Elderfield on Resolution

Thanks to Karl for the link to the transcript of Mr. Elderfield’s appearance before the Oireachtas Committee in the post below.  There is clearly a great deal that is of interest in the transcript, and it might be useful to develop some separate threads.  

One part of the transcript worth highlighting is Mr Elderfield’s responses to questions on the need for a resolution regime.  These responses came in exchanges with Deputies O’Donnell and Varadkar.   I have included the relevant extracts after the break. 

It is encouraging to see Mr. Elderfield engaging with the resolution regime question.   It is also hard to argue with his portrayal of the complexity of the issue, and with the legal challenges in particular.  While we must sympathise with how much he has had to deal with since taking the job, I am still struck by the lack of urgency he appears to give to the need for a resolution regime to limit the extent of the creditor bailout. 

Mr. Elderfield is understandably taking a forward-looking approach, and is concentrating on putting in place a regulatory regime that limits systemic risk, including consequent future liabilities to the exchequer.  This is indeed essential.   Maybe I am naive, but I think the risk of Irish banks engaging in reckless lending in the near term is low.   How we allocate the losses associated with the reckless lending of the past is still a live issue, however, and should be higher on the list of Mr. Elderfield’s priorities.   We should be focused on how we can draw on international best practice to have a regime ready for when the guarantee expires so that losses can be fairly shared with long-maturity investors. It is as if we are out in the workshop building a state-of-the-art new door, all the while the horses are still bolting.  Continue reading “Elderfield on Resolution”

Elderfield at the Regulatory Committee

The transcript of Matthew Elderfield’s appearance at the Oireachtas Committee on Economic Regulatory Affairs is here. Reading over the answers, this was clearly a very impressive performance by Mr. Elderfield, one that signalled a break from past practices and attitudes in a number of ways. There are a couple of issues arising from Mr. Elderfield’s comments that I would like to discuss at greater length but don’t have time to discuss now, so for the moment I’ll leave it to our commenters to dig through the transcript for interesting material.

Wave power again

Breda O’Brien argues that it is high time to gamble on wave power in today’s Irish Times.

She hails Danish wind power as an example. The Danes heavily invested in wind power for two decades before benefiting handsomely from German subsidies. The Danes were alone for a long time, while Irish wave power lags behind Scotland, the USA, and Portugal. And other renewables are far ahead of wave power. It is a gamble indeed.

O’Brien argues that wave power will bring a substantial amount of jobs in construction and manufacturing. That may be. Wave power devices have heavy and simple components that are best built close to the shore off which they are deployed. Wave power will be first commercialized in Ireland, if anywhere, because our waves are the best in the world. Those construction jobs will come to Ireland regardless of who invented the technology.

O’Brien picks a winner. That is best left to the market. We should prepare ourselves for a range of possible futures rather than pretend that we can accurately predict technological change and develop skills  to match our preferred forecast.

“Liberalism in Crisis” Symposium

The Department of Sociology and the National Institute for Regional and Spatial Analysis at NUI Maynooth are holding a symposium on May 6th on “Liberalism in Crisis: US, UK and Ireland”. The conference is free but we are asking that people register before Wednesday April 30th.

Registration form and details at:


Further details of the event below the fold

Continue reading ““Liberalism in Crisis” Symposium”

Sovereign Risk in Europe and the Euro Area

The IIEA and Law Society are running a seminar on April 26th on this topic  – details here.  Among the speakers is Lee Buchheit who was a leader in sovereign debt restructuring in the 1980s and 1990s and is currently representing Iceland in the Icesave dispute with the Dutch and UK governments.

Reminder:  Bob Aliber talk on financial crises in TCD tomorrow Friday, 12.30-2, Room 3051, Arts Block.

Update:  Aliber seminar will be held in IIIS seminar room, not Room 3051.

