Technicalities

The domestic response to yesterday’s Eurostat announcement has been fairly predictable. Opposition politicians are treating it as a substantively bad development that makes our fiscal problems worse. The government are calling it a mere technicality that is nothing to worry about.

I’ve generally been critical of those who seek to ease our fiscal problems via accounting gimmicks. So, on this point, I’m more inclined to agree with the government than the opposition. There may be some particularly uninformed bond traders out there for whom it was news that the government’s €4 billion recapitalisation of Anglo last year wasn’t actually an investment but I wouldn’t imagine there’s too many. Irish government bond yields may have risen a bit yesterday but this may be more related to increased jitteriness about the Greek situation and its potential spillovers than the fact that our headline deficit figure has been changed.

Of course, one problem that the government has in making its “just a technicality” argument is that this same government practically bent over backwards to create the strange beast that is the NAMA SPV and then emphasised how important this accounting gimmick was. For instance, we were told that Brian Lenihan “heartily welcomed” Eurostat’s decision to keep the NAMA debt off balance sheet and that he said the SPV “is an essential device for ensuring that our national debt is off balance sheet in Eurostat terms”. So I think there’s an element of live by the sword, die by the sword about this situation.

101 thoughts on “Technicalities”

  1. The EU has been fairly clear on the principle of ‘One Bad Bank Per County’

    As teh Anglo recap appears to be over and above the NAMA envelope the government is not allowed to account for that tranche within the ‘One Bad Bank Per County’ envelope ….not least because we have 3 of the buggers

    1. NAMA (EU nod)
    2. Anglo (EU WTF moment)
    3. INBS (EU WTF at all at all, do these Irish not understand the idea of mutuality ad adversum or something )

    In the case of 2 and 3 certain parts of their loan books may qualify for NAMA and therefore for off balance accounting but much of the loan book does not.

    Ido think that restatements of GDP and GGD > Debt ratios are likely in future. Eurostat said that about Greece in the most explicit terms.

    These restatements could be downward revisions as well as the threatened upward ones.

  2. @Karl

    It states in the Irish Times http://www.irishtimes.com/newspaper/breaking/2010/0423/breaking11.html

    “If the Government is going to put €2 billion into Anglo and Nationwide this year, in order to stick to their budget targets to bring the deficit down to 3 per cent by 2014 – the target they’ve agreed and committed to with the European Union – they’re going to need to take €5 billion out in the forthcoming budget and not €3 billion. And that’s the crucial point,” he told RTÉ’s Morning Ireland.

    Would you please let me know if this statement is technically correct? Thank you

  3. Eurostat had previously indicated that they were keeping an eye on debt falling outside the GGD which was incurred during bailouts. As such, the issue was upfront as far as the international markets and the EU were concerned.

    However, Garret FitzGerald and Brian Lenihan seem to think the technicalities matter. This suggests that they do. A nation which misses targets and breaches pacts and targets in interim arrangements does not look as good as one which doesn’t.

    I don’t think Leo Varadker is right to say that the reclassification of part of the debt means the Governments fiscal policy lies in tatters compared to say yesterday. However, it makes it harder for us to keep our head down at a jittery time on international markets. Did anybody see the wildebeests crossing the river on TV last night?

  4. @Karl
    ” I’ve generally been critical of those who seek to ease our fiscal problems via accounting gimmicks. So, on this point, I’m more inclined to agree with the government than the opposition.”
    Be careful Karl I can hear them already ..” the respected economist Karl Whelan supports the governments position.. ”
    On a more serious note – is it really true that it is just a technicality. I mean when Greece was fiddling it’s accounts with the help of Goldman it wasn’t just a technicality, it allowed them to access the Eurozone. There are consequences to hiding money even if it is apparently in “full view”

  5. @Zhou
    Gno – gnever saw the gnus last gnight
    afraid the meaning of that metaphorical allusion escapes me?

  6. @KW

    The “this” is the importance attributed by current and former senior politicians to the EU’s technical assessment of the size of GGD and to being seen to meet targets in respect of same.

    @AMcG

    The Wildebeests charged across together while the crocs picked off the odd one at the side of the herd. You could see the shock in the eyes of an individual wildebeest realising he was beside a croc. The wildebeest clearly (I can read a wildebeest like a book) thought he had placed himself well in the charge.

  7. Of more interest – one assumes that following the logic the Xb to be injected into Anglo this year will also be classified as not-investment? And so for the INBS dripfeed

  8. @ Zhou

    “The “this” is the importance attributed by current and former senior politicians to the EU’s technical assessment of the size of GGD and to being seen to meet targets in respect of same.”

    If I were Excel, I would accuse you of a circular reference for that one. Am I misinterpreting or are you suggesting that because GFitz and Lenihan reckon something is true, then it must be true?

  9. @KW

    Politicians can make unimportant things become important by getting worked up about them. To quote from Billie Jean – “be careful of what you do, because a lie becomes the truth [woo hoo hoo]”.

    @Marcus

    I don’t think its circular. I could phrase it as follows:

    I note that the objective importance of ‘fact X’ is a function of its subjective apprehension by numerous others. A & B’s reaction to ‘fact X’ indicates clearly they consider ‘fact X’ to be important. A & B are experienced in these matters and in judging other people’s reactions. A & B are also intelligent people whose judgment I trust. Therefore, I consider it probable that ‘fact X’ is indeed objectively important.

  10. @Zhou.

    Could you say that?

