61 replies on “Morgan Kelly on VOX: Whatever Happened to Ireland?”
@Philip
“in contrast to Greece, Ireland’s woes stem almost entirely from its banking system, and could be swiftly and permanently cured by a resolution which shares the losses of Irish banks with the holders of their €115 billion of bonds through a partial debt for equity swap.”
All agreed – let’s just do it then and get it over
Wow…debt at 140% of GNP?
Both Ireland and Denmark were outliers in Europe by guaranteeing existing unsecured bank bond debt.
Ireland extended coverage to interbank deposits and existing and new senior unsecured debt. It also guaranteed covered bonds and even subordinated debt.
The ECB explicitly recommended on October 20, 2008 that government guarantees on interbank deposits should not be provided.
Wouldn’t the unlimited deposit guarantee have sufficed in the short-term at least rather than surrendering every chip on a night of panic?
An admirable summary. I have suggested that those who pumped up the banking bubble did so deliberately, possibly with the connivance of others. The extended guarantee therefore was just part of it?
Aidan: I agree!
Off topic:
Word is that the oil spill in the gulf is 2 or 3 orders of mag worse …… than reported! This has implications not just for oil running out (!) (it won’t) but for the whole of the south of USA and Carribean as H2S is poisonous and other volatiles may be released etc. Another Katrina? This is enough to move the markets …. not the Euro, for once.
Those graphs are as clear as the light of day and a welcome antidote to the bluster and obfuscation that have surrounded, and still surround, the valuation of property in Ireland. As suggested by many on this forum and elsewhere, accurate publishing of prices and better bankruptcy laws, together with a proper bank resolution scheme and some form of debt for equity swap for bondholders are the solutions on the horizon that are becoming clearer each day as the ash from the 2007 eruption of Mt Hubris settles.
The new GM, 61% owned by Uncle Sam, reported net income of $865m in the first quarter today, compared with a $6bn loss by the old GM, in the same period last year.
While global sales grew by 24%, interest expenses dropped by $863m as a result of the shedding of debt.
The Obama task force pushed GM into bankruptcy last June, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.
That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.
All this happened in “the land of the free.”
As for Ireland, it certainly wasn’t the home of the brave and there wasn’t a huge risk invloved as would be the case in exiting the euro and launching a confetti currency at a time of peril.
“and could be swiftly and permanently cured by a resolution which shares the losses of Irish banks with the holders of their €115 billion of bonds through a partial debt for equity swap”
If what you are currently doing isn’t working…. I just wish someone would get on and do it. After an initial bit of a flurry, the dust will have settled and people will have moved on after six months. Ireland taking this step is not going to be the end of Western civilisation and capitalism as we know it.
Morgan Kelly makes two net points as far as I can see:
1. The bank recapitalisation figures and losses are probably greater than even the current estimates.
2. The current approach to the banking problem will end up with the State labouring under debt levels of Greek-proportion (though not necessarily with the same structural deficit and socio-political strains), which could leave Ireland in need of financial rescue.
One wonders is Morgan Kelly of the opinion that we would be better off if the markets gave us the thumbs down and we were forced into a default on the Guarantee leading to debt for equity swaps.
Morgan Kelly does not propose a mechanism for bringing about debt for equity swaps so one wonders does he see it happening by the sovereign negotiating with bondholders. It would be interesting to know how Morgan Kelly sees the sequencing and legal procedures playing out.
I note that Alan Dukes said that Anglo had to advertise to find subbies to buy bonds back from in the past. Does the same problem as to the identity of senior bond-holders apply or are they as identifiable as depositors?
zhou: You are being disingenuous. The guarantee expires in four months. Force a debt for equity swap then.
Of course Anglo had to advertise. When the government is giving such a sweet deal, the bond holders will push back as much as they can.
BTW, do you have any arguments on point number 2? If continue what we are doing, will we be Greece in 2 years?
Morgan is the only economist who seems to have noticed that our GDP is 20-25% higher than our GNP and that we pay our domestic bills out of GNP not out of GNP, eg bailouts for the well connected gambling classes.
EVERY OTHER EU country has a lower or similar GDP than GNP except us ( and did someone say Cyprus ??? ) and therefore the true picture is only obvious as a % of GNP not as a % of GDP.