February Retail Sales

Occasionally we get accused of only posting about bad news. I’m not sure that’s fair. The fact is there’s been plenty of bad news to comment on and some of it eye-popping enough to warrant a posts with a bit of additional analysis. That said, yesterday’s release on February retails sales was encouraging, so I thought I’d just point people towards it. After eight quarters in a row of falling retails sales, we seem to be stabilising. Maybe it’s time to have another round of “call the bottom of the recession” given that John the Optimist’s plucky call of a bottoming out last summer doesn’t seem to have worked out.

Warmer Homes

I was wrong. I previously argued that subsidies for home insulation are an expensive way to reduce carbon dioxide emissions. The SEAI has now release a post-hoc assessment of the Warmer Homes Scheme. The executive summary puts a brave face on, but if you have a look at the detailed results, you soon discover that the Warmer Homes Scheme seems to have had no noticeable effect on fuel use (and hence emissions), poverty, comfort, or health. Most results are insignificant, a few are significant with the right sign, and a few significant with the wrong sign.

One of the striking results is that the control group (without subsidies) have put in about as much insulation as the intervention group (with subsidies).

The research is not brilliant, so perhaps there is more to it, but for now the conclusion must be that the Warmer Homes Scheme is an expensive way to achieve nothing.

The SEAI should be praised for studying the impact of their interventions and for publishing the results.

McDonagh at the Oireachtas Committee

NAMA CEO Brendan McDonagh appeared today before the Oireachtas Committee on Finance and Public Service. Here‘s a copy of his opening statement. Normally, when there are important Oireachtas committee meetings, I usually have to wait for the transcript to go up on the website. However, thanks to the tireless work of our friend Jagdip Singh, you can get a lot of information on what happened today here and here as well as lots of excellent questions.

One statement from McDonagh that got a lot of attention today was that, of the loans in the first tranche, only one-third are paying interest. I wasn’t too surprised about this because it tallys well with information from the annual reports released by Anglo, AIB and Bank of Ireland.

As I noted earlier in comments, the amounts going in to NAMA from these banks in terms of initial face value are as follows: €36 billion from Anglo, €23 billion from AIB and €12 billion from BoI. That’s a total of €71 billion.

All three banks have released detailed analyses of the loans going into NAMA (here, here and here). From these, we know that €6.6 billion of Anglo’s NAMA-bound loans are neither past due or impaired while the figure for AIB is €10.4 billion and for BoI is €5.4 billion. Add them up and we get that, according to the banks own figures, only $22.4 billion of these loans are performing.

So, according to the figures released by the banks, of the original €71 billion in loans made, only €22.4 billion or 31.5% are currently performing.

One can also point out that if the discounts from face value of 50% for Anglo, 43% for AIB and 35% for BoI are applied across the board to the rest of the tranches, then NAMA will pay €18 billion, €13 billion and €8 billion respectively for a total of €39 billion for the loans from these three banks. So, for these banks, we are paying €39 billion euros for a portfolio of loans of which only €22.4 billion are ostensibly currently generating any revenue.

Profile of Morgan Kelly

Today’s Irish Times has a profile of Morgan Kelly. As is appropriate for someone who was correct in predicting the house price crash and its consequences for our banking system, the article is very positive.

The implicit comparison in the first sentence with Nouriel Roubini is interesting. My sense of Roubini is that while his predictions of doom were less accurate than Morgan’s (I seem to recall Roubini being very focused for a long time on a dollar crisis as the source of the impending doom) he gets far more respect in the US than Morgan does here. For instance, it’s hard to imagine representatives of the US press going to policy conferences and declaring that Roubini should not be allowed speak at such gatherings.

Dublin to Cork in less than 10 hours

A trained cyclist can probably do it in that time. An all-electric vehicle would manage in three and a half with a bit of luck. The drive is about 3 hours, but the car would need to be recharged half-way through. If there is no queue at the “fast” charging point, you need at most half an hour. But as batteries wear or your driving style does not get you the nominal range, you would need to re-charge twice. And maybe you’re out of luck and need to recharge at the kerbside rate (60-90 mins) or from a standard socket (6-8 hours).

The government announced its support for electric vehicles yesterday: No VRT and a €5000 grant. In addition, the ESB gives away electricity and is investing in infrastructure, all courtesy of the shareholders (aka taxpayers).

