Ireland: Confronting the Problem

The opinion of the economics team at Goldman Sachs is important in shaping market views of the Irish economy and the Irish fiscal position:  see here for the latest briefing note by Kevin Daly.

32 thoughts on “Ireland: Confronting the Problem”

  1. It is heartening to see Goldman Sachs predicting light at the end of the tunnel for Ireland.

    Reading the report, one comes to the conclusion that, notwithstanding the pundits criticism of Cowen and Lenihan for lack of leadership, the Irish Government must be credited (along with respected commentators such as Garret FitzGerald, Alan Dukes) for effectively communicating the fiscal problems to the public and generating some degree of political consensus.

  2. @ Zhou/Philip

    Greece is getting hammered at the moment as a result of not accepting their fiscal reality. An EU/ECB/IMF bailout can’t be ruled out right now. If Greek debt gets downgraded below BBB (they’re only two notches above it) then it is no longer eligible for ECB repo and the Greek banks fold overnight.

    Ireland on the other hand appears to be making real progress with the markets in terms of persuading them of our ability to overcome our current problems via the joint NAMA/budget initiatives. I personally think we’re incredibly lucky to have Lenihan in the hot seat at the moment, and the actions of Dr Fitz only confirm him to be one our greatest living patriots.

  3. @ Zhou/Philip

    just now….

    *GREECE DOWNGRADED TO `BBB+’ AT FITCH; OUTLOOK NEGATIVE

    Outlook negative probably the worst part. This could get messy.

  4. @Zhou/Eoin:
    While it is heartening to see that the government is finally trying to deal with the deficit, something that I was advocating way back in Oct 2008, I think it is too early to go on a victory lap or to anoint Lenihan as “one our greatest living patriots”.

    Wait another year or two and then we will see whether this praise was truly warranted.

  5. Yes well, let us just say that my opinion of Dr. Fitz has gone down considerably in the past year or two. He of the AIB 200,000 and Alan Dukes of the Moral Hazard have both been rather disappointing.

  6. @ Eoin

    Our fiscal reality was obvious 18 months ago, the Governments actions (Bank Guarantee/NAMA) and inactions (no spending cuts till this budget) have only exacerbated the situation. A mix of ignorance, incompetence, possibly fear and certainly vested interest lobbying has prevented a timely intervention to stop the fiscal rot. As long as a year ago the public acceptance that pay cuts were inevitable was there and possibly stronger than now, as the job losses mounted on a daily basis. They should have cut then rather than dither away billions by waiting till now.

    The guarantee of bank liabilities has and will add billions to the eventual cost of this depression. The only people who believe the Government are communicating effectively are the bondholders who were inexplicably saved at our expense.

    The true cost of their ineffective and inefficient learning on the job “leadership” will surely be evident in the coming years

  7. The fact that the opposition parties and the unions accept that €4bn in cuts must be made together with the fact that backbench TDs and their constituents would not countenance baulking on cuts shows that the message has been communicated effectively. Our circumstances are different to other countries and the unions and the opposition, particularly Richard Bruton, deserve credit.

    However, it is clear that the Govt have done great work in bringing the public with them thus far despite the fact that this Government is hugely unpopular. The Goldman Sachs note explains the political consensus in Ireland is far more constructive than it is in other countries being monitored by the markets.

  8. @zhou: Oh please! What CM says. It was pretty clear that drastic cuts were needed about 18 months ago. But these guys were saying in September 2008 that the Irish financial system is stable and blahdy blahdy blah. The situation is so clear to everyone by now – except perhaps the unions and IBEC – that the government cannot really get any credit for communicating the message. If they had communicated the message a year ago and enacted cuts that would have saved us 10 billion in 2009 – as Morgan kelly and even Alan Ahearne at the time were advocating – we could have given the government some credit. But it is way beyond overtime now.

    PS: Take the GS note with a pinch of salt. I know the biz and analyst notes like that are a dime a dozen. The “rah rah Irish people are great to take the pain” note coming from someone with an obviously Irish name does not exactly inspire confidence either. But there is a kernel of truth in that note. The only way you can explain the deference to the child rapists and continually voting for the same corrupt politicians is through some intense masochistic streak.

  9. @Eoin, Could you clarify the position for me on the Greece ratings?

    Found this on the telegraph… but I think its out of date….
    In the absence of further measures, S&P added that Greece’s general government debt burden could reach 125pc of GDP in 2010, the largest in the eurozone, or move even higher over the medium term. The next notch down from Greece’s current level would be BBB+, which is still in investment grade territory, albeit only narrowly.

    Whats the limit on the ECB? Whats the story? Is it 1 or 2 more drops right now….And whats the outlook….

