Ireland: Confronting the Problem

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.

@ Zhou/Philip

just now….

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

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

@ Garo

the “patriot” line was at Dr Fitz.

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.

@ 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

@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.

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

@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.”

@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.

@ 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.

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.

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?

@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.

@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 🙂

Eoin
Thanks for the updates. Shame that you are dedicated to OPM :-0 !

@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.