    Final Objective Importance = (Initial Subjective importance as perceived by many) ^ (The difference ratio between the Reaction of A&B and the initial subjective importance as perceived by many)

    Of course this is a time variant interdependent calculation, where the result of the equation at time 1 may feed into a different result at time 2. It may be a problem that is difficult to form properly.

  11. Dress it up whatever way one wants, we are borrowing outrageous sums that will need to be repaid – as will the interest incurred. So Lenihan, the Department of Finance, Jean-Claude Trichet or Eurostat can do a Heston Blumenthal or a Dr.Bunsen Honeydew on the books but that simple fact will not change.

  12. There are two points on which this is not a “mere” techinical matter:
    1. As Zhou has alluded to, the accounting visibility matters. While it was clear to many here that the 4 bn put into Anglo stood no chance of being repaid, that was not evident to many at the time (including opposition politicians and others on here who suggested using Anglo as a good bank). As Morgan Kelly pointed out, you might as well just burn the money (and he was talking about just 1.5 bn of it). So now Ireland has for 2009: the worst deficit (debt to GDP); a higher general government debt (no spinning please at the back); a de-facto wind-down bank.
    2. The bleed-over consequences are terrible. What about BoI and AIB – we’re not going to get value for the preference shares are we? That’s another 7 bn reclassified as spending rather than investment (since 4 bn came from the NPRF, it had already been borrowed and counted as investment). What about the 10 bn that is to be paid to Anglo and INBS this year? What about the 40 bn into NAMA? As 2Pack says, we could be restating our debt again in years to come.

    And the figures do matter. Look at Greece – part of their problem comes from a constant restating. Each restatement of ‘investment’ into ‘liability’ is another draw on the exchequer. It transfers a debt that will pay for itself and has a reasonable prospect of being paid back into dead-weight cost that must be borne by the taxpayer. The millstone just got heavier.

    Go on, Mr. Keenan, tell me this new debt doesn’t matter and it doesn’t matter that Anglo will, in Eurostat’s estimation, never pay it back.

  13. with the greeks now about to trigger the eu emergency fund does this open up the possibility of ireland borrowing money from international markets at an interest rate in excess of 5% and lending it to Greece at an interest rate of 5%.

  14. Not to defend Brian Lenihan or NAMA but if the rules are that investments (ie spending money in the hope of getting it back with profit) are not classed as part of the national debt, and given the repeated claims that NAMA will generate a profit (draft business plan, CB governor in March, NTMA CEO yesterday) isn’t NAMA still technically an investment?

    Presumably there is detail in the EU IAS legislation that prevented the government just setting up a 100% owned quango to invest the money in the banks. Having read the government publication that guarantees the NAMA bonds, I really struggle to see any difference between the NAMA SPV and the government. However that doesn’t stop NAMA being for the time being an investment. Though presumably if NAMA fails and we need write off €15bn in 2020 that will be manageable and will be another one-off spike (after the 2009, 2010 and 2011(?) one-off spikes).

  15. @Mr. Jagdip
    “isn’t NAMA still technically an investment?”
    Yes, and normally it would be in 2020 that it is obvious that NAMA has failed, however, Eurostat has not waited until it is obvious that Anglo has failed, or at least not according to the government. Instead, they’ve said “well, you’re putting more money in this year after the ‘final’ amount last year, so that last year was clearly a waste”.

    If they start using this logic with NAMA – effectively making provisions on the GGD for losses – we will see the ‘investment’ turn to ‘plainoledebt’ sooner than 2020. We could even see it start to happen before we get out of the current deficit situation.

  16. @andyk
    I expect the NTMA will be borrowing very short, possibly using commercial paper?, and lending long to Greece. Luckily that is an entirely risk-free strategy…

  17. Yogan
    Sure, if we follow Donal O’Mahoney’s logic as per my comments on NAMA, thats not borrowing short to lend long at all, as sure wont it be rolled over. It only LOOKS short-term but when you look at it in the long-term the short-term is long-term. got that?

  18. @Brian
    Gotcha.
    …φαίνεται ότι μόνο βραχυπρόθεσμα…
    (It only looks short term… 2002 dialect…).

    Given that we never have to pay it back it is not both long-term and short-term? Heisenberg eat your heart out…

  19. yogan…
    More appropriate would be έχει έλλειμμα μου ματιά σε αυτό το μεγάλο?

  20. @yoganmahew
    “I expect the NTMA will be borrowing very short, possibly using commercial paper?, and lending long to Greece. Luckily that is an entirely risk-free strategy”

    I think spotted somewhere in the last few days that the NTMA has decided to cut back on the short term commercial paper issuance. They intend to run down the department cash balances to repay it.

  21. I think we are all talking about the point were a government investment is classified part of the capital investment and when is spending. You could make the same point about education which we are all told is a “long term” investment. Should the entire education budget be classified as capital rather than expenditure, of course not and Eurostat would never let as away with that one.
    2 points, 1. I think the NAMA spend should be classified as expenditure rather than capital. Anything else is an accountancy “technical”trick. We were all told that NAMA would generate 5 billion net in ten years. Complete BS, put it this way would anyone on this site invest €10000 euro for 10% of NAMA if it was put on the open market. I think that if a government wants to rate something as a capital item then they should be able to justify by bringing it independent evaluators in much the same way auditor would require in large PLC.
    2. Europe is not a coherent whole with one boss. In other words Eurostats objectives may be at odds with the ECB on this one which explains the “technical” change. The ECB is worried about all that all the cash given to Irish Institutions in exchange for Irish government paper and wants to get as much of this cash back. In that way it is in their interest to keep the story rolling for as long as possible to keep the chances of cash recovery up. Eurostat has now such agenda

  22. Maybe we should hold on to the Anglo €18.3bn. After all we can “make a profit” by lending it to Greece Spain and Portugal?