  10. Kevin is Irish- good guy too apart from the fact that he works for a giant vampire squid wrapped around the face of humanity 🙂

  11. Another Irish guy from a top investment bank has given his verdict in advance of tomorrow’s budget – from today’s Bloomberg:

    “Irish government spending cuts aimed at reducing the budget deficit may end up sacrificing long-term economic growth, according to Michael O’Sullivan, head of asset allocation at Credit Suisse Private Banking.”

    http://www.bloomberg.com/apps/news?pid=20601085&sid=aKSsZDqhrz14

    It is not stated whether this is a Credit Suisse institutional position though, and I doubt that it is.

  12. @zhou
    Garret Fitzgerald and Alan Dukes (of moral hazard) are the bail-out brothers. Having bailed out AIB once, and having in Fizgerald’s case had a loan written off by AIB, they should have completely recused themselves from this. But triumphantly ignoring any perceived conflict of interest they supported NAMA. If politicians like the bail-out brothers keep saving them why should banks stop being reckless? For their role in bailing out AIB twice they should be commemorated with solid gold statues in the lobby in Ballsbridge. It’s the least they deserve. Still don’t agree? Just read this:

    http://www.irishtimes.com/newspaper/weekend/2009/0613/1224248747843.html
    “THERE WAS a moment at an Oireachtas committee hearing on Tuesday when former Fine Gael finance minister Alan Dukes, one of the Government’s directors at Anglo Irish Bank, put it in very simple and stark terms – the population will pay “a big cost” to rescue the banks.

    There are 4.25 million people in the country who are the only ones that will bear it sooner or later,” said Dukes, sitting next to the bank’s executive chairman, Donal O’Connor, the man charged with solving the Anglo debacle.”

    We need pay none of this €65 Billion cost and have healthy banks too. Our elite have dumped it on us to rescue themselves. See below for the truth:

    _____________________________________________________________
    http://www.irishtimes.com/newspaper/…256508947.html

    Prof Morgan Kelly Oct13, 2009:
    “All that needs to be done is for ownership of Irish banks to be transferred to their bondholders…Resolution offers a way for Irish banks to be adequately recapitalised at no cost to the taxpayer, and able to manage their business without political interference.”

  13. @zhou_en lai
    You will be surprised to know that I don’t agree with you.
    Garret Fitzgerald and Alan Dukes (of moral hazard) are the bail-out brothers. Having bailed out AIB once, and having in Fizgerald’s case had a loan written off by AIB, they should have completely recused themselves from this. But triumphantly ignoring any perceived conflict of interest they supported NAMA. If politicians like the bail-out brothers keep saving them why should banks stop being reckless? For their role in bailing out AIB twice they should be commemorated with solid gold statues in the lobby in Ballsbridge. It’s the least they deserve. Still don’t agree? Just read this:

    http://www.irishtimes.com/newspaper/weekend/2009/0613/1224248747843.html
    “THERE WAS a moment at an Oireachtas committee hearing on Tuesday when former Fine Gael finance minister Alan Dukes, one of the Government’s directors at Anglo Irish Bank, put it in very simple and stark terms – the population will pay “a big cost” to rescue the banks.

    There are 4.25 million people in the country who are the only ones that will bear it sooner or later,” said Dukes, sitting next to the bank’s executive chairman, Donal O’Connor, the man charged with solving the Anglo debacle.”

    By scrapping NAMA we would instantly lower our cost of borrowing and avoid the heavy burden of future interest costs and massively increased national debt it will dump on us.

    We need pay none of this €65 Billion cost and have healthy banks too. Our elite have dumped it on us to rescue themselves. See below for the truth:

    _____________________________________________________________
    http://www.irishtimes.com/newspaper/…256508947.html

    Prof Morgan Kelly Oct13, 2009:
    “All that needs to be done is for ownership of Irish banks to be transferred to their bondholders…Resolution offers a way for Irish banks to be adequately recapitalised at no cost to the taxpayer, and able to manage their business without political interference.”

  14. @Philip Lane
    Gold Sacks backing NAMA – why am I not surprised.

    @zhou
    Garret Fitzgerald and Alan Dukes (of moral hazard) are the bail-out brothers. Having bailed out AIB once, and having in Fizgerald’s case had a loan written off by AIB, they should have completely recused themselves from this. But triumphantly ignoring any perceived conflict of interest they supported NAMA. If politicians like the bail-out brothers keep saving them why should banks stop being reckless? For their role in bailing out AIB twice they should be commemorated with solid gold statues in Ballsbridge. It’s the least they deserve.

  15. @ Garry

    downgraded to BBB+ by Fitch today and put on creditwatch negative yesterday by S&P. Bonds and CDS obviously getting hammered.

