Extreme Contagion

Both Donogh Diamond on last night’s Prime Time and Simon Carswell in this morning’s Irish Times provide useful overviews of the “Anglo options”.  But there is a certain surrealness to the discussion.  Behind the debate is what might be called an “extreme contagion” view of default on any bank liabilities.  Investors have done a good job convincing the government that bad things will follow any imposed losses.   This supposes some combination of backward-looking and grudge-holding market participants.   It also seems to be based on the idea that Irish borrowers operate in narrow segments of the international debt markets, and investors there must not be annoyed under any circumstances.  The media has taken the view that we can’t know what the consequences of loss imposition would be, so we should probably play it safe.  

 I do not think that independent analysts are that clueless.   Patrick Honohan’s post on this blog back in May is worth re-reading.   An extract:

It might be argued that losses incurred even by sub-debt holders of a bank could damage the credit of the Irish government.  I disagree. 

First, it is really immaterial that the bank is Government-owned: eveyone knows that situation has only arisen as a result of the disastrous performance of the bank. No new subordinated debt has been issued since the nationalization. Besides, in his statement in the Dail on January 20, during the debate on the nationalization bill, the Minister removed any doubt about whether nationalization entailed an expansion of the guarantee.

More generally, even though there might be an immediate knee-jerk reaction in market prices of debt, mature reflection by the financial markets would recognize that a country honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors.

The government’s strategy seems to be to create a 100-percent credible implicit guarantee not to impose involuntary losses on any bondholders once the explicit guarantees expire.   Obtaining future funding will be challenging.  But a less costly approach for taxpayers would be a liberal use, if necessary, of prospective explicit guarantees.  Attention should be focused on convincing investors that the Irish government will bear any burden to meet the explicit obligations—guarantees and sovereign debt—of the State.    With all the talk of government reform, a good start might be to ban anyone from the Department of Finance from attending an “investor roadshow”.

60 thoughts on “Extreme Contagion”

  1. The Danes have recently published their proposal for dealing with insolvent banks – initial feedback suggests it will have majority support and will pass into law. Some of the main points are very prescient to the above post and should be highlighted in the media discussion on Anglo here.

    In the proposal not only are shareholders equity and subordinated debt used to cover potential bank losses but there is an explicit recognition that senior debt and interbank deposits will also take a write down.

    For the progressive and realistic Danes the implicit assumption that senior debt is guaranteed by the government and taxpayers is no longer valid.

  2. Excellent point.

    The current dilemma facing the government has the hallmarks of a market-entry game. Bond-holders are purporting that future lending costs will increase following possible losses (just as an incumbent may threaten a price war in advance of a new market entrant). This is an empty threat because the subgame perfect equilibrium following non-payment to subordinated bond-holders would be for them to continue lending afterwards. Alan Dukes’ claim that those same bond-holders would run is bogus because it assumes irrational ex-post behaviour.

  3. The government’s strategy seems to be to create a 100-percent credible implicit guarantee not to impose involuntary losses on any bondholders once the explicit guarantees expire.

    This is inaccurate. As Patrick Honohan pointed out, the Government did not guarantee all subordinated debt. The proposed extension of the guarantee provides no additional protection for unguaranteed subordinated bonds.

    Alan Ahearne made the argument about Ireland selling to a small part of the bond market in the Paddy Ryan memorial lecture. Like you said, there is an assumption we are selling to a small sector of the market. There is also a [logical] assumption that senior debt will bear a grudge against us if we burn them. However, Alan Ahearne specifically differentiated between senior debt and subordinated bonds. He pointed out that subbies had taken losses. I understood that the government’s position is that the Government is not concerned to protect subbordinated debt. In fairness, I think we should all be clear on that by now.

    There is a question as to whether any money should be offered to subbies to buy back bonds. The EU have put a stop to that for the moment which is welcome. I expect that no debt for equity swap can be proposed for subbies until recapitalisation plans are ready and resolution is also ready. In the meantime, nobody is offering to buy them out, even at a discount.

    It is also worth bearing in mind that the original subordinated bondholders may already have taken their losses and sold on their bonds for whatever they can get. They may find talk of them being guaranteed by the Government as somewhat galling.

  4. Zhou,

    I have found it strange to hear the government taking credit when subordinated debt has been bought back at a discount. I see nothing in the government’s policy that would actually have imposed involuntary losses (unforced that is by the EU) . Imposing these losses short of bankruptcy would require a resolution regime. The buy backs were possible because at certain points in time the government’s implicit guarantee policy was not fully credible, most likely becasue of the chance of a change in government.