All-electric vehicles are not yet ready for prime-time. They are fine for city driving and the perfect choice for those who can afford a second car and want to polish up their green image.

The current investment will not result in any intellectual property for Irish companies. Given the dire state of the public purse, it would be better to let others pay for the demonstration of all-electric vehicles and roll them out in Ireland when (if?) the technology is ready.

Donal O’Mahony Returns

Our old friend Donal O’Mahony from Davy’s returns to defend NAMA in today’s Irish Times and he’s on form.

The article starts with some reasonable observations:

IT HAS proved a prolonged and at times frustrating gestation period, but the policy prescription to stabilise the Irish banking system and help kick-start credit creation has finally reached its implementation stage. Nama’s journey has been an understandably arduous one, confronted as it has been by a welter of legislative, regulatory and, not least, administrative needs.

Fair enough. However, one doesn’t get any sense from this article that there was an alternative to the slow and tedious procedures surrounding The World’s Slowest RecapTM. The delays, it seems, are simply something that must be endured.

Continue reading “Donal O’Mahony Returns”

Iceland: Report of Special Investigation Commission

English-language versions of some of the report into Iceland’s financial crisis are now available here.

Update: this Powerpoint file contains the main points.  Plenty of lessons for Irish readers.

Update:  A panel of philosophers considered the ethical failures during the Icelandic boom and bust: the one-page summary is here.

Greek Bailout Unveiled

So finally we see the terms of Greece’s impending bailout. €30 billion to be made available from EU countries (€500 million potentially from Ireland) at an interest rate of about 5%. Apparently, a further €15 billion is available from the IMF. To my mind, the interest rate is a bit lower than might be expected for an emergency bailout that should be acting as a serious incentive to get the Greek fiscal house in order. The operation certainly seems to be slanted towards carrot rather than stick.

What next? Peter Boone and Simon Johnson discuss this issue and are not confident that Greece can emerge from the crisis with access to private debt markets. They worry about Portugal being next. We worry about something else.

Brendan Keane on Municipal Waste Management

Brendan Keane of the Irish Waste Management Association takes issue with Scott Whitney’s piece of last week.

You can see for yourself who has the better arguments.

A lot of people in this debate (incl. IWMA and DCC) seem to believe in the virtues of vertical integration of waste collection and waste disposal. I do not understand that at all. A collector should deliver waste to the disposer with the lowest cost, regardless of ownership. There are no economies of scope or issues with information or contracts that would favour vertical integration.

(There is a coordination problem between waste separation at source and final disposal. For example, mechanical-biological treatment (MBT) is more valuable for aggregated waste streams than for disaggregated ones.)

Mr. Keenan and Political Economy

A common jibe that journalists and politicians level at academics they disagree with, or perhaps just plain don’t like, is that the academics are disconnected from reality by virtue of their ivory tower employment. In relation to economists, this often takes the form of the tired line about the discipline originally being called “political economy” and academics putting forward proposals that are “good economics” but “bad politics”.

Brendan Keenan’s column in today’s Sunday Independent is a classic example of this genre. Mr. Keenan argues that the various economists associated with this blog (the “dissident economists” formerly known as “opinionated economics lecturers”) are politically naive and their advice unsound. Specifically, Keenan proposes that we would be better off if, contrary to recommendations emanating from this site, the government had paid more to the banks for the NAMA loans and demanded lower capital ratios.

There is such a thing as political economy. Anglo would still have been a nightmare, but a somewhat more generous payment from Nama, and a less stern view on bank capital, would have made the numbers a lot less frightening.

That might have made it easier to get the deal with the trade unions approved, and get another unpleasant Budget through in December. Not only better politics, but possibly better economics than worrying about Tier One capital and Long-Term Economic Value.

I’m not sure that either the politics or the economics of this column are particularly compelling.

Continue reading “Mr. Keenan and Political Economy”

Inflation once again?