  23. So the money pumped into BOI, AIB and EBS will be seen as an investment?

    Is there really a liklihood of getting that money back?

  24. April 23 (Bloomberg) — German Chancellor Angela Merkel said the Greek government must satisfy “very stringent conditions” for aid, signaling that she won’t be rushed into granting financial help for Greece.

    The Greek government must negotiate a “credible savings program” with the European Commission and the International Monetary Fund, Merkel said. The IMF, the commission and the European Central Bank have to determine “whether an aid program for Greece is needed for the euro’s stability.”

    “Only when those two conditions are met can we talk about specific aid, including the kind of aid and the amount,” Merkel told reporters in Berlin today.

    “whether an aid program for Greece is needed for the euro’s stability.”

    Sounds like a back door for Merkel.

    With friends like that !!!!!

  25. The Finance Ministry has said that Germany would aid Greece through <strongloans from the state-owned KfW development bank backed by government guarantees. In that case, German taxpayers wouldn’t have to bail out Greece, Offer said.

    Merkel must have got the memo from Brian Lenihan.

    If you guarantee something you never have to pay.

    The German Professors might begin to query whether a State owned bank would be acting outside its powers in lending to a bankrupt country.

  26. @Rob S.
    BoI +AIB – yes, though the return may be less than than the risk would have called for.

    EBS – dont know enough to answer but I expect it should be ok.

  27. @ Rob,

    the exchequer will make a handsome profit from AIB & BOI. It will not offset the loss on Anglo.

    Besides, if the worst comes to the worst, we can always sell the AIB/BOI deposit book for about 180bn or so -at least that is implied valuation based on the post of an academic on this site.

  28. “the exchequer will make a handsome profit from AIB & BOI. It will not offset the loss on Anglo.”

    @tull: I marvel at your crystal ball. Care to tell me what the stock market is going to do tomorrow?

  29. @ Garo,

    nothing ….its closed. I know You are not allowed to be optimisitc on this site. Pessimism rules.

  30. Now tull…that wasnt posted on this site – it was discussed on the wireless (and, incidentally, the CEO designate of the bank agreed with the idea, if not the price). Want to talk more, email me. Else, stick to the plot.

  31. @ Brian

    well the article in the Indo was actually posted/linked to by Philip in the post about your IT article…

  32. @Brian Flanagan:
    “I suppose you might mean Radio Eireann broadcast from the GPO.”

    That would be 2RN, then.

    bjg

  33. @ tull mcadoo, Brian Flanagan, Bond. Eoin Bond…, Brian J Goggin

    And the reason you can’t sell a book of deposits is what exactly?

  34. Pappy Dross pulls the trigger.

    Ten year Greek yield drops like a stone from 8.957 to 7.989.

    Some German has an opinion. The yield rises to 8.661 and finishes the day at 8.656.

    Is the bond market a market? You know the kind of thing …. long term value?

    Or is it just fragile and needing the protection of Mammy State?

    What happens when Mammy State looks into her purse and finds nothing there?

    €25bn into Anglo Irish?

    Here’s the thing. The bond market must be thick as sh*t or they (the market, not the holders of the bonds) are front running the default of a number of EZ countries.

    Still maybe it’s something else. Maybe the Greeks and the Germans are laughing up their sleeves while they pretend (wink wink, nudge nudge) there’s a problem while they plunder Wall Street and the City.

    Some days you just have to bow to Fianna Fail. They’re like the missionaries of old. They spread the faith everywhere.

    Greece will default.

    It’s not about contagion. It’s about profit.

  35. @Greg – “Sounds like a back door for Merkel”

    I’ve been amazed at some of the things she’s been saying in the past 24 hours. It almost sounds like no plan of any real substance was ever in place – just a lot of hot air (sorry, I meant ‘confidence building’) about how 30bn + 15bn would be available.

    One wonders, if she thought it might not destabilise the Euro, would she just let Greece sink? It’s hard to see how she’s going to politically swallow all this with some 70% of Germans not in favour of bailing Greece out and a key election coming up.

    I wonder what the present day value is of all that gold the Germans nicked from the Greeks in WW2? It wouldn’t be 45bn (or 8.5bn, which I think is the German share of all this) would it?

  36. @Greg:
    “And the reason you can’t sell a book of deposits is what exactly?”

    I haven’t got one. I could sell you a book of words, though.

    bjg

  37. Chou
    Wrong ….again! Most of the wildebeest survive. Wish I could say the same for Irish home owners and small businesses. Beyond decimation. Duodecimation is likely.
    I see many others are now calling you on your lack of economic logic.

    NAMA
    Is a way of overpaying for land with planning permission, now that the greedy, lazy, rich peasants have stopped doing so. PP can be obtained by anyone with cash and brown paper bags. Nothing has been done to reverse this. It reflects prices, but not values. Prices have and will continue to collapse. This is not an investment!!!!! This is a way of penalizing those who were not involved before now in this greedy lazy stupidity.

    Greg
    The bond market was once a market. Now there are derivatives, the fantasy bond market as it exceeds the value many times, driving the so called actual market. To sane investors, this might seem like lunacy. But hey, it is only OPM!

    Jules
    Europe … has not one boss. Never heard of the Golden rule? As capital disappears, threatening interest rates, those with the Gold merely need whisper for things to happen. They are not thinking on daily or yearly terms. They plan over a few K cycles. They watch their would be rivals disappear with depressions like this. And they develop allies. Some of whom have very fancy head gear. Merkel and the rest are grateful peasants.