  5. @JMcH

    Do you not think the exclusion of subordinated debt from the explicit guarantee (as contained in the statutory instrument) and the proposed renewal thereof has impacted on the value of subordinated debt and the behaviour of debt-holders?

  6. Zhou,

    Absolutely. But it is a question of differential probabilities. Even though the government is unwilling to impose involuntary losses on anyone, some forms of debt are clearly more exposed to changes of mind/changes of government/EU intervention than others. The absence of a guarantee certainly does make the affected classes of subordinated debt more vulnerable despite the bondholder friendly government policy.

    Just to be be clear, I am absolutely not suggesting any sort of malfeasence here, just the use of a wrong model, one that leads to an exaggeration of the risks of contagion. It is quite shocking how much follows from this model in terms of policy. Of course, I could be wrong and it would be good get the views of market participants without (or even with) vested interests.

  7. @JMcH

    I agree that the mechanics of the market are quite opaque.

    I suspect that one of the reasons subordinated debt was not burned already was because the DoF did not have the capacity to implement a resolution scheme within the necessary timeframe on top of their other duties.

    However, the logic for buying back subordinated debt in the absence of a resolution scheme is not clear. Was it a stop gap solution to falling capital ratios?

    In any event, I think that it is a fair question to ask who the subordinated debt owners are in general terms and to what extent there is or isn’t any cross-population of subbies with seniors.

    Where the lenders are international we should be looking to see what losses they have incurred on subordinated debt holdings elsewhere.

  8. The buy-backs are a waste of 40c in the € or whatever it is if zero is a feasible option, whether or not they show a ‘profit’ as I have heard one banker describe the outcome, referring to meaningless book capital.

    The onus is on those who argue contagion (higher costs for other sovereign or sovereign-guaranteed debt) to back up their fears. There is at least an arguable case that sovereign lenders would be pleased to see bank rescue costs minimised ruthlessly, within the terms of law and explicit guarantees already given.

  9. Is not this enormous migration of private debt into public debt the result of a lack of a bank resolution process and of the legal difficulty, even if one were devised, of applying it to impose losses retrospectively? Senior bondholders could claim legitimately that if they had known losses would be imposed in such a manner they might not have invested or would have sought a higher coupon or similar risk premium/repayment assurance.

    And is there not also the possibility that, even if some citizen-protecting – and legally bullet-proof – resolution process could be devised and applied to Anglo Irish, it would reveal land and property valuations that would totally undermine the NAMA loan valuation process?

    It seems the the Government – and, by implication, all citizens – is between a rock and hard place – both of its own devising.

  10. “The onus is on those who argue contagion (higher costs for other sovereign or sovereign-guaranteed debt) to back up their fears. ”

    I think that hits the nail on the head. The only thing is that I am not sure that anyone is saying that have to save the subbies, even if others might suggest they are following a subbie-saving plan.

    One assumes that subbies must be dealt with, or not, prior to recapitalisation. The liability to subbies will not be taken on cost free by private equity.

    The only alternative I can see is that the state might recapitalise the banks and then put them through a resolution process to cleanse them of the subbies before letting private capital in. That seems a bit fanciful though.

    Do others agree that the subbies must be dealt with prior to recapitalisation if losses are to be enforced on them?

  11. Mike Aynsley (Anglo) asserted that it will cost the taxpayer ??? – just make it up as you go along amounts – to keep Anglo in business as a zombie bank, but liquidation would have cost in the range of Eu27b – Eu35b. Please, could we have some real detail on these extraordinary figures. The Irish taxpayer does not now, nor will ever (except we print our way out) have such massive sums. Someone MUST know this for a fact. So what is the true story?

    Are we being scammed by ignorant persons, or being lied to by knaves? Which?

    !. What would it have cost the citizen taxpayer if these private companies had been put into voluntary liquidation – before the FF party ‘volunteered’ the citizen taxpayer? Please DO NOT tell me the financial industry would have collapsed. We had a very long bank strike some time back, and the same banks are still extant. Well, sort of!

    2. What would it cost the citizen taxpayer if the Gov gave the Agincourt salute to the market in respect of those debt guarantees? A GDP of -XX%? Sure we are going there anyway, so what’s the difference?