Since the second half of 2008 this country has experienced the first sustained period of deflation in over sixty years. In 2009 the Consumer Price Index (CPI) fell by 4.5 per cent relative to 2008. Not since 1946 had the annual rate of inflation been negative. The record for deflation was in 1931, when the CPI fell by 6.4 per cent.

The accompanying Charts show the behaviour of the CPI and the Harmonised Index of Consumer Prices (HICP) over the past four years. (Am I only the only one to have the patience to enter Charts on this Blog?)

The CPI peaked in September 2008 at 108.4. By January 2010 it had fallen to 100.0, a cumulative fall of 7.7 per cent. The rate of deflation reached a maximum in January 2009, when a month-on-month decrease of 1.7 per cent was recorded. The HICP is less influenced by changes in interest rates, but it followed much the same pattern as the CPI, although varying within a narrower range. The month-on-month HICP deflation rate never exceeded 0.8 per cent, recorded in January and July 2009. It peaked at 110.0 in June 2008 and by January 2010 had fallen to 105.0, a cumulative fall of 4.3 per cent.

The rate of CPI deflation has tended to fall since early 2009 and the HICP since a few months later. By February and March of this year both were showing positive, if very low, rates of inflation (and seasonal patterns are in play). This reversal received little attention because most commentaries on the monthly CSO releases headline the year-on-year changes. Thus even as the monthly rate returned to positive territory in February 2010, the newspapers continued to discuss annual deflation rates in excess of 3 per cent.

In its latest Quarterly Bulletin (released last week), the Central Bank forecasts annual inflation rates for 2010 of -1.3 (CPI) and -1.1 (HICP). These are year-on-year forecasts and therefore reflect substantial carryover from the record deflation of 2009. If the CPI continued to edge up by 0.1 per cent a month from March to December 2010 – not implausible given that interest rates are on their way up, the euro is falling and oil prices rising – the annual rate of inflation for 2010 would be -1.3 per cent – exactly what the Central Bank forecasts. But by December the price level would be 1.4 per cent higher than it was in January.

This is another illustration of the tendency of Irish economy commentary tends to focus unduly on annual changes, to the neglect of significant indications from quarterly or monthly data, a phenomenon to which Rossa White drew attention in an Irish Times article last week.

More Secrets from the NAMA Temple

The EU Commission has released the full text of its decision to approve NAMA announced on February 26. Emmet Oliver discusses the statement in today’s Independent. Thanks to Jagdip Singh for the hat tip. What I find frustrating about this process is why we get a minimal “EU approves NAMA” statement in February and a slightly-censored version of the full approval six weeks later. It would be far preferable for the full text to be released at the same time as the announcement of the decision.

Thanks also to Jagdip for getting us more information on the “NAMA total consideration” mystery. As outlined in his comment, Jagdip wrote to NAMA:

Dear Sirs,

I have studied your four publications from Tuesday 30th March 2010 with respect to the transfer of the first tranche of loans to NAMA. I write to ask if you could make publicly available the overall methodology to derive the Long Term Economic Value (LEV), Current Market Value (CMV) and consideration paid with respect to the first tranche of €16bn of gross loans.

In summary the gross loans of the first tranche are estimated at €16.03bn, the LEV is shown as €10.51bn, the CMV as €9.44bn and the consideration paid is €8.51bn. Could you explain in general terms how the LEV and CMV were calculated and why the consideration paid is different to the LEV.

Also the press have widely reported the estimated haircut on the first tranche at 47%. Would it be more accurate to quantify the haircut as 34% (1 – LEV/Loan Value or 1 – 10.51/16.03)?

I have read the Act and the LEV Regulations before writing to you and I can still not resolve the figures produced for the first tranche. I propose publishing any response from NAMA to the above questions on the irisheconomy.ie blog.

Jagdip received a reply (Garbo speaks!):

Thank you for your email.