    It’s not 100% on the following (i’ve heard two situations), but this is what i believe to be the case:

    ECB collateral rules, in normal times, mean that for securities to be eligible for ECB repo operations, they have to be rated single A or better by two of the three main ratings agencies. Due to the financial crisis, this was extended to all securities rated BBB or better. At this moment in time, Greece is one notch above this on Fitch (but below the original criteria), two notches above it on S&P (and only one above the original criteria), and on negative with both them and Moodys (but still 3 notches above original criteria). Given that they cant really be moved off negative watch until there is a significant improvement in the fiscal situation, they are likely to remain in a precarious situation for the next few months at least.

    Even if they are not downgraded further, we are now left with two problems – the ECB will either have to extend its own qualitative easing measures further (and i think it may ‘automatically’ lapse next yr) by leaving the credit threshold at BBB until 2011 at the earliest, or the ECB is gonna be faced with refusing to accept the collateral of one of its own member central banks. Either outcome will be damaging for the ECB’s credibility.

    If Greek govt debt is no longer acceptable for repo, this means that (a) their bonds are gonna get hammered even more and (b) Greek banks will no longer be able to use their massive holdings of Greek govt debt to repo with the ECB. We’d likely see the Greek banking sector fold pretty much overnight in this situation.

    (the ‘alternative situation’ is that the ECB will always accept member bank government debt, but can’t find a definitive asnwer on this)

    @ Garo

    GS have been big fans of the Irish “solutions” for a while now, its not just the Irish guys working there. Erik Nielsen, their head of European Economic Research, is a particularly big fan.

    @ CM

    lots of European govts have needed to cut back spending (especially the Greeks) but we’re the first to actually do it, and it looks likely to be in a significant way. While it seems obvious to even the dogs in the street about the need to cut, governments are almost unheard of it terms of actually doing it. Usually all that actually occurs is a spending freeze or simply a pull back in spending growth.

  16. just out from Barclays re Greece:

    “Some of the latest concerns focus on the eligibility of collateral at the ECB of Greek debt. In this regard we would highlight that in 2010, Greece is unlikely to be affected as the ECB in October 2008 lowered its acceptable collateral minimum ratings to BBB from one rating agency. These measures are supposed to be removed at the end of 2010, with minimum ratings reverting to the minimum A- rating from one agency applicable previously. Even then, however, the impact on Greek banks capacity to fund themselves at the ECB would only be affected if Greece was downgraded by three notches by Moody’s and one notch by S&P. Following today’s downgrade, Fitch already rates Greece at BBB+ (Negative Outlook). It is, though, quite possible that should these rating downgrades take place, some kind of carve-out for accepting Greek debt at the ECB will be devised.”

    This seems to lower the immediate term issue slightly by saying that only one credit rating agency needs to have it rated above the threshold to make it elligible (and Moodys have a few steps to breach that), but i’ve also seen a GS piece which says its needs 2 of the three. Confusion reigns.

  17. http://thestory.ie/2009/12/08/nama-and-risk-reports/

    Gavin Sheridan requested, “A list of all cost-benefit analyses, impact reports or preparatory reports that have been carried out by the Department in relation to the proposed National Asset Management Agency (NAMA),” on Aug 17. He was grudgingly given them today.

    “Why is this information valuable? It contains a timeline of what companies were involved in consulting the Government on the formation of NAMA, and gives us insight into the process. It also contains previously unknown titles, such as HSBC’s “Project Neo”. This is likely relates to the rumoured formation of a “New Anglo Irish Bank” in 2010. And it gives us an idea as to the level of involvement of Merrill, Arthur Cox, Rotschilds, PwC and HSBC.”

    The site is well worth checking out. This new material is here:
    http://www.scribd.com/doc/23836471/NAMA-Cost-Benefit-Analyses-Impact-Reports-or-Preparatory-Reports

  18. Currently, under emergency measures, BBB- is the floor for eurozone sovereigns. There’s a haircut applied at BBB-, so BBB is the lowest that is moptop. According to FTAlphaville anyway.

    The one credit rating agency rule at the minimum applies from March 2010, although at least two agencies have to rate. By March 2011, it will be best/second best – two agencies must rate at the minimum. Note, this was intended to be a limitation on ABS, but I presume it also applies to sovereigns?

  19. @ YM

    correct, 5% haircut at BBB-, which wouldnt be the end of the world, but wouldnt be good either.

    At the moment the more realistic “problem” would be in March 2011 both S&P and Fitch have the Greeks below A-, and the ECB is forced to put a deal together to let Greek debt continue to be used as a collateral. The problem is that in the meantime if your’re a fund/bank holding Greek debt, there’s an outside chance that that doesn’t happen and your bonds aren’t very much use to a lot of people then. The smart idea would be to chuck them now and not have to worry about it. Which is probably what we saw today.