    Andyk
    HaHAHAHahahaha!

  38. I posted something last night which has gone AWOL 🙁

    @Joseph

    There is no German plan, they will eventually muddle something together along with th erest of the Eurozone but for now they will let the IMF make the running as I explained apropos Latvia in 2008/2009.

    The Greek politicians are presenting the backstop as a loaded money train but in their hearts they must know that the IMF will be along by Monday or Tuesday and that Merkel is essentially squabbling over who will drive the money train at present.

    Nobody has bothered to load any money on it yet. That is months away.

    Forget Greek holidays in 2010. They will be on permastrike.

  39. @ Greg,

    Pehaps the main reaon that it is difficult to sell a book of deposits is that they do not belong to you. They belong to the depositors. You can “sell” the PV of the excess income that these deposits generate i.e the spread between what you take them in and lend them out at. You could sell the deposit taking franchise…staff, buildings, goodwill etc.

  40. @ Pat Donnelly

    ‘The bond market was once a market. Now there are derivatives, the fantasy bond market as it exceeds the value many times, driving the so called actual market. To sane investors, this might seem like lunacy. But hey, it is only OPM!’

    Your point about derivatives; where do people get this idea from, net notional cds on greece at the end of the last month amounted to app. 9bn. Are you saying that this value exceeds the underlying value many times over?

    @ Greg

    ‘Is the bond market a market? You know the kind of thing …. long term value?’

    It’s behaving exactly as one would expect given the level of uncertainty: high volatility, discontinuities. It’s very hard to price a long term value of a note when the probability of default is so uncertain.

  41. @Pat Donnelly

    The wildebeest are countries. The edge of the herd are the debt statistics. The crocs are the vigilantes. I am not an economist and I don’t hold myself out as an economist. However, I will brook no criticism of my knowledge of wildebeest or my own complicated metaphors.

    Also, what am I to take from your repeated mis-spelling of my pseudonym? Does it indicate you are from an older generation when the “Chou” spelling was more common? Is it a gesture of disprespect by declining to accept my choice of online moniker? Is it a gesture of friendliness such as calling a Mick a Michael or a Patrick a Paddy? Is it a denial of the significance of visual symbols and the appearance of the written word. Or is it a meaningless flourish?

    (Before you make another pronouncement as to the extent of my ignorance – I admit I cleary have no knowledge of philosphy, psychology, semiotics or literature. 🙂 )

  42. The only thing that distinguishes from Greece at the moment is that the level of our public debt is lower than them. On every other measure we are in much worse position, % unemployment, % deficit, private debt as % etc.
    Given that we have a finance minister who bizarrely wants to convert all private bank debt to sovereign debt it is only a matter of time before the vultures of the CDSs visit our lovely island with their IMF medicine bottle I have a couple of suggestions
    1. Could we buy an island off Greece for 10 bn and then sell it back to them for 10 bn boosting our and their GDP significantly a la Anglo Irish. If we were clever enough in the timing we could get some goon in the EU to classify the island purchase as a “technical investment” and change the Greeks Year end so we could get to purchase the Island without it being classified as government expenditure or better still the government could set up an SPV, approved of course by the EU, and could buy the island by giving the SPV government bonds that they could run off to the ECB with to get the cash. In that way we wouldn’t have to come with any cash at all to finance the “Island Purchase and Buy Back GDP Booster Scheme”.
    2. When sometime in the next couple years when Ireland gos to the bond markets and they pull down the shutters what are the Germans going to demand off us for their support for keeping Tallaght Hospital open you guessed it – The increase in Corporate taxes will suddenly become critical to our fiscal hair shirt…….

  43. On another point it was recently reported that the average public sector wage increased last year. What is going on… They seem to explain this away by saying pension contributions have not been taken away from the average public sector wage – The pension time bomb was coming down the line for the public sector anyway you can’t have huge index linked strong currency pensions for close on half a million people that was not funded. Talk to the Russians…The only way the state could possibly fund all these pensions in 20 years time would be by a massive currency devaluation unless they start making some contribution… Are we really achieving the move on public sector pay we keep trumpeting on about or are the Greeks doing it better?

  44. @ Jules

    While the absolute value of the debt and the value relative to gdp are important metrics, I believe a more appropriate metric when evaluating the risk of sovereign is annual interest payments / annual exchequer income. The last budget forecast this ratio to be 14.4% in 2010 (I don’t know the greek equivalent but for comparison the uk ratio is around 5%). In isolation this figure is dreadful.

    The reason the debt market has been more favourable to Ireland since the budget is that it has believed the story that by taking action to reduce borrowing and increase the tax take, this ratio would stabilize and begin to come down.

    Given that exchequer income has been missing gov forecasts on the downside so far this year and that going forward it’s hard to see interest payments declining (deficit increasing, rates increasing) I would take the view that we are more likely to see this ratio increase. As much as sovereign investors dislike countries that refuse to tackle their problems (Greece), they are downright afraid of countries that attempt to address the problem and fail (possibly Ireland). If things don’t start picking up we could find ourselves in trouble very soon.

  45. @ GK

    Greek “forecast” (pinching of salt there…) net government revenue (ie excl tax refunds) for 2010 is set to be 54bn.

    Total outstanding Greek government debt is around €300bn, at an average coupon rate (as opposed to the current yield) of 4.1% (both end 09 per the Greek PDMA).