    Our legislators and their commercial sponsors are walking out onto treacherous tidal sands – whilst they regale the tide not to turn and engulf them. If unemployment hits 20%, or Real Interest rates increase, or domestic mortgage defaults exceed 5%, or we have further wage/salary cuts or oil prices stray above $85bl (or Eu below $1.15). Watch out!

    B Peter.

  12. @colm McCarthy
    100% spot on, paying 40c in the € for subordinated bonds is a complete waste of taxpayers money. And the excuse of not having a proper bank resolution scheme 18 months after the crisis started is simply inexcusable.

    I would also agree that those who constantly repeat the mantra that forcing bondholder to accept any losses would bring about catastrophic consequences explain the costs in both options.

    As i’ve always accepted that forcing losses on bondholder is not cost free but I don’t think the cost is any close to the money we would save by playing far tougher with all bondholders.

  13. There seems to be broad agreement that default on sub-debt would not have much contagion effect. However we chose to focus on the very clear policy difference between the Government and Fine Gael on the much larger question of potential default on senior debt, and there is no such agreement on that issue.
    It seemed to us that – in a rare case of ‘clear blue water’ – the Minister for Finance and the main Opposition Finance spokesman have diametrically- opposed views on this question of potential default on senior debt, and that therefore we should focus on that area. I would have liked to do a bit more on sub debt, but I’d always like to have done a bit more on something, and there is a limit to the amount of detailed financial information can put in a general-audience current affairs programme. Even with cartoons

  14. @Paul Hunt
    Senior bondholders have always been at risk of suffering losses because their guarantee was never anything other than a fuzzy implied government guarantee.

  15. @D_E & Colm McCarthy
    Yup. Total waste of real money to prop up notional.

    In addition, much of what was bought back was undated subordinate and it was bought back in part with dated subordinate… with juicy coupons that are still payable… this moves from looking stupid to looking suspiciously stupid; these are the masters of the universe after all.

    Aside from having to explain how saving the sovereign from huge contingent liabilities is going to make the sovereign more attractive, those claiming wind-down costs really need to back up their numbers, as Ms Burton pointed out last night on Prime Time.

    Anglo’s last accounts were fifteen months ago; those must be treated with a great deal of suspicion given all that we have learned and the more that we’ve heard rumoured. When was there a last true picture of Anglo’s position? Who knows, but we for sure don’t have it now.

  16. I thought that it was interesting that the primetime seemed to conflate Repos with Senior Debt

  17. @Brian Woods
    “We had a very long bank strike some time back, and the same banks are still extant. Well, sort of!”
    Well I remember it – and as you say we seemed to roll along quite nicely without them. The sky didn’t fall – in fact – depending on your musical tastes – the worst, (or best) outcome was that we have that strike to thank for giving us Christy Moore.
    Simon Carswell has another telling article in todays IT which casts some light on the goings on at Anglo over the last few years. Apparently they have a tendency to lose a lot of golf balls.
    http://www.irishtimes.com/newspaper/finance/2010/0326/1224267097237.html

  18. How much could the contagion cost?

    If Ireland’s national debt was to grow to 100% of GDP over the next few years (unlikely, but I am looking for a worst scenario case here to give the contagion arguers a chance) then we would need to borrow and extra €70bn (again, assuming that out GDP doesn’t totally colapse)

    Assuming we put no more money into Anglo, we save approx €14bn.

    For this saving to be a ‘real’ saving then our bond coupons would have to be, on average over a seven year period, 2.857% higher than they otherwise would be.

    Which, (and allowing for the fact that I have used the word ‘assume’ way too many times in this post) in my opinion is an unlikely punishment for us allowing one reckless bank to fail.

  19. @Brian Lucey

    “I thought that it was interesting that the primetime seemed to conflate Repos with Senior Debt”

    That struck me as odd too. The repos are asset backed, with the CB/ECB having a cliam over the assets in the case of Anglo not repoing them. The assets are valued at a discount by the ECB/CB, surely these are not the taxpayers concern in the same way that the senior bonds are?

    For example the Master Loan Repurchase Agreements with the Central Bank, valued at €10bn last Mar were backed by assets with a book value of €14.8bn.