  20. @Philip Lane
    Shares in companies owned by the late Robert Maxwell suffered from “The Max Factor” a belief, later proven, that all was not above board.
    Similarly, the Irish government’s debt interest must be suffering from similar beliefs in world markets. This cannot be helped by the following:
    both the chief executives and chairmen of AIB and BOI are insiders. The boards of AIB and BOI have also remained almost intact. Anglo however takes the biscuit.

    The chairman of Anglo was appointed by Sean Fizpatrick and has close links to BOI and he worked on ICI (formerly part of AIB) when it was bought by the state. Fellow board member Alan Dukes was involved in the previous bailout of AIB. The chief executive of Anglo – the only outsider – was recommmended by the former head of BOI Michael Soden (A director of another guaranteed bank was recommended by the minister’s brother). Another director of Anglo is Frank Daly, the former head of the Revenue Commissioners. We’ll come to the fourth director later.

    A lot of the work on the banks (see previous post) was done by PWC and Arthur Cox. PWC were the auditors of BOI. How on earth could their Irish branch be expected to investigate this impartially?
    http://www.irishtimes.com/newspaper/weekend/2009/0613/1224248747843.html

    There were already question marks about Irish standards due to incidents like this:
    “O’Connor was criticised at the committee hearing last Tuesday over the way in which he was appointed as a non-executive director of Anglo in June 2008 at the request of then chairman Seán FitzPatrick and then appointed as chairman in December when FitzPatrick resigned. He was also criticised because he was a member of the board last December, when the bank said impaired and problematic loans totalled €2.5 billion. This has since risen to €23.6 billion.”

    But now read the following:
    “O’Connor’s Monaghan connections have brought him into contact with Eugene McCague, chairman of legal firm Arthur Cox. He is close to PwC partner Feargal O’Rourke, a cousin and confidant of Brian Lenihan. O’Rourke was sounded out by the Minister before he appointed O’Connor to run Anglo in February.”

    Arthur Cox. But there’s more about O’Connor:

    “He was the firm’s partner in charge of the independent audit of Bank of Ireland from 1991 to 1997. In 1991 he was asked by Pat Molloy, the bank’s chief executive at the time (and, since Wednesday, its governor [see above]), to help clean up another mess – its failed investment in US bank First New Hampshire Bank, which suffered heavy losses following the collapse of the local property market.”

    “Molloy’s successor at Bank of Ireland, Maurice Keane, was appointed a director of Anglo in January by Lenihan, to provide banking expertise to assist O’Connor and the other directors.” So the fourth director of Anglo worked for BOI.

    If this was all an establishment cover-up, how different would it look?
    International investors will draw their own conclusions from our elite’s actions, not from their cheap talk about reform and regulation.

  21. @Zhou_enlai

    Just for the historical record, it is Lenihan and his Government that have accepted Fine Gael’s position, set out as early as lourpre-budget position ast March, that we must cut spending by €4-€5 billion in 2010 to restore fiscal credibility and long-term growth prospects. Lenihan has even started to parrot Richard Bruton’s mantra that “we cannot tax our way to recovery”, after his attempt to hike taxes by €6 billion in the last two budgets spectacularly back-fired.

    It is unfortunate, however, that insufficient groundwork has been done by the Government to cut spending primarily through reforms, efficiency improvements and service re-configuration, rather than through cuts in front-line services and entitlements, as wil inevitably be the case tomorrow.

    Andrew

  22. @Eoin: I wonder if GS directly or indirectly has any share/bond interest in the Irish banks. Ah but there is a firewall between their trading and research divisions so it wouldn’t matter would it 🙂

  23. Zhou

    A sage, ageing academic politician. Strange that we never hear from Garret the once good at all. At least in his own name! I’m calling it! U R really: …….

  24. From Fitch this morning:

    *FITCH’S PRYCE SAYS GREEK BUDGET DOESN’T MAKE BIG ENOUGH CHANGES
    *FITCH’S PRYCE SAYS IT IS `POSSIBLE’ BUT NOT ‘LIKELY’ GREECE BE DOWNGRADED AGAIN
    *FITCH’S PRYCE SAYS `NOT CONVINCED’ GREECE WON’T DEFAULT
    *FITCH’S PRYCE SAYS IRISH GOVERNMENT IN CONTROL

    Greek debt getting hammered again this morning. Yields up another 20bps+.

  25. @Andrew
    I don’t know if I agree with your interpretation of the working of the Government’s minds but I certainly believe Richard Bruton (and therefore you) deserve credit. My core point was that I think the government has shown effective leadership which people said had been lacking.

    @Pat Donnelly
    I lack GF’s experience, knowledge and wavy hair.

  26. @zhou_enlai

    Agreed – I wasn’t trying to suggest that Richard Bruton’s arguments and critique of Government policy have been decisive in forcing a shift in fiscal policy; only that he and FG had comes to terms with economic reality long before the Government.

    Andrew

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