    So thats 12.3bn a year in interest, over 54bn in revenue, so they’re at 22.4% as is.

    However, if the economy continues to contract, revenue could well end up stagnating or even falling back over the next few years.

    At the same time, total outstanding debt is increasing at an average clip of 25-30bn per year for the next few years, so in 3 years time we’re probably going to end up with debt of 375bn, and revenue still at 55bn. They’ll also be rolling over another 20bn annually in existing debt, so thats 45-50bn a year being issued at much higher coupons. So average coupon rates could rise from end-09 4.1% to much closer to 5%, even via the IMF/EU bailout route.

    So then the maths are more like this:

    (375bn x 4.5%) / 55bn = 30%……. or….(375bn x 5%) / 55bn = 34%

    These are so high that default seems an assumption rather than a possibility, and hence why they’ve had to hit the panic button. Only some big resturcturing of their existing debt is going to solve the problem.

  46. @ Eoin

    That is truly shocking. Where did you get the figure for exchequer revenue, it seems a bit low relative to gdp, although very much believable. Could you imagine what would happen a company rocking that kind of interest coverage!!

  47. Sorry this is so long but it is an interesting note from Citigroup comparing Ireland and Greece.

    From: NIVETHAN THARMENDIRAN (CITIGROUP GLOBAL MAR)

    the more and more I look at it, the more remarkable I find Ireland’s skills in navigating though these stormy sovereign credit seas. It’s spreads have remained a low beta despite it’s spread levels being only second widest to Greece for much of this episode, (now Portugal). I understand why this has been the case, but I question whether this is warranted once the market has finished with Greece.

    Ireland has benefited from:

    – smaller on balance sheet issuance 2010 funding requirement (i.e.. ahead of the Nama accounting trick)
    – smart 1st out the door funding in January – c.f. Greece holding off.
    – an open and honest admission of past misbehaviour and a pre-emptive attempt to strike the budget – c.f. Greece
    – a “lets shut our mouths” policy – c.f. Greece

    I feel that these are the main reasons why Ireland has been allowed to buy time where as Greece’s approach has led it to a liquidity issue.

    However Ireland’s issues situation is remarkably similar to those of Greece. Our economists highlighted these in early March before the Greek situation went Titanic (I.e. as the ship bobbed like a cork ahead of the big plunge). Please take a read from p4 onwards of the attachment where Juergen and Giada compare the situations of Greece with Ireland.

    to summarise:
    – Ireland’s fiscal tightening was 6.5% of GDP Greece’s fiscal tightening was 6.5% of GDP
    – however the Irish budget has failed to fall significantly after tightening because a falling real and more importantly nominal GDP – debt/deflation spiral starting to bite? – great chart on p4 with the Irish and Greek budget balance profiles – very similar. The Irish fiscal tightening has slowed growth “too much” – worsening the deficit numbers. Greece actually has a better chance given the size of the black economy (an estimated 13% of GDP is tax receipts lost/GDP unrealised). Ireland deficit/GDP ratio has just been revised to 14.3%! Greece on 13.6%

    – Ireland will be facing much higher deflationary pressures – take a look at the chart on p 5 (or the excl file attached) – Ireland has seen the highest growth in price levels in the eurozone since 1995 and remains well above the average. c.f. Greece which broadly in line. Greek disinflation vs the average is likely to occur but we have our doubts as to whether we will see deep negative numbers especially when compared to Ireland.

    if you add to this:
    – the Irish property market mess… Irish average property prices are now back to 2004 levels. 1st time buyer prices are at 2003 levels. down something like 30% and the yoy price change chart hasn’t shown signs of bottoming as yet…Charts attached. Personal and Bank balance sheets have been significantly impaired. Home ownership in Ireland is only second to that of Spain within the eurozone, but Spanish house prices have only fallen 10% to date. that’s not to mention the speculative buy to let housing purchases in Ireland.

    – take a look at Irelands Real effective exchange rate: bang on with that of Greece – despite a reduction in the trade deficit – Ireland remains significantly uncompetitive.

    – NAMA is expected to be worth 30% of Irish GDP. this does not show up in the Irish national debt due to the off balance sheet nature of NAMA – factor this in and Ireland Debt/GDP ratio is closer to 90%.

    threes more +ves and -ve’s i’m sure.

    The market has generally had an issue with Portugal being a small guy with issues and Spain being a large guy with large issues.

    I would argue that the shorts can’t getter shorter in Portugal given the size of it’s market and it’s insignificance in the benchmarks.

    and I’d argue that Spanish is 1) too large and will likely see it’s other capital markets (equities corporate and covered debt have issues before the government bonds – it’s a much slower burner.

    Ireland however is a plump pigi – it may not have liquidity issues but solvency is a big un asked question… and defining the line where liquidity issues and and solvency issues begin is very hard….

    sell it.

    Niv

  48. Liquidity was always a big potential issue with Ireland and this explains NAMA which is an attempt to put off the evil day. NAMA is just an attempt to transfer long term paper to cash via the ECB, the government in fairness always said that.