  20. @LorcanRK
    “If Ireland’s national debt was to grow to 100% of GDP over the next few years (unlikely, but I am looking for a worst scenario case here to give the contagion arguers a chance) then we would need to borrow and extra €70bn (again, assuming that out GDP doesn’t totally colapse)”
    Unlikely? Planned, if you include NAMA…

    “The repos are asset backed, with the CB/ECB having a cliam over the assets in the case of Anglo not repoing them. The assets are valued at a discount by the ECB/CB, surely these are not the taxpayers concern in the same way that the senior bonds are?”
    The state is responsible for making up any shortfall at the Irish Central Bank…

    Repo counterparties are ones I would be more alarmed about burning than unsecured creditors. There is a case to be made that there would be contagion there to the other banks. Whether this applies to central banks or not is another question.

  21. @Yogan,

    It is a complicated web alright. If the repo counterparty ends up having to cash in their chips (by taking the collateral) then what doe the bank have left to pay the depositors?

  22. @Yogan
    “The state is responsible for making up any shortfall at the Irish Central Bank…”
    lets just say frinstance that they didnt. That would leave the bank holding, lets say, 5b losses for argument. 2008 central bank capital and reserves were 1.3b
    How, absent the cb making lots of profit, can these reserves then be booseted? Coin issue to the tune of a couple billion?

  23. @All
    Poster MPB explains how the DDDA became the establishment’s own personal planning authority:
    “In the 70s and 80s, FF used to sell planning info to Developer friends.

    They would use the inside information they had with regard to rezoning and sell it to Developers for cash.

    They would then sell their ability to influence planning decisions.

    After the planning tribunals exposed this behaviour, it was stopped.

    FF then decided to, more or less privatise into party ownership, a prime development area ( the dublin docklands ) and legalise the old system of selling planning permissions to party donors, by handpicking the board of the DDDA and giving it the power to grant planning without the need for scrutiny by local councils and An Bord Pleanala.

    And just like the good old days, they get to continue in Govt and we get to pick up the bill.”

  24. @All
    Poster MPB ends his post with this call for action:
    “When is this country going to stop taking it up the arse from these corrupt parasites?”

  25. @David O’Donnell
    “ANGLO Irish Bank will reveal next week its reliance on emergency funding from the Central Bank has increased “significantly” from €10bn a year ago.”
    What? The aristocracy have stolen even more?
    ” Government sources said last night it expects to inject capital into the bank on a phased basis, initially tapping a €22bn pool of short-term cash balances managed by the National Treasury Management Agency (NTMA).”
    They want to steal another €9Bn? This is a resigning matter for the government. If it isn’t then this country truly is lost. More than 13 BILLION, €13,000,000,000 (4 + 9(of 10) + unknown extra from central bank) poured into the megadevelopers bank to protect them and bank investors. They want to pour in another Nine Billion?
    22 BILLION lost to protect megadevelopers/bank investors?

    This lunacy must end. Everyone needs to get behind the FG plan before it’s too late and the government if it had any honour would resign. They are responsible for the banking system and they are responsible for its destruction.

  26. @ Oliver Vandt
    +1
    Here here. We need to get rid of our zombie government in order cure our zombie banks and stop the madness.

    I’m a devout athetist yet everday morning I wake up and pray to read about a snap election being called. My latests hopes are centered around this DDDA mess ‘please please please let be a slow burner that brings down the government’

    @ All founding fathers of Irisheconomy.ie
    Any chance of another letter guys? This time maybe Gareth Fitz will sign it rather that argue the finer point on it.

  27. @All letter callers
    insanity is defined as doing the same thing time and again expecting a different result. Last year two multisignatory letters were issued. What benefit would another bring?
    I might sign one, but I wont organize on one

  28. @Celtic Pheonix
    You should pray too that the FG plan for Anglo is implemented. It’s the only hope. The current banking policy is establishment insanity. We’re trapped on “Shutter Ireland”. We should be focusing on recovering the €14Bn PLUS (when will we be told how much the plus is?) already put into Anglo, not letting this leech drain another nine thousand million out of us.

    Those who allowed themselves to be convinced that it was sane to permit the government that wrecked the banking system to also manage its repair will be harshly judged by history. This government are responsible, and by many acts of commission not just by omission, for the simultaneous destruction of our economy, our public finances and our banking system.

    We need a letter calling for a new government with a new banking policy.