Please see below a brief guide to how NAMA obtains these calculations:

1. The €16.03bn is the nominal value of the loan balances transferring to NAMA.

2. The property CMV represents the current market value of the property as at 30 November 2009.

3. An LEV uplift factor is applied to the property CMV to arrive at the property LEV which is one of many inputs to the valuation methodology to arrive at the consideration NAMA will pay for any of the transferring loans. In addition to the LEV of the property, the loan valuation is determined by reference the discount rates per the valuation regulations taking account of enforcement costs and the legal due diligence levy, and the potential for legal haircuts regarding defects in security and title amongst other inputs which influences the consideration paid by NAMA for the loans. The average LEV uplifts per participating institution are available on our website.

4. The discount applied can therefore be calculated as: (1- (Consideration paid/Loan balances at transfer)).

Some additional information is available on our website http://www.nama.ie.

As Jagdip notes, “defects in security and title” are likely to be the principal explanation for why the “total consideration paid” for the first tranche was below the “current” (i.e. November 2009) market value of the underlying assets. I think this means that the signed copy of the 46 guy letter is on its way to an anonymous NAMA official, who I’m sure will treasure it.

Between this reply and Brian O’Neill of NAMA’s letter to the Irish Times commenting on Brian Lucey’s criticisms of their ingenious linked-to-Euribor strategy (Brian’s original article here and reply to NAMA here) there is some sign of NAMA becoming a somewhat less secretive organisation. This is a welcome development though I suspect those who ask tough questions may find limits to this transparency.

The Impending EU\Greece Deal

It appears that a deal involving the EU and Greece is imminent. Greek bond yields hit their peak level in the current crisis, the ECB has altered its rules for collateral and the media are reporting that a deal is in place (here and here.)

The FT reports on the negotiations over the terms of the deal:

Officials added that Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates of 6 per cent or more, though this could lead to different rates being charged by other countries.

One said the agreement “reflects high rates … it is not a ‘subsidy’ and thus not a climbdown. Not even the Germans regard most recent rates as market rates”.

The FT also editorialises on this, blaming the Germans for failing to calm the bond markets sufficiently:

Berlin is also adamant liquidity support be given at market rates. This makes no sense: a rescue is needed precisely when debt markets cease to function and refuse to refinance Greece at sustainable rates. Insisting that a rescue takes place at “market rates” is to insist no rescue takes place at all. Market yields reflect this contradiction, and show that Europe has not yet put its money where its mouth is.

I have a tendency to question agreed wisdom so let me play the role of academic devil’s advocate here for a second. Ultimately, Greek fiscal stability will require a combination of lower spending and higher taxes. Yes, bond yields at current levels—if sustained—would be unlikely to be consistent with long-run fiscal stability.

However, a program that

(a) Made it clear that Greece would be able to roll over private sector debt because the EU will intervene to provide the funds

(b) Credibly lead to the adjustments in Greece’s structural deficit.

should stabilise the fiscal situation in Greece and lead to a return to lower borrowing rates for Greece. That the EU should charge a high interest rate for providing the funds for (a) and overseeing the program for (b) is, it could be argued, not unreasonable. Indeed, if the rates associated with (a) are not high enough to be painful then it may be difficult to get much traction going on (b).

Of course, the Greek government is going to look to get the interest rates on its assistant loans set as low as possible. But that doesn’t mean that a percent here or there on these loans is the key issue right now.

The other major unknown here is how any deal will affect the sovereign bond market’s attitude to Ireland.

Eddie Molloy on Finance and the Public Service

I know Philip linked yesterday to the first of his articles but I think it is worth having a thread on Eddie Molloy’s two articles on the Department of Finance and the public sector (here and here.) To my mind, most of his opinions are spot on. I can certainly relate to his opinions in relation to the misplaced belief in generalists and in the absence of management skills. But, of course, most of this material has been aired before. The question is whether the current crisis is likely to generate sufficient momentum to finally generate the kind of reforms that people have been talking about for many years.


Bob Aliber will give a talk on this topic in TCD next Friday April 16, 12.30-2 in Room 3051 of the TCD Arts Block  – all welcome.    Most recently, he had a prominent role in predicting the banking crisis in Iceland, which built on his long research career in the analysis of asset bubbles and crises.