  49. @GK
    You are of course correct, whether we can manage the debt is the most important priority for bond buyers/sellers in much the same way as the old bank manager driving the ford mondeo would determine whether “you are good for it” before giving you a mortgage.
    However I think there are a number of major market distortions going on in Irish bond market at the moment that are causing this disconnect. These are
    1. Government banks (I include the entire banking sector other than TSB as this will all come to pass before XMas) even BOI have been told that by about 0.75 bn of real private equity, after the govenment and other bond holder swaps, can have 50% ownership, pull the other one, have been told by the regulator to increase their Tier 1 to 8%. There is NO tier one in Ireland other than short term deposits by multinationals and the odd positive vanity balance by the Irish elite that they have been slow enough to leave in a irish bank account. Now the ECB have said that the ECB will consider government bonds as Tier 1. How do the government banks get Tier 1 – you guessed it by Irish govenrment bonds with money given to them by suprise, suprise by the Irish Government raised on purchase of Irish bonds by the Irish government owned banks -good way of adding to liquidty and printing money if you can get away with it. If only the Germans would accept Irish government bonds ad inifinitum we could set up a printing press to print 100 euro government bonds – give these to the government banks who get 100 euros to add to liquidity and your liquidity problem is solved permanently. I exaggerate for effect.
    2. There is also the “moral hazard” if the greeks get away with it at all with little or no long term “tax” (because in pure financial terms that all is that interest is, the interest is a “tax” transfer to financial institutions) then bond holders will be pretty sure of getting short term interest (+total capital) off the paddies considering also that the minister of finance has told them that he will meet all their liabilities.

    Considering all if I was a bond-puchaser of Irish bonds I would buy three month – six month bonds because ultimately I can out with my shirt subsidised by Hans the german tax payer – Longer term sell sell sell

  50. “It does seem that financial markets have become excessively speculative, and something needs to be done about it. ”

    Brendan Keenan

    He noticed and he cares.

    GK, Jules
    Liquidity that depends upon borrowing is not liquidity, but an accounting sleight of hand that fools none! The whole point of the expensive, panic measure of the guarantee was to announce that OK, the banks are insolvent, but the government promises to make up all claims. There have been no profits in banking since, quite the opposite. The opposite, in spades! Extend and pretend. That is what it means. Government, sovereign debt replaces all new business capital. Because everyone with a brain is withdrawing their capital ……

    All
    What is the Irish multiplier now? That is the fourth time of asking and I have had no answer. I expect none, becuase it is so bad.

  51. GK
    Sorry, I was not confing the derivatives mess to Greece. I care little about Greece. This is all about Irish naivety.

    You can have no idea how much in derivatives, relates to Grrek liabilities. There is no record kept of them! That is the whole point. We must await the demise of the parties to find out how much and to whom they owe, ie who is the next domino!

    Chou
    You got it babe!

  52. 2Pack

    Nations have been revealed, with the exception of Chile, to be incapable of planning and executing plans due to consumerism ruling voters in our “democracies”.

    Those who own and control capital plan. Everyone else thinks of the next election.

  53. @ Jules

    no offense man, but that was a serious ramble, maybe somewhat drunken given the time and day. I have absolutely no idea what you’re trying to say. Deposits = tier 1? ECB says government bonds = tier 1? Huh??

  54. @ Jules

    I’m not sure I completely follow your first point but it I think your alluding to the extent the banking sector is going to effect the deficit, I agree it will have a negative effect.

    I don’t know why but I seem to be referenced in a couple of comments regarding liquidity vs. insolvency but I guess i’ll address this. They are of course two different things, but the point is that liquidity can be a cure for insolvency (ask any small business owner). The ratio I mentioned above, or more importantly it’s 2nd derivative, is a good indicator of how this strategy of adding liquidity (whether it is to the banking sector or the public finances) is fairing.

    I thinks as Eoin pointed out, more liquidity isn’t going to help greece out of it’s mess. For Ireland, my gut syays it’s not going to work and I don’t agree with large parts of the governments strategy (although remember any strategy would have required external borrowing) , we haven’t yet reached the point we’re we can say it is destined to fail. We’re getting mighty close though.

  55. @ Dreaded.

    Heed the warning of the Greek Finance Minister. You will lose your shirts betting on Greece defaulting…see Bloomberg.com. the cavalry are coming bearing sacks of Gold in early May.

  56. Is this right?
    Bond holders rule the world. They rule it because they have bluffed the world’s governments into bailing out the institutions that fund them.
    They are an invisible money-lending elite who, if not faced with moral hazard, will probably rule our lives for a very very long time to come.
    I’m not into conspiracies – but those who have money always want more – and those who haven’t dare not stand in their way.
    Who are these bond holders? Can someone please tell me who my new rulers are?

  57. @Eureka

    It could be either a gnome in Zurich, a pan european Jewish banking family, a German or Japanese insurance company, your local credit union. Take your pick.

  58. Thanks Tull
    I realise it was a dumb question. Just trying to make sense of it all. I think I’ll pick the insurance companies and credit unions. I notice you left out banks. Presumably they lend to governments too.
    So if these guys have all this money to lend, when the rest of the world is in dire straits – where do they get it from.
    I realise this is probably another really dumb question but just trying to figure this out

  59. Eureka,

    they get it from you and …our savings. So the bondholders are in part ….er …us

  60. Thanks again Tull
    Ok – so my government is taking money from me to pay me for money which I never knew I lent them!
    It’s confusing for me.
    is this it – the more we save the more money gets lent out and the more money is ultimately owed in debt…….aaaaaaagh…..I give up!

  61. @Eureka
    Nah, you’re still missing it. If you have money on deposit in a bank, a post-office, somewhere, anywhere, some of it is used to finance bonds. The bonds pay an interest rate the banks take their share and give the rest to you.

    If the banks are not investing your savings in bonds (loans of a particular type), they are maybe investing in mortgages, loans to small businesses, credit card debt, etc. etc. That’s what banks do. Insurance companies do it so they can provide pensions or cover life insurance policies or car or health etc. Basically, they charge you less than they pay out because they can make profits on what you pay them.