Once the morkesh run the debt numbers rebased in GNP we are truly in the proverbial smelly outhouse 🙁
Ignoring the obsessional “litres of blood from the banking wound” I find considerable comfort in this piece from the greatest doomsayer of them all. He states that we are on course for 3% fiscal deficit in 2012 (hard to see that) and that (ignoring the litres of blood) our overall Debt/GNP ratio will be quite healthy.
@Garo
1. I am not being disingenuous. If the money that can be lawfully demanded prior to the end of the guarantee is lawfully demanded then failure to pay up would constitute a default under the Guarantee.
2. Will we be Greece in two year’s time? I don’t know. Neither does anybody else. It is not clear that the markets would lose confidence in Ireland if our debt figures were as bad as Greece’s if we had implemented the necesary austerity measures an were experiencing healthy growth. We may or may not be subject to contagion at the same time.
@BW11
I agree with you. Morgan Kelly is remarkably sanguine on the public finances given his bearish view of the banking system.
The article also reads as if the final 200-300 words are lopped off. His assessment of the banks’ post NAMA losses is greatly in excess of the CBs stress test. In fact reading between the lines, is he calling out Honohan and Elderfield for being too optimistic.
There is also no discussion of the quantum of senior debt that could be burned. It must be greatly less than 115bn if you take out the under 1 year, govt guaranteed and collatoralised stuff. A quick ring around would get to a more accurate figure.
There is also no discussion of the mechanism for defaulting on senior debt & swapping debt for equity. The actions of the EU/ECB in the last week would seem to imply that this would be verboten.
All in all, I am mildly disappointed at this article by the most authoritative voice in Irish academia on the bust.
@ Tull & BWII
“There is also no discussion of the mechanism for defaulting on senior debt & swapping debt for equity”
Pretty sure i’ve been harping on about that exact point for a little over a year now. But hey, lets still claim that this is the answer to all our banking problems, right?
Morgan Kelly said,
Irish banks were lending 40% more in real terms to property developers alone in 2008 than they had been lending to everyone in Ireland in 2000, and 75% more to house buyers.
I thought that sentence packed a lot of punch and a good overall analysis of events. The crucial thing it shows is how the same lending institutions were playing the game from both sides simultaneously. Should we try to be vigilant of that going forward? BOH.
I am just looking at the graphical representation of that one sentence, shown as Figure 1. Bank lending to households and non-financial firms as a percentage of GDP (GNP for Ireland), 1997 and 2008.
A picture does say quite a lot, doesn’t it? BOH.
Morgan provides his usual incisive analysis of Ireland’s crisis. But the sting is in the tail. Although he uses the (uncharacteristic) euphemism of a debt-equity swap, as others have noted his proposal amounts to default on the sovereign guarantee. (This proposal is very different from the idea of imposing losses on long-maturity bank lenders once a guarantee expires in the context of bankruptcy or explicit bank resolution authority, an idea that I support even if the sums saved are relatively small.) Any offer of a swap would simply be laughed at without a credible threat of default on the guarantee to back it up.
Putting aside any ethical qualms, the idea of a near-term restructuring is not mad if we think a broader sovereign default is ultimately unavoidable. Why put the country through the pain of meeting obligations if our reputation is going to end up shot in any case? However, Ireland has already shown an impressive political capacity for deficit reduction—a point actually underlined by Morgan when he predicts reaching the 3 percent deficit target by 2012, a year ahead of schedule. His pessimism comes instead from a high estimate of the ultimate cost of the bank bailout, clearly getting no comfort from Patrick Honohan’s careful examination of the balance sheets.
The explosion of spreads over German bunds the week before last did show the markets were not ruling out an Irish sovereign default. But I think the fear was illiquidity rather than insolvency—effectively the possibility of self-fulfilling expectations that Ireland would not be able to roll over its debt at some point. While we are not out of the woods, the EU/IMF/ECB package has dramatically reduced the chances of a bad equilibrium taking hold. With the odd emphasis on the cost of funding Ireland’s contribution, I think the post-package commentary has greatly underestimated how much Ireland is a beneficiary of this new lender-of-last resort capacity.