  29. @ BL

    Hungerstrike!!!
    I think Aldi or Lidl are selling padlocks and chains next week.
    Bulk up on pasta for the next few days though

    Al

  30. I have said this here at IE before, and I think it is a point worth making. That during the immediate post crisis phase of the Irish financial system in 2008, what the Dept. of finance and minister for finance, Brian Lenihan did was daft. They went off in a wild goose chase, attempting to solve a liquidity crisis in Irish banks, which they claimed had been prompted by the global credit squeeze. The Irish financial regulator and so on were drafted into the game at the time in late 2008, to present the problem that way. In early 2009, a consultant Dr. Peter Bacon was commissioned to assist Ireland’s banks in their time of ‘liquidity problems’.

    The fact is, the minister for finance Brian Lenihan made too many promises to senior bondholders at that stage, because he viewed them as part of his solution – to improve the liquidity situation of Irish banks. Bear in mind at that stage, people in Ireland still thought that property would remain stable and in fact recover. That is, it made sense to keep the liquidity on the books, in the form of deposits and senior debt, which presumably balanced up in some far out way, with the Irish banking assets. On the other hand, in early 2010, as Ireland really fights at last for its economic survival, the liabilities presented by bondholders and depositors is actually a problem. We are having to move to that side of the equation, very late in the game. The liabilities are getting in the way, of Ireland assessing the problem of solvency in Irish banks – which in turn in hurting the real economy very badly. What we have really is arrogance on the part of consultants to the government, and to be honest, the government themselves behaved more like consultants than leaders. BOH.

  31. @Al
    President of Anglo, Alan Dukes “of Moral Hazard”, demonstrates the effect on the Irish population of putting further funds into Anglo by testing his plan on an international audience. We’ve already lost our shirts on this bank. Moral Hazard won’t stop until he’s got all our clothes:

  32. @Brian Lucey
    ““The state is responsible for making up any shortfall at the Irish Central Bank…”
    lets just say frinstance that they didnt. That would leave the bank holding, lets say, 5b losses for argument. 2008 central bank capital and reserves were 1.3b
    How, absent the cb making lots of profit, can these reserves then be booseted? Coin issue to the tune of a couple billion?”
    While there is a printing press in the state, the state does not have the authority to issue notes and coins except in respect of general proportions of M1, I believe. So we would not be able to print our way out of it.

    If it was viewed as a temporary situation, the ECB could transfer some reserves in, I suppose. But I can’t find an law governing it. The problem is that the NCBs are shareholders in the ECB, not the other way round.

    In the event the losses at the Irish Central Bank are not made up, the Irish Central Bank would go bust. The result would be a withdrawal of the marginal lending facility for Irish banks. This, I believe, would see them instantly collapse as they would have no lender of last resort.

  33. @CM

    I have a lot of time for “the progressive and realistic Danes the implicit assumption that senior debt is guaranteed by the government and taxpayers is no longer valid.” Think they were hit for 20%GDP (not certain where) and think we are >50% GDP – but does anyone really know? Open to better informed on these percentages?

    @Zhou
    “Do others agree that the subbies must be dealt with prior to recapitalisation if losses are to be enforced on them?” Seems to make sense – maybe why some of got out early on a cut.

    @LorcanRK
    “… the Master Loan Repurchase Agreements with the Central Bank, valued at €10bn last Mar were backed by assets with a book value of €14.8bn.” Anglo! + Book Value = Big Red Flag (add it to sovereign debt via NAMA/ECB bonds] – who can believe what out of Anglo? Call it a ‘time penalty’ for the Gov … and …
    @yoganmahew ‘The state is responsible for making up any shortfall at the Irish Central Bank… @ Brain Lucey + Oliver Vandt nuff said. everything to do with Anglo ends up in black hole ……… CB will be burnt ………

    @Brian Lucey – go front page of The Sun & The Star Brian …Photo Op etc. the Times readers don’t do revolution ……..

    @All …….. good thread ….. we are way beyond polite letter writing ….

    1789

  34. @Brian
    Here’s some more on it from voxeu:
    http://www.voxeu.org/index.php?q=node/1148
    “Under current Eurozone rules, each national fiscal authority stands behind its own central bank, but no fiscal authority stands directly behind the ECB. The lender of last resort function is assigned to the ECB’s members – an arrangement that should work well when the failing private bank has a clear nationality. But who stands behind the ECB as its recapitaliser of last resort?

    Not the European Community. It has a tiny budget and no discretionary taxation or borrowing powers. Presumably the burden would fall on the Eurozone national treasuries, but in what proportions would they participate in the recapitalising the ECB, should the need arise?”