    It’s a perfectly valid position to say you want nothing to do with all that stuff, but you’ll sort of have to do without a few bits and bobs – money, insurance, banking, credit, that sort of stuff.

  62. @Eureka
    Your government is taking money from you to pay for money which you never knew that Anglo and INBS borrowed.

    25,000,000,000.00 and counting.

    Even I find it confusing.
    😉

  63. @ tull mcadoo

    ‘It could be either a gnome in Zurich, a pan european Jewish banking family, a German or Japanese insurance company, your local credit union. Take your pick.’

    Yea right, with respect. As if your local credit union could sit down with the gnomes of Zurich. Just like Cobh Ramblers could play Man U. In an August exhibition match, in aid of charity, and with a few pints afterwards.

  64. @tull mcadoo – “the cavalry are coming bearing sacks of Gold in early May.”

    Would they be Gold man sacks? Or are they going to give Greece the old ‘sack, back and crack’? Painful. Either way.

    My take on reading the continental papers this morning is that there are a lot of people out there who doubt that 45bn is ultimately enough (but nobody dare say what ‘enough’ is so better to put that one on the long finger for now) and/or doubt whether the Greek government can get their people to take the medicine without kicking them out – a la Hungary.

    That’s assuming Germany goes along with it in the first place – they are saying some very strange things for a country which has allegedely been instrumental in putting this plan together.

    Bluff and counterbluff has been the name of the game since the start of the year. I thought the Greeks were winning but now I’m not so sure. ‘Failed state’ anyone? Has some nice islands for sale.

    Germany needs to delay action until after those pesky elections. Maybe it will be purely IMF money to fund what Greece needs in May?

  65. @ Brian J Goggin

    “I haven’t got one”

    That’s what I thought.

    “I could sell you a book of words, though.”

    I don’t buy words.

    They are free.

  66. @ Brian J Goggin

    Here’s a word for you.

    Take a fifty note out of your wallet.

    What “word” is there?

    EURO/EYPO.

    Is that an eight letter word or two four letter words strung together?

    What does EYPO mean?

    Is it the word Jean-Claude Trichet used when he instructed Brian Cowen to steal €50bn from the Irish people to bail out Deutsche Bank?

    Words Brian?

    Try these.

    Justice, Fascism, Fairness, Brutality, Truth, Lies.

    Is that sufficient “words” for your comprehension?

    Thing is I have no idea what “EYPO” means.

    But that should be expected.

    After all I am just another piece of illiterate scum that has been marshalled into bailing out Deutsche Bank.

    I bow to your knowledge of “money”.

  67. @ tull mcadoo

    “Pehaps the main reaon that it is difficult to sell a book of deposits is that they do not belong to you.”

    Are you really that ignorant?

    “You could sell the deposit taking franchise…staff, buildings, goodwill etc.”

    Yup. You are.

    Your ignorance goes so far as to imagine that a bank is like McDonald’s.

    Tell me. Can I get a “loan” of “money” created out of thin air if I walk into McDonald’s and order a Big Mac and fries or is does that just come with the happy meal?

    Is it because they have “staff, buildings, goodwill etc”?

    Is that the “banking” franchise?

    Would you like condoms with that?

    You can do better than that.

    Tell me why you can’t sell a book of deposits?

  68. @Greg:
    “I don’t buy words. They are free.”

    Silly boy. Many people, including me, earn money by selling words.

    bjg

  69. @ Bond. Eoin Bond…

    “eh….its just the Greek for Euro…”

    Silly me. I don’t be noin them things. I is igorant.

    It’s all Greek to me.

  70. @ Brian J Goggin

    “Silly boy. Many people, including me, earn money by selling words.”

    And whether they have truth or not is of no concern to you.

    Do you have a mother?

    There’s a market for everything. Including your words.

  71. @ Greg

    the issue isn’t whether you can or can’t “sell” a book of deposits, its to do with the true nature of that transaction. Its about understanding that the deposits taken in by the bank are a liability, backed up by the cash asset alongside it and sitting on the other side of the balance sheet.

    If you’re saying that we are going to “sell” the book of deposits and its going to cost us 28bn EYPO’s in cash to get rid of, then you’d be right on the money. If you’re saying we’re going to sell it and receive 21bn against it, then im sorry, you’re completely wrong. Its all about understanding that when we “sell” a deposit book, we actually have to GIVE an asset alongide it, not receive one in return.

  72. @yoganmahew
    Thanks for the tutorial – I’m in the slow-learner stream when it comes to this stuff I’m afraid.

    David Mc Williams piece in the SBPost yesterday got me thinking a bit. I stand to be corrected on this but most of the major religions had rules on lending money and charging interest on it. In Islam I think some of these restrictions still apply. So, at some level they realised that uncontrolled credit markets could really destablise society.

    The bond market as it currently stands seems without rules. The biggest worry is that sometimes it seems that this market and its constituents are treated with the kind of reverence we reserved for the church (“oh the bond market won’t like this etc…..”). We know where that kind of reverence got us!

    I’m not saying that we ban credit (I know that it is essential for proper functioning of society) but maybe we need to have a look at what’s going on here.

    Bond holders actually don’t deserve one red penny from anybody at all!!!!!. They messed up. If it wasn’t for them Greece would not have been able to let its budget deficit balloon in the first place. I wouldn’t have leant money to Greece so why did they?

    There should be no bailouts for anybody.

    Sorry for the rant. Just getting angry with all of this.