Of course, if the wholesale markets think there is any real chance that the government will heed Morgan’s advice, then there will be a run on Irish banks—“guarantee” be damned. Looking at Ireland’s proven capacity for deficit reduction, its liquidity and term-structure management and the new funding facility, I do not share Morgan’s extreme pessimism on solvency. While calls for professional economists to don the green jersey are offensive and counterproductive, it is still worthwhile for those who think Ireland is solvent to say so.
A well written succinct piece without doubt.
I like the conclusion which appears to challenge the Governor of the Central Bank’s assertion that the banking crisis is manageable, depending on how you define the word ‘manageable’ of course!
“This debt would probably be manageable, had the Irish government not casually committed itself to absorb all the gambling losses of its banking system. If we assume – optimistically, I believe – that Irish banks eventually lose one third of what they lent to property developers, and one tenth of business loans and mortgages, the net cost to the Irish taxpayer will be nearly one third of GDP…”
I hope this article’s conclusions are reported in the press…
John McHale said,
With the odd emphasis on the cost of funding Ireland’s contribution, I think the post-package commentary has greatly underestimated how much Ireland is a beneficiary of this new lender-of-last resort capacity.
Good point.
Not to mention the fact that euro weakness may give Irish export industry a nice nudge in the right direction, which it badly needs. We will have to wait and see though what kind of inflationary targets the ECB is willing to put up with in the medium term. It should bear a lot on Ireland’s situation I should think.
I cannot believe, looking at Morgan Kelly’s figure one on the VOX article. The behaviour of the German economy between 1997 and 2008, was nothing like that of Portugal, Greece, Spain or Ireland. It was so dangerous for our small island to get caught up in that madness of aggressive wholesale borrowing by banks. Remind me again, why it makes sense to to try and save an Irish bank Oh yeah, it costs more to wind them down. BOH.
“It depends on what the meaning of the word is is” William Jefferson Clinton!
‘manageable’ is more flexible!
@Bond. Eoin Bond.
“Pretty sure i’ve been harping on about that exact point for a little over a year now. But hey, lets still claim that this is the answer to all our banking problems, right?”
The question is why nearly 2 years into the crisis we still don’t have that piece of legislation that could save us billions.
@John McHale
Small point but we haven’t actually reduced the deficit yet, all we have done is stop it growing.
Yes, we have done far more than the other PIIGS but that is because we had and still have far more to do.
I notice on May 16th 2010, Simon Kelly wrote in the Sunday Tribune, Selling our sovereignty in the name of Europe.
“The question is why nearly 2 years into the crisis we still don’t have that piece of legislation that could save us billions.”
Fair point, and one i have made myself. However, in Kelly’s article above, there is absolutely zero mention that we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes. It’s a bit like saying i want to date Cheryl Cole, without admitting i dont have any of the necessary qualities to do so (money, good looks, fame, etc). But like i said, lets keep suggesting that someday she’ll be Cheryl Bond and im sure it’ll turn out ok…
Btw, a question i’ve asked before – in an era with relatively low taxes and incredibly low relative interest rates, as well as far more dual income households than previously, does the “House Price divided by Earnings” ratio still make sense? Shouldn’t we really be using something more like “disposable after-tax household income minus interest payments” as the divisor? For instance, while the ‘secondhand house/industrial earnings’ graph in M Kellys article almost quadruples from 1995 to 2006, the ‘affordability index’ that used to do the rounds (think its EBS) only ever really doubled from recollection, and is already back to historic norms/averages.
@ Dreaded,
Clearly forcing losses on bond holders would save us billions but how much, and what mechanism would be used other that to tell them that they are not getting their money. It the little details like these that are missing from the calculus. What happens if Allianz or Dexia says no!
I’m no economist but…
Wouldn’t it be optimum to default once we’ve balanced the books? i.e. pretend we’re going to pay the guys that are lending the money until we don’t need to borrow for our day to day spending.
Perhaps a better analogy would be, that the small wound is a laceration to the hand. The hand in question is that of a sergeon. Hence once we fix the small wound, the patient is in far better shape to sort out the big wound for him/her-self.
While we talk, hospitals are reducing services …… Tighten your belts, you have been living too well. Who cares if the poor have to suffer? They are only little people, who do not matter.