    It comes at it from the other angle, who would rescue the ECB, but the implication is clear. It is up to the national government to rescue the NCB…

    As I say, burning repo counterparties would be a dangerous thing to do. They do take a risk and take collateral in return, but it is structured as a no-risk situation and the price reflects that. It is a situation where liquidity to other banks would disappear if one of them collapsed. This is, after all, what happened with Bear Stearns.

    The reliance, over-reliance would be the only way you could call it, of Irish banks on repo for day-to-day liquidity operations lies at the heart of their failure. They are little different from Northern Rock and this has been evident from the time that Northern Rock got into trouble. Nothing that has happened in the intervening two years has improved that situation one iota. The banks are still gorged on liquidity provided now by central banks (both the ECB and the Irish NCB) at well below market rates. As that dries up over the course of the year something will have to replace it. Something that is acceptable to the interbank repo market. About 54 bn of something.

  35. @Yogan
    lets be clear – im not suggesting we do it. im wondering what if. Because to some extent that seems to be the way FG are headed.
    As you say, its a liquidity issue at heart. The only way I see now is that we slowly dry the liquiity out. NAMA is liquidity methadone…
    @Al
    hungerstrike for moi would while being useful from a personal health perspective useless as a threat . I suspect my personal reserves could outlast the crisis, alas…

  36. @Brian Lucey
    I understand you are only what iffing, the problem is that the what iffery pretty soon leads to a whiffy end!

    “NAMA is liquidity methadone”
    Absolutely. It is not so much pretend and extend, it is more “look over there, I thought I saw the dead corpse of the banking system twitch” shortly followed by “oh dear, it’s bitten the state in the aras and now the state is a zombie too”

  37. @All
    I have a feeling we are going to hear a lot more about central bank liquidity. Leaving that aside we discussed Lucey’s alternative to NAMA here:
    http://www.irisheconomy.ie/index.php/2010/03/19/policy-of-disposal-just-makes-banks-weaker/

    I summarised it as follows:
    “So we begin with bank resolution legislation to give us a stick to threaten the bondholders with. Then:

    1. Recognise losses (NAMA may have done some good).
    2. Haircut subordinates.
    3. Recapitalise through NPRF
    4. and selling stakes.
    5. Wind up Anglo/Nationwide. (OV: FG Plan?)
    6. Create third force

    Result:
    “Overall, this would leave the State with a new investment of some €25 billion or more, cheaper than Nama as planned… [And it] would result in healthy banks and a healthy banking system [instead of NAMA’s zombie banks].”

    Alternative:
    The Neverending Zombified Banks Story
    (Author: Mr. B. Lenihan).”

  38. The public aren’t going to join in on the ‘torch the senior bondholders’ chimes while we have the likes of Alan Dukes moping the floor with Joan Bruton on prime time. They’re fed up of talk of billions for this billions for that. I personally think another letter outlining what should be done on Anglo specifically would go a long way to helping cure the apathy. At the very least it’d give Joan Bruton something to use in an argument. I know it seems like your wasting your time, but surely it’s better than letting these lunatics torch the asylum.

    In the mean time I’ll continue to pray for a snap election.

  39. @ yoganmayhew

    ‘As I say, burning repo counterparties would be a dangerous thing to do. They do take a risk and take collateral in return, but it is structured as a no-risk situation and the price reflects that’

    A risk which is ‘structured like a non-risk’ is obviously not a risk. It is a non-risk which is falsely sold or presented as a risk, on the principle of caveat emptor/vendor. The opposite also occurs, as with the CDS scam, where risks were concealed by slice and dice etc.

    Isn’t that the core of the capital markets problem ? There is competition, but the competition, and pricing, is always structured (gamed) in favour of the dominant. An insiders game. ‘Burning creditors’ is a most heinous crime, but ‘burning citizens’ seems to be fine, if you can get away with it. Money naturally has to spent on lobbying and spin, but that’s part of the ‘business’ model.

    Assymetric information, and trust, takes many forms. There is no economy which is not also a political economy. ‘Soft data’ of the cultural, political and social variety is often decisive in risk assessment, because status and ‘respectability’ matters hugely to people. The forms differ from place to place. Knowing about that is all part of the game.

    When the gamers are also ‘government advisers’, we get systemic conflict of interest. Because it is so widespread, and globally prevalent, it cannot be acknowledged. To admit it is to blow the gaff on the the pretence of ‘objective capital markets’ and of ‘objective advice’.