Robert Z. Aliber is Professor of International Economics and Finance at the Booth Graduate School of Business at the University of Chicago emeritus. He has written extensively about currencies, international monetary and banking relationships, and financial crises and the credit bubbles. He brought out the fifth edition of Charles P. Kindleberger’s Manias, Panics, and Crashes, (Palgrave, 2005) and is completing the sixth edition. His book the The International Money Game (Basic Books, 1972) first appeared in 1972, and the seventh edition is scheduled for publication in 2010. Other publications include The Multinational Paradigm (MIT Press, 1993) and a book on personal finance, Your Money and Your Life (Basic Books, 1984). A sequel, Your Money and Your Life All Over Again, (Stanford University Press, 2010) is scheduled for publication in 2010. He has consulted to numerous organizations including the Board of Governors of the Federal Reserve System, the World Bank, and the International Monetary Fund. He has testified before committees of Congress, and lectured extensively in the United States and abroad. He received his Ph.D. from Yale University.

Public Sector Reform and Policy Reform

The proposed agreement with the public sector unions is intended to facilitate public sector reform.  In addition to reform in the delivery of public services, the reform agenda may also be interpreted as extending to reforming the role of the public sector in the process of policy development.  In this regard,  Brendan Tuohy recently contributed an interesting reflective article in the Irish Times, while there is also a critique of the Department of Finance by Eddie Molloy in today’s edition.

In thinking about how policymaking can be improved in Ireland, I invite the readership to offer their views on how policy development can be improved, especially in terms of the advisory role played by civil servants and other public sector policy officials.

Anglo and Quinn

Let me see if I have this right. Quinn Group has debts of €4 billion, €2.8 billion of which is owed to Anglo. Quinn Group used some of this money to acquire shares in Anglo which it has lost about €3 billion on. Now Anglo is proposing to take over Quinn Group including its insurance arm but the Financial Regulator isn’t happy with this idea and is going ahead with appointing administrators for Quinn Insurance. (Irish Times story here.) And people are on the streets protesting against the Regulator, apparently favouring a return to light-touch regulation. It’s all pretty strange stuff.

The serious point here: We are where we are in large part due to very serious regulatory failures. If the first time our new regulator steps in and deals with what he sees as serious failures to comply with regulations, there is any sense of the government (any arm of it) stepping in to protect those who failed to comply, then this would do serious damage to our attempts to build an image of having made a fresh start on the regulatory front.

Daft Report for 2010:Q1

The latest Daft report is out, including a commentary from Brian Lucey. The analysis of asking prices is, as always, interesting and useful. However, given the evidence on how long it is taking units to sell, it seems clear that asking prices are still above what would be required to produce a normally functioning market.

The recent receiver-driven apartment sales in Mullingar that attracted considerable buying interest (Independent story here) perhaps provide an insight into the gap between asking prices elsewhere and what would be needed to attract demand. The two-bed units in Mullingar were priced to start at €82,000 and I seem to recall that the median two-bed in this scheme was selling for €90,000. For what it’s worth, a non-scientific comparison shows that the average asking price for two bed units in Westmeath in the Daft report is €162,000.

Greek Bond Yields

The yield on Greek government bonds has now crept up to more or less where it was prior to all the EU meetings of the past few months (see here.) I’m not sure why the various annoucements haven’t helped and newspaper reports like this one and this one don’t explain as much as I’d like.

If the high bond yields are a sign of doubts about whether a rescue is actually going to happen, and thus the debt may be defaulted on, then the eventual arrival of the cavalry (in the form of the EU) to keep the debt rolling over would end up bring the yields down to more sustainable levels and hopefully stabilise the situation. A less sanguine interpretation of current events offered to me by a colleague is that the terms of the deal being offered by the EU—in which any lending would be at current market rates—doesn’t really offer Greece a route out of insolvency because bond yields at this level are not consistent with stabilisation of the public finances.

I’m more inclined to believe the former intepretation and that the EU will prevent Greece defaulting. Whether it should is a different matter.