Keep those lifeboats for the gentlefolk
“incredibly low relative interest rates”
No Mr Bond, I expect you to DIE!!!!!!!!!
Tut, tut. Relative interest rates have NEVER been larger~! That is why folks are not investing. Negative numbers your weakness at school?
When housing is falling at 1% a month, what is the relative interest rate if rates charged are 3% pa? 15% Doofus!
Celtic Phoneix (sic)
Thinking like that got us into this mess! There are no short cuts to wealth. If you want it, work for it. If you want it, would you borrow? Please reflect and learn from this massive experience.
tull mcadoo
That is when we find out who is sovereign! Clever investors know to avoid a set up. The pumping in the last three years in Ireland was clearly such. I will remind you this is not sovereign debt.
Mr Bond
We still love you, but comments like that do undermine most of your statements on anything economic or mathematical. Sorry!
@ Pat
You’ve taken on a fairly impolite and at many times rude bent of late. Possibly playing well with the other kids was your weakness at school? A little bit of decorum and people may not just assume that your wild-eyed conspiracy-theorising about all kinds of anything & everything undermines absolutely EVERYTHING you say.
Over the course of 2000-2008 were interest rates, both real and nominal, not at historically low levels? Were they not, in real terms, more or less negative in Ireland? With some form of quasi-QE now being used in the Eurozone, will real interest rates not likely be negative in the coming years?
@eoin bond
But saying we cannot impose losses on bondholders because we don’t have the legislation is a very flimsy argument IMO.
The point is we should have that legislation now, because imposing losses in its absence would be difficult.
But when someone such as Kelly suggests we impose losses on bondholders I take it to mean we do everything necessary to allow us to do that first, including introducing the bank resolution scheme
@eoin
“Btw, a question i’ve asked before – in an era with relatively low taxes and incredibly low relative interest rates, as well as far more dual income households than previously, does the “House Price divided by Earnings” ratio still make sense? Shouldn’t we really be using something more like “disposable after-tax household income minus interest payments” as the divisor? For instance, while the ’secondhand house/industrial earnings’ graph in M Kellys article almost quadruples from 1995 to 2006, the ‘affordability index’ that used to do the rounds (think its EBS) only ever really doubled from recollection, and is already back to historic norms/averages.”
The EBS index only showed the mortgage affordability double because the average term was continually pushed out. So while 15 years ago the average first time buyer may have purchased over 20 years the average is probably now over 35 years
Mr Bond
I am wholly chastened by your righteous rebukes so in amends find some stuff on haircuts.
By the way, I assume you agree that interest rates are no longer negative? I suggest that you verify that whenever they were negative there followed some interesting times!
Bondholders are legally pari pasu with depositors, so default on bondholders and you must default equally on depositors triggering a massive call on the government guarantee scheme.
Change the law so that the banks can torch bondholders ahead of depositors? That would have to be done retrospectively and then we have no legal basis at all and Ireland inc. would be a pariah in international commerce. Hey, we need international commerce more than anyone. There is no silver bullet to the banking crisis.
@ Tim Morrissey,
Those graphs are as clear as the light of day and a welcome antidote to the bluster and obfuscation that have surrounded, and still surround, the valuation of property in Ireland. As suggested by many on this forum and elsewhere, accurate publishing of prices and better bankruptcy laws, together with a proper bank resolution scheme and some form of debt for equity swap for bondholders are the solutions on the horizon that are becoming clearer each day as the ash from the 2007 eruption of Mt Hubris settles.
I have to agree with that. Also, I thought that Morgan Kelly’s comparison of the Irish housing bubble to that in Arizona and California was very relevant. Given the fact the American housing bubble burst before ours did, and the fact that parts of the United States are looking at 25% default of residential mortgages, I would say there is a lot more to come here in Ireland. Jon Ihle reported something in the Sunday Tribune newspaper, about the project that Karl Deeter is currently involved in. I am sure that a return to a realistic market in the residential sector would be helpful to all. What Morgan Kelly observes about the Dublin market – prices at 17 times average income – was useful to remember. In other words, houses ceased to become something you simply lived in, during the bubble years. Houses became something else entirely. Furthermore, the estate agents in Dublin who sold those ‘articles’, which cost 17 times the average income, had re-invented themselves as something beyond simply auctioneers and estate agents. They probably began to think of themselves as masters of the universe. I can honestly claim to have fallen to the temptation of believing about myself for a period. It has humbling to realise now, that my skills are the least in demand in this new era post 2008. I am not worried about that, but it is important once and a while to look at a newspaper. You see entry level public service jobs advertised at between 30 and 40 thousand euro per year. Clearly, there is a lot of bottom-ing out still to happen in the Irish residential market. We will go back to being a poor country in Ireland for a time, and that seems to be the psychological road block for a lot of people on this island today. BOH.