    Default risk was ‘structured/gamed out’ pretty effectively in the lending to Irish banks. Creditors knew our institutional leaders would close ranks to protect their own if (when) things went sour. They were dead right about us. A few ‘bad apples’ are mentioned, but the responsible institutions and professions are basically untouched. Ireland is doing the Right Thing. AAA for compliance with gaming.

    As I read Rogoff and Reinhardt, Ireland has never defaulted on sovereign debt. There are doubtless good reasons for that, but the bad reasons probably have to do with our banks tradtional dependence on the City of London. They always preferred to deposit passively there, and lent only for ‘safe’ property. It was a thoroughly conservative and institutional orientation which retarded economic development here for decades. We don’t trust ourselves enough.

    Even though, or perhaps precisely because, they were not state banks in the formal sense, our main banks were able to consolidate, and embed themselves in our state. A seamless web of personal, state and business connections grew up around the powerful clans with family members or close associates in all the relevant sectors. Informal channels is our style.

    Creditors to the Irish boom knew they had an implicit but cast-iron guarantee. ‘Solid repectable’ folk exercising their ‘natural’ function and doing what they feel is right. Formal regulation seems unnecessary, as they have unwritten rules of conduct. People who went to good schools just wouldn’t mess with banking, legal or audtiing rules. Now that the secret is out, ‘heads down, close ranks and keep mum’ is the watchword.

    Irrespective of the rhetoric, austerity, deflation, unemployment and emigration still is the ‘ recovery plan’. Any other route would threaten our institutions and our dominant players. We have been, and remain a marginal state, so the costs of economic adjustment MUST be crammed down onto the general population. Move on, get along, nothing to see here.

    It will be interesting in coming years to see whether education and the decline of religion will have changed that traditional dynamic.

  40. Wow
    Just heard eammon Ryan on radio one equating pulling the plug on Anglo with leaving the euro.
    “Do you want to leave the euro?”

  41. @Al
    Expect to hear a lot more along those lines. The terror campaign by the establishment to keep private what went on and to protect megadevelopers and bank investors will now restart at full pitch.
    ICELAND! LEHMANS! GREECE! TBA!
    Lehmans collapsed because there was no investment bank resolution legislation in the US at that time. I find it deeply suspicious that when the government could have copied and swiftly passed the UK bank resolution legislation at any stage in the last year and a half they didn’t do so. Is this a conscious omission? I would say yes.

    @All
    For Anglo in the above posts read Anglo/Nationwide and add €2Billion. Nationwide, the establishment’s own building society, is Anglo’s toxic twin sister. I wonder if Nationwide got any money from the Central Bank?

  42. @All
    Anglo Cowen DDDA Cowen Anglo DDDA…does anyone believe that Cowen wasn’t fully aware of how the DDDA/banks/building societies were being run? He was finance minister and Taoiseach for FOUR YEARS before the bank guarantee. He knew EVERYTHING.

  43. Colm McCarthy succinctly crystallizes the arguments against buybacks.

    I’m still amazed that we had domestic cheerleaders for the AIB and BOI buybacks this time last year. I note that formerly strident voices that cautioned against scaring the horses are now strangely silent. Is it possible that the Anglo bill has prompted them to recalibrate their assumptions? Somehow I doubt it.

    Over the next weeks these erstwhile soothsayers could face the appalling vista of Danish sovereign debt spreads tightening in response to the plan to remove the implicit guarantee so beloved of our bond holder and CDS writing bretheren.

    I look forward to the gyrations that will be unveiled to square such an outcome with the predictions of a bondholder strike were any such measure enacted here.

  44. @ Al,

    Just heard eammon Ryan on radio one equating pulling the plug on Anglo with leaving the euro.

    Presumably at the Green party conference in Waterford too, to make it even more surreal. An expression comes to my mind, never bring a boy to a gun fight. Maybe Eamon Ryan should look at the constructive work he has done in publishing reports about energy security and so on. And work from there, in terms of how he approaches the dire problem of money supply (lack of it)? BOH.

  45. @ Colm,

    I note that formerly strident voices that cautioned against scaring the horses are now strangely silent.

    I think that attitude was informed by Ireland’s reality of being per capita, the most indebted country in Europe. The fact is the bill of interest on personal debt in Ireland reduced from €10 billion in 2007 to €5.5 billion in 2010. That is the ‘stimulus’ Ireland received from low ECB rates. Of course, the more indebted you were, the more of that €4.5 billion worth of indirect subsidy you received into your pocket.

