. There is certainly nothing personal in my criticism since I barely know the man. And I have been generally supportive of his fiscal policy measures.

7. I know it is a common rhetorical device to present someone you disagree with as “becoming increasingly unbalanced!” I would emphasise that my opinion on overpayment via bad banks has been the same for months:

Here’s me in January, long before any announcement of an Irish AMC http://www.irisheconomy.ie/index.php/2009/01/17/bad-bank-bafflement/

And here’s me in the IT in February after the announcement of Bacon’s appointment

So if I’m “unbalanced” it’s because I have, you know, an opinion. And I think the opinion is worth airing.

Finally, the implication that I set out to deliberately confuse people is noted and resented. I guess I should know better than to be bothered by Internet trolls but still, it does make one feel like giving up and re-allocating time towards the many other things I can and probably should be doing. Perhaps that’s the point.

1. Sub debt holders are losing money, so the Minister’s reference to bondholders taking the hit from bank failure and the resulting loss of confidence must refer to senior bonds.

2. The Labour Party want nationalisation of all the institutions covered by the State Guarantee, including IL&P and EBS:


So objecting to wholesale nationalisation is hardly attacking a straw man.

4. The bill doesn’t extend the Guarantee. Such legistlation is necessary to allow the 5-year bond extension.

5. The point is: do you determine the onwership structure before or after the pricing of assets by NAMA? Pre-emptive nationalisation, as I understand it, means do it before, irrspective of what values the NAMA valutation process might subsequently reveal.

@BrainL & KarlW. Both of you make the point today that you have better things to be doing than engaging with us trolls.

Granted, I’m sure it gets damn frustrating having to repeat yourselves for us in the cheap seats or having to defend yourselves and position against what are quite often personal attacks.

But. I do think that the current financial crisis will have ramifications for many years and decisions made should at least be subject to some rigour. From what I can see, this site and the contributions of the bloggers is one of the only sources of that required rigour at the moment. It would be more than a shame to see it fall foul of a little bit of flaming.

So, keep up the good work. It is appreciated.

Its not a problem to engage in reasonable, robust debate. Thats what we do in the “day job”, and you are a great exemplar of such debate. Whats frankly not on is as you said the often personalised/jibing sniping from often vested interests who seem to think that our analyses are somehow personalised against them. They arent, any more than say a paper (forthcoming J Common Market Studies) which looks at the dynamics of equity market integration in europe is a pop at governments when it notes the importance of political statements in the said dynamics.
Thanks for the encouragement.

The government can’t nationalise the banks because the ECB won’t let them fund the deficit through repo from a nationalised bank. That’s why the Irish Central Bank had to provide a 10 bn credit facility for Anglo (and not the ECB). Look at who the primary purchasers of government debt in times of stress are. Look at what the banks then do with that debt. Look at Mr. Bacon’s NAMA proposal and its explicit statement that the government must get approval for issuing bonds directly to the banks before it introduces the scheme.

There are two issues at play here: NAMA and how it is to be funded and the deficit.

If the government could nationalise the banks, they would in a heartbeat. It would be wildly popular. The current government is nothing if not populist (I begin to think it is nothing, even if it is populist, but that would be an ecumenical matter…).


Are you saying that the ECB will not conduct repo operations with a nationalised bank. I don’t think that’s true. For instance, the Dutch arm of Fortis has been nationalised (see http://www.holding.fortis.com/general/brief.asp)

Do you think Fortis can’t borrow from the ECB? I don’t. Perhaps you’re confusing this point with the regulations that permit the ECB to lend directly to governments. But, as far as I know, lending indirectly via collateralised loans to state-owned banks is ok.

Bacon mentions ECB in his document but my understanding is that he’s just saying that need to check that whatever bond they issue passes the ECB’s technical requirements for “eligible collateral” for ECB repo operations.

There seems to be a lot of misapprehension out there about the ECB’s role in the banking system. I might write a post about this in the next few days.

@Karl my point is not about existing assets that the bank has, it is about new debt. Are Fortis active buyers of Dutch government debt, i.e. are the Dutch government able to issue debt to an owned entity without the intermediation of the markets?