Those graphs are as clear as the light of day and a welcome antidote to the bluster and obfuscation that have surrounded, and still surround, the valuation of property in Ireland. As suggested by many on this forum and elsewhere, accurate publishing of prices and better bankruptcy laws, together with a proper bank resolution scheme and some form of debt for equity swap for bondholders are the solutions on the horizon that are becoming clearer each day as the ash from the 2007 eruption of Mt Hubris settles.
I have to agree with that. Also, I thought that Morgan Kelly’s comparison of the Irish housing bubble to that in Arizona and California was very relevant. Given the fact the American housing bubble burst before ours did, and the fact that parts of the United States are looking at 25% default of residential mortgages, I would say there is a lot more to come here in Ireland. Jon Ihle reported something in the Sunday Tribune newspaper, about the project that Karl Deeter is currently involved in. I am sure that a return to a realistic market in the residential sector would be helpful to all. What Morgan Kelly observes about the Dublin market – prices at 17 times average income – was useful to remember. In other words, houses ceased to become something you simply lived in, during the bubble years. Houses became something else entirely. Furthermore, the estate agents in Dublin who sold those ‘articles’, which cost 17 times the average income, had re-invented themselves as something beyond simply auctioneers and estate agents. They probably began to think of themselves as masters of the universe. I can honestly claim to have fallen to the temptation of believing about myself for a period. It has humbling to realise now, that my skills are the least in demand in this new era post 2008. I am not worried about that, but it is important once and a while to look at a newspaper. You see entry level public service jobs advertised at between 30 and 40 thousand euro per year. Clearly, there is a lot of bottom-ing out still to happen in the Irish residential market. We will go back to being a poor country in Ireland for a time, and that seems to be the psychological road block for a lot of people on this island today. BOH.
I think the reference to 25% mortgage default in the US is entirely misleading. In the US you are legally entitled to walk away from a mortgage – why wouldn’t you if you were in negative equity? In Ireland the mortgage is legally enforceable and the property is merely collateral security, a completely different contractual arrangement. Sorry, Morgan, this is one prediction that won’t come to fruition.
@Brian Woods II (there are two of you?) – “this is one prediction that won’t come to fruition”
Yep. Debt slavery for life in Ireland instead.
Chap by the name of Locke, John., made up somethink about Private Property. Very innovative. Something to do with food production and all. Now that we are technologically very advanced ‘barbarians’ we have a new ‘food’, its called Credit. So we make Debt the new private property. Very innovative.
Taddsey bit of a problem. Food stops growing at a specific point. Now debt on the other hand! What did Einstein have to say about Compound Interest?
If your future required income has to increment by 0.0x%, and x has to be greater than growth rate of your debt interest – how in hell are you going to crank up enough income – into the future, given that the Biosphere is scarcely 2 Km thick! Defeats me.
@ BW II,
I think the reference to 25% mortgage default in the US is entirely misleading. In the US you are legally entitled to walk away from a mortgage – why wouldn’t you if you were in negative equity?
Thanks for pulling me up on that point, which is indeed a very good one. BOH.
@ BW,
Chap by the name of Locke, John., made up somethink about Private Property. Very innovative. Something to do with food production and all. Now that we are technologically very advanced ‘barbarians’ we have a new ‘food’, its called Credit. So we make Debt the new private property. Very innovative.