  73. @ Eureka

    you’re right on many fronts there. The problem is that we’re going to be running either sizeable budget deficits and/or going to require sizeable external funding for most of the next half-decade. As such, we “need” the bond markets much more than they need Ireland. The theory (disputed by many) is that if we default on lots of the banks debts, then this funding from abroad may stop, and so bankrupt the State much like Greece is facing right now. Its a bit like a cancer patient complaining about the cost of the drugs he’s taking – ultimately he doesnt have much choice but to keep paying until he’s better again.

  74. @ Eoin, Eureka

    I think use of the term ‘bankrupt’ may be misleading, the state would just need to cut spending by about 40-50%. Unemployment would sky-rocket and health, education and other vital services would deteriorate rapidly. One could argue that if we were able to maintain a democratic market based economy we could overcome this in a decade or two but given such social upheaval this would be unlikely.

  75. @ Eureka

    The Church opposed the development of credit and banking for many centuries. They didn’t want people developing any system of obligations which would undermine their own feudal and episcopal holdings. They made lending at interest a sin ‘against God’, but they were happy to take cash for ‘indulgences’.

    As Karl Polanyi showed sixty years ago, in The Great Transformation, ‘high finance’ took over the Church’s role as a top level intermediary between states and royal houses. There are rules of conduct in those highly secretive circles, but there is no room for morality in the ordinary sense. We have to understand that.

    You say you are a ‘slow learner’, but you haven’t lost your sense of smell. It’s the same old game, with different players. Plutocracy is always a threat to democracy, and we have a bad dose of it. The bond market ‘players’ always knew they were on a winner with ‘our’ banks. It was their business to know all about about the web of personal and institutional connections that Matt Coooper and others have described. That’s just risk assessment.

    They correctly calculated that the links between our banks, property interests and political parties were so tight that the taxpayer could and would be put on the hook. They can now look forward to a full repayment of the debt, as well as an opportunity to get their mitts on the billions in cash which was sucked out of the country in windfall gains during the the boom. If it wasn’t for the miserable social consequences, you’d have to hand it to them.

  76. @Paul Quigley
    Thanks for that great clarification.
    Frightening in a way isn’t it. The parallels between the bond players and the church – both make people feel guilty for excess, both use a kind of moral language (“e.g. punishing Greece for their fiscal imprudence” etc.”), both occupy this odd space between the ruled and the ruling classes, and both use (and enjoy using) a language that nobody (not economists) can really understand. And both are based on a premise that it’s often too scary to challenge – not believing in the current credit system is akin to not believing in God.
    So as the Catholic Church falls the bond players rise. I know I’m really pushing it now but is it there a logic in them wielding greatest power in Europe’s most Catholic countries? Is the social structure in those countries such that it just lends itself much more easily to this kind of powerbroking. Just a thought!

  77. @ Eoin

    “the issue isn’t whether you can or can’t “sell” a book of deposits”

    At last. I knew I could depend on you.

    It is possible to “sell” (or if I may “transfer”) a book of deposits to a competitor.

    At last.

    My lonely days are over.

  78. @ Eoin

    “Its about understanding that the deposits taken in by the bank are a liability”

    Quite.

    Somewhere in my (admittedly) peasant education that makes sense.

    After all how could it be possible for a “bank” to accept “money” from “strangers” if it were not so.

    Ayn you will agree that when the “bank” has no “money” from “strangers” there is no “bank”

    http://heritageamerican.files.wordpress.com/2008/08/ayn-rand.jpg

  79. @GK – “the state would just need to cut spending by about 40-50%.”

    …and privatise everything too – just to add to the misery. ‘Do a Chile’ on us – that would keep some folks happy.

  80. @ Eureka

    People don’t just have to get power. They have to be able to convince others that their power is legitimate, in that they represent the general interest. The mesage from the plutocrats has been ‘you can change your government, but you can’t change the ‘laws’ of the ‘self regulating’ market. As markets are anything but self regulating, that message needs to be recognised for the dangerous BS that it is.

    The connection between religion and money is a huge topic. Suffice it to say that the ancient world (or at least the part that became Europe) was centred around the Mediteranean. There were well financial and credit centres in 2000 BC.

    The French historian Fernand Braudel wrote fascinating accounts of how the centre of business and finance moved from the Catholic countries of the Med to the Protestant north of Europe in the 16th century or so. Wall St, Amsterdam and the City of London had, or have, global reach. It’s a very long, fascinating story.

    The market for bonds (debt) is just one part of the world of finance, so we don’t have to propose that there is some conspiracy in that sector. We have been suckered once more, but we weren’t the only ones, so it’s more a question of once bitten twice shy.
    One of Warren Buffet’s (reported) principles, which I like, is ‘You don’t have to make it back the same way you lost it’.

  81. @Paul Quigley
    I know I was the one who brought them up but the danger with historic parallels is that we can sometimes over-rely on history repeating itself. One if the other essentials for people to buy into the legitimacy of a system is that there’s something in it for them. Religions made the virtuous feel superior to the sinners and guaranteed them eternal reward for sticking to the programme. Where is the reward for sticking to the bond holders programme. They’ve sold the people on fiscal hell but nothing on reward.
    So they’re asking for sacrifices from people who really don’t believe. There’s a fair probability the Greeks won’t do enough on the austerity and there’s a fair probability the Germans won’t do enough on the bailout – and there you might have it!
    There’s default and then there’s what…….?
    Gonna be interesting to see if this brand of credit fuelled capitalism is a religion or a cult

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