@Karl, I refer you to the section of eligibility criteria that my concerns lie with:
p.35 (adobe p.36)
[quote](b) they must be acquired from the originator
or an intermediary by the securitisation
special-purpose vehicle in a manner which
the Eurosystem considers to be a “true sale”
that is enforceable against any third party,
and be beyond the reach of the originator
and its creditors, including in the event of
the originator’s insolvency;[/quote]
I take this to mean that they must be ‘priced’ on the open market.

“because it’s essential that the banking sector can fund itself abroad” – i think what Lenihan means here is that there is a political diktat from the ECB that says ‘if you nationalise, we can’t lend money to Ireland via the legal fiction of the banks borrowing the cash’. What’s wrong with reversion to the pre guarantee world and everyone with savings over, what, 25k and all bond holders etc. takes the hit, instead of everyone?


Your posts are one of the key democratic forces at play in a country where our government is in the process of actively burning 20% to 40% of GDP (the higher estimate being aggregate fiscal cost of the different bailouts if, as is quite possible, the property market keeps heading south for 5 more years) without even a genuine pretence of cost/benefit analysis (they have substituted cost/end of the world analysis, which is less rigorous).

Your post on the AIB recapitalization was, for example, a perfect illustration of the type of analysis that is required as the governmental-banking complex uses practically transparent mechanisms to favour bondholders over taxpayers. It can carry these out such transactions as practically nobody in the print media has the financial literacy/independence to be able to address such issues.

I’m afraid Brian Lucey may be correct in braodly stating above that nothing whatsoever will change this government from its dogged, doomed approach (“regardless of any advice, evidence, suggestions, musings, or comment”), however that increases the need for your comment and analysis.

Don’t let the trolls get you down!

PS: To your post on Tuesday regarding the government potentially issuing bonds to recapitalize the banks, I believe that Thursday’s IT reported that the 4 billion for Anglo will come out of the 20 billion the NTMA has borrowed to fund the country’s general running costs. As the NTMA had raised substantial funds berfore December 2008, I believe it may constitute a very significant % of funds raised by the government this year. In a worst case scenario, this means that the government will run out of money 2 months earlier than would have otherwise been the case. They are accelerating towards the cliff.

[Please delete previous posts awaiting moderation. Reason was error in email address.]

Four points:

1. There is nothing new in Lenihan saying that if NAMA causes a deterioration in capital positions of the banks then the state will have to stump up for a greater equity interest in the banks. I think we shoul welcome his restatement of this point as it indicates a willingness to tread that path, i.e. to impose a significant haircut on asset prices and to take a greater shareholding in the banks. My confidence is increased by Lenihan’s comment that gains must be socialised if losses are socialised. (I wonder is it harder to socialise future gains when re-floating a previously nationalised bank!!)

2. The Brits are gone in all but name. Referring to the British and other foreign owned banks as part of the banking sector could paossibly be called semantics. Staff within the British owned banks are expecting huge lay-offs. The vibes coming from senior british management are very negative. I don’t know if Rabo and Danske are treating their Irish staff the same but I think it is fair to say that we can have no confidence in foreign owned banks to attend at the birthing of the new Irish economy. To my mind Lenihan would be substantially correct in saying that nationalising the Irish owned banks is tantamount to nationalising the banking sector. In any event, his reference to “wholesale or total” can equally be taken to mean 100% nationalisation of any given institution (as opposed to <= 100% for any given institution).

3. Lenihan’s comment that the Govt is not “convinced” that 100% nationalised institutions will be able to raise funds may well change in time.
If banks are:
(a) NAMAfied, and then
(b) recapitalised/part recapitalised, and then
(c) nationalised,
they may well find it easier to raise funds at that stage; because:
(i) their capital position is more transparent and credible, and
(ii) (in the case of partial recapitslisation) the path to reprivatisation should be clearer, and
(iii) global liquidity and confidence will hopefully have improved.

I take solace from Minister Lenihan’s stated lack of ideological objection to nationalisation of the banks and to his broad welcome for the IMF report which says that nationalisation must remain a key element in the Govt’s toolkit to deal with the banking crisis. (I refer to transcript of the teleconference following on from the IMF report.)