The point you make about barbarians and credit is noteworthy. I made a comment on Liam Delaney’s recent thread on behavioural economics, where I cited the example of human cooperation in order to capture wild game for protein, or later in the 1800s, to supply markets with fuel to light up houses in the dark. There was a deep relationship between the whale fleets operating out of Nantucket (starting point in the voyage of the Pequod in Herman Melvilles classic, Moby Dick), and the emerging American economy post the war of independence. Today we hear about the EU’s problems with bond spreads etc, and we hear expressions used like ‘wolf pack’ and so on. Clearly, there is some basis in what Brian Woods has described about ‘credit’ being the new food. I think the point was expressed several times by Brian Lucey on the panel on the Frontline with Pat Kenny yesterday evening. The fact that Ireland will have to send its Pequod out of harbour very shortly, in search of the great white whale. BOH.
I agree that Morgan Kelly is sanguine about our structural fiscal deficit and our relatively low levels of public debt. I think it is right to emphasise our solvency.
“…the idea of a near-term restructuring is not mad if we think a broader sovereign default is ultimately unavoidable. Why put the country through the pain of meeting obligations if our reputation is going to end up shot in any case?”
Assuming this was the choice (and I am not sure that it applies given the remedial action on the public finances), Ttis is quite a decision for a Minister to have to make. Do we go for a defacto default now for fear of having to go through a worse de-facto default in 2-3 years time? Or do we tough it out in the hope that we will be able to get through it without defaulting at all? Option no. 2 might look better to a lawyer whereas option no. 1 might look better to an economist or business man.
However, there are added complications.
(i) Could a de-facto default on the Guarantee insofar as it affects Anglo cause a run on BoI and AIB?
(ii) Could this in turn spark wider financial market contagion in Europe?
(iii) Could it spark sovereign debt contagion?
(iv) Will any of our European neighbours ever speak to us again?
The answers may be – no, no, no, yes. However, the great powers of inertia and fear mean that we will never find out. Instead, we are likely to stick with the EU herd so that whatever happens we will all be in it together to some extent. This is why we joined the EU. However, we have seen how selfish the larger members can be.
In the meantime, we also face the risk of doing everything right and then being subject to sovereign debt contagion in a couple of years time. Would we remove ourselves from such contagion, and from being the source of such contagion, by getting our strike in now?
The solution might be if the EU decides that Anglo must be dealt with as per Morgan Kelly in order to lance one of the EU sovereign debt boils. In that scenario, we could revoke the guarantee insofar as it affects Anglo bondholders and at the same time the EU could announce that it stands ready to help us protect AIB and BoI. This approach would minimise the risks of immediate contagion and of future contagion. It would minimise damage to our international relations and to intra-EU relations generally. Most importantly it could minimise the pain which the people of Ireland will suffer.
Of course, a huge amount of wealth might be destroyed. However, seeing as nobody knows who the bondholders are then perhaps we needn’t worry?
Again, I would say that the above comments are based on Morgan Kelly’s analysis. I note that the Governor of the Central Bank has said our position is not so grim. I also note that Morgan Kelly agrees witht he fiscal adjustment and accordingly any risk of sovereign default must be seriously reduced as compared to the current Greek crisis even if we do end up with Greek levels of debt.
@zhou_enlai
“I note that the Governor of the Central Bank has said our position is not so grim.”
What do you think the reaction would be if the Governor of any Central Bank came out and said their countries position was grim?
@Eoin
“we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes. It’s a bit like saying i want to date Cheryl Cole, without admitting i dont have any of the necessary qualities to do so”
Is it really? The bank guarantee is just a law. So we could pass another law repealing it. Then Lenny gets on the horn to the subbies, petrol cannister and match in hand….
@ Ribbit
the government guarantee is but one issue (and ive always been dubious about the “we can just repeal it” – under EU contract laws, could we just do this with no liability?). We don’t have any legislation dealing with how to restructure a failing bank without having to literally liquidate the corporate entity. I assume you’re not suggesting liquidating AIB and BoI? Remember, Morgan Kelly has gone far beyond just suggesting bond losses at Anglo, he has said we should do it across the entire banking system.
@ Zhou,
I didn’t get around to reading your comment today at all, but thanks for leaving it there – I’ll manage to read it at some stage. Must fly. BOH.
@Zhou
“(i) Could a de-facto default on the Guarantee insofar as it affects Anglo cause a run on BoI and AIB?”
Are you taliking about a run on deposits here zhou? I presume that the guarantee would be left in place for depositors, at least to some degree. Or can the bondholders do a runner also?