    That is how we took advantage of 10 years of economic growth. We leveraged ourselves up to the hilt. What we did in Ireland, was exactly the same as what the United States did in the 1920s with buying common stock on margin. (You could lay down $25 dollars and your broker would loan you $75 dollars to buy a total of €100. When the market rallyed, your investment became worth $200, $300 etc) Great when the market is going up, equally devastating when the market plummets. We tied all of the faiths of our 4.5 million population, to that of the property market. In the 1920s, it is estimated that 40 cent in every dollar loaned to society, was used to buy common stock on margin. That is how leveraged the US population was. It took the US the entire decade of the 1930s to de-leverage painfully (or re-inflate both confidence and growth). What we need in Ireland, is a left wing government who will institute the public works necessary to get Ireland’s population through the great recession.

    At the same time as we allowed our government to construct a taxation policy around property transactions, which temporarily injected stimulus into the public service. Which of course injected stimulus into the real economy at a time when it wasn’t needed. We are unwinding that investment into our public service now, when the economy is least able to take the shock. (Yeah I get Colm McCarthy’s argument for competitiveness ahead of flimsy innovation task force reports). BOH.

  46. @All

    Tuesday, March 30, 2010. The Day the Music Died.

    Wednesday, March 31, 2010. Nothing Happens.

    Thursday, April 1, 2010. A Nation of Sold Serfs Chained by Bought Fools.

  47. @ All,

    I think if Patrick Honohan and Mr. Klaus Regling should examine the concept I outlined in this post:

    http://www.irisheconomy.ie/index.php/2010/03/26/the-canadian-banking-fallacy/#comment-41546

    The tremendous attempt by the FF government in 1997-2002 and 2002-2007 to create a new wealth owning class, to underpin solid and sustainable growth in Ireland over the long period. I believe this thesis amongst many others from that era, though nice as a thesis no doubt, in reality has proved to be disasterous. It would be nice to those same governments held properly to account for that, and asked to explain exactly why they thought their plan was so attractive. BOH.

  48. Eamonn Ryans equation of anglo with the euro id gobsmackingly foolish, wrongheaded, and …
    words fail me.
    he clearly hasnt a clue

  49. @paul quigley
    “Isn’t that the core of the capital markets problem ? ”
    Yes, but as I keep trying to say and keep being moderated on, whose problem is premature ej? The capital markets get it all wrong and need a bailout, they want it with no reformation attached, so they threaten armageddon. Is this their problem or the state that would endure armageddon?

    Unfortunately, all the capital markets need is a single large captive. They appear to have it in the US Treasury with the result that they will be able to play regualatory arbitrage one more time… and this time with feeling?

  50. @ Yoga,

    Viewing it in the Irish context alone, all you have to do is switch on your radio on Sunday morning, tune to Today FM Business show, and listen to a Dolmen securities broker explain how credit spreads have narrowed. But what he doesn’t explain, regardless of how cheap it is to service debt, is how much debt Ireland has outstanding. For instance, €3.0 billion in credit card debt alone. €3.0 billion! At what interest rate? ? ? I mean, we talk about Liam Carroll’s €3.0 billion in debt on property and development land loans. But isn’t it time, that Ireland as a nation also took collective responsibility, for the debt it is accummulating? How in the name of ? ? ? is Ireland going to pay down €3.0 billion in credit card debt. And I don’t care an iota, what the credit spreads are. It is simply too much. We are too exposed to collosal swings and roundabouts of the said markets. BOH.

  51. Have I got this very wrong or does Anglo’s winding down story i.e. that property prices won’t recover, conflict with NAMA’s breakeven story, that property prices will recover?

  52. The whole banking system is damaged and likely broken altogether. Don’t expect Canada or Australia to help. Aussie deposit rates are higher than mortgage rates!

    As it is broken, there is a potential worse problem than contagion. Incapacity. When lil’ ol’ Irelan’ comes a callin’ the cupboard be bare!

    This is unlikely, as the derivatives can be kept flying for a very long time, but as the big players are cashing in their chips and buying commodities, for cash, it is a possibility. Not just a difference in rates, but a completely bare cupboard, especially since Basle II.
    Any assessments?

  53. @ALL
    It looks like the TBA! is:
    “If we don’t pour billions more into Anglo we’ll have to LEAVE THE EURO!”

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