4. I find Lenihan’s call for a return to prudent banking disconcerting. This arises from my having started to watch Krugman’s LSE lectures. Monetary policy failed to lift 1990s Japan and 1930s USA out of recession because banks and individuals hoarded the additional cash. In other words, the retrenchment by the banking sector to much more “prudent” banking practices became a large part of the problem. We cannot have all medicine and no nutrition. If our national financial credibility will be damaged by forcing banks to lend then we the State will have to take direct action. Personally I think it is a bit of both and that banks should have to make a certain amount of lending to start-ups by first time business people.

@Pat Lynch.

The ability of Brian Lenihan to talk fluently on the subject after 1 year of on-the-job training is only testimony to the power of genetics.

The problems arise when you look at what he says.

Again, genetics would indicate a remarkable ability to knowingly talk nonsense to confuse the listeners, to occupy time and space, play possession football and watch the clock wind-down – tactics that are very useful in time-limited TV appearances.

The trouble with Minister Lenihan is that I believe that he is sincere.
He may be a very clever lawyer, he may have learnt some of the vocabulary but he has no notion of the grammar of economics. He has repeated these statements so often that one can only conclude that he believes what he is saying.

So, to quote Richard Bruton last week mirroring donald Rumsfield, Minister Lenihan doesn’t know what he doesn’t know.

And that is what I find scary.

Anatole Kaletsky in the London Times today sets out clearly what is going on – “Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.”

Katelsky’s comments in the London Times (a long-time paddy-basher newspaper) are a bit rich, given that the projected UK budget deficit in 2009 is higher than in any of the countries mentioned, including Ireland. Its time the crisis junkies in Ireland started putting things in perspective. Ireland’s projected budget deficit in 2009 (10.75%) is only about 2% to 3% above the OECD average. Its lower than in the UK (latest projection 14%) and the US. At current rates of budget deficit, it will be years before total government debt in Ireland reaches the EU average. The probability is that it will peak well below the EU average. Neither are the bank problems unique to Ireland. In fact, almost every advanced country has similar problems. The main difference is that, because we had a booming economy, Ireland’s banks lent a lot of money to people in Ireland. Because they had stagnant economies, banks in most other western European countries lent a lot of money to people in eastern Europe and to the underclass in the U. States. Sweden’s banks are now entirely dependent on Baltic countries not devaluing, something which is inevitable sooner or later given their balance-of-payments deficits. The same can be said of other Nordic and central European countries.

@Karl W,

There is an unreasonable focus on Lehmans from the powers that be. From my point of view, better comparisons are WaMu and IndyMac. Maybe throwing some light on the plight of their bondholders might demonstate real alternatives.

@Ahura Mazda

Closer to home, contrast Northern Rock where bondholders were looked after because UK government had not put measures in place with Bradford and Bingley where UK government was able to use legislation it passed in September 2008, BEFORE our Bang Guarantee.

The failure of Lehmans had an immediate worldwide effect.
The collapse of any Irish bank would affect Ireland but nowhere else with any great damage,certainly not on the scale that Lehmans collapse threatened.

Regarding Katelsky’s comments in the London Times perhaps the reason the government is shy of nationalisation is because how can you nationalise ECB debt?
This mixing of sovereignty between the ECB and the Irish State is in some ways like the situation in Lehmans where risk and funds were transferred over many national boundaries and which caused in the end much greater problems when it collapsed.

I agree entirely and have said the same thing in comments here before. The ECB is engaged in QE on the QT through the eurozone governments. The banks are supporting their governments by bidding high. The denouement *could* come when the banks are nationalised and the governments don’t have to pay back their bonds as the ECB writes them off? Nah, a bit tin foil…

This site accesses the less weird of the economic analysis sites and blogs. Yves is doing a great job of putting together a real and balanced picture of what is actually happening. Do not expect to read 90% of this in the MSM. It is frankly frightening. Do not expect help from the rest of the world!

@p.odubhlain / yoganmahew

Given that we are in a liquidity trap where recapitalised banks are not lending and businesses and individuals are not expanding and are also hoarding money, is it not a good thing that the additional liquidity is being channelled to Governments who will spend?

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