@EB
“However, in Kelly’s article above, there is absolutely zero mention that we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes”
I presume here you are talking about this resolution regime which you guys are pointing out for some time we don’t have.
Is that not what Morgan Kelly means when he refers to:
“…and could be swiftly and permanently cured by a resolution …”
@ Aidan
apologies, we have one very fleeting and vague mention to an as-yet non existant resolution regime, in the very last sentence of a long piece about what went wrong with the Irish banking system and how we should fix it. Quite clearly its the tour-de-force i have not given due credit to.
This isn’t even chicken & egg. Its coming up with a wondferful recipe for a sunday roast chicken and then realising you never even had an egg to begin with. “Oh yeah, that damn resolution thingy, im sure someone’s looking into that…”.
Previously mentioned on here – lots of economic and legally type people need to get together to discuss this further and spell out what should happen…
EB said,
Previously mentioned on here – lots of economic and legally type people need to get together to discuss this further and spell out what should happen…
I appears to me, that a considerable weight of project management is required in order to facilitate legislation that comes into play at national level here in Ireland, passed through parliment or government departments etc – which ties up with wider EU and global directives also. What I mean is, during the Ahern years we saw regulators and quangos of all kinds set up with headed paper and websites and so forth, before any legislation was passed to set out parameters for what they would do. You can imagine, to use the building construction analogy, that is like the builders being paid by the hour, and standing around while they wait for the plans of the kitchen extension to arrive to get to doing some real work.
I blogged a while back, a blog entry I called ‘School for Innovation’. If it is the case that to pull down those EU directives, and transform the articles into national statutory instruments, and then furthermore think about the systems required to implement all of that – they clearly, more efficient and creative cross disciplinary cooperation will be necessary. But at the moment, the way it is in universities, we train kids out of third level to sit in their own corner and not transfer knowledge and communication, out of that corner so that other people can get a full picture of what is going on. Fred Brooks wrote a really good book on project management years ago, called ‘The mythical man month’. He has just published a follow up, after many years, which he entitled ‘The Design of Design’. I think I mentioned it amongst the references in my blog entry.
At the moment, the man hours in terms of legal services and economic analysis is costing us a fortune. Which means that many projects which need to happen, and possibly should have happened a long time ago, are simply sitting there. And there is no telling how far the knock-ons from that, in the real economy, extends. I suppose, this is the reason why Fascism gets popular immediately after times of intense economic and social upheaval. If we don’t want to go there, we should think about getting smart instead. BOH.
A good example of where legal binding directives are passed by local government and nothing whatsoever follows up behind that, was the tyre recycling Prime Time investigative episode last night. You know, you had a minister on air, being interviewed, who was learning with interest for the first time, whats actually going on out there.
I worry too about our inate ability as a people in Ireland, to deal with ‘issues’ which are straight in front of our own faces. It possibly takes more effort and creativity to bury the tyres in the ground and avoid detection, than it would to spend the money and create a proper pipeline for recycling. Lets face it, until the green party came along, this sort of issue would not have gained much attention. BOH.
@Eoin
“we have one very fleeting and vague mention to an as-yet non existant resolution regime, in the very last sentence of a long piece about what went wrong with the Irish banking system and how we should fix it. Quite clearly its the tour-de-force i have not given due credit to.”
Quite.
We didn’t have a guarantee until we had one either. Or a nationalised Anglo. You seem to be of the opinion that nothing is necessary unless it already exists?
Resolution regimes are reasonably standard and reasonably well understood. The mechanism by which they are funded, in particular, is fairly common through different states – a tax on assets paid for by the banks.
This may be why nothing is happening. With a resolution cost known (e.g. the 25 bn for Anglo and INBS), the fund would start in deficit to the tune of a large amount and would require a heavier payment schedule from the banks than would otherwise be the case in calmer times.
Our German friends, however, seem unwilling to wait for calmer times. It appears that their parliamentary approval of the Greek bailout will be linked to financial market restrictions and a tax for a resolution fund.
@ YM
you see what Ze Germans have done this evening? Insanity is reining there this evening, wouldnt be going to them for advise…
@EB
Not sure what is the insanity you are referring to Is it the ban on naked short selling? That seems a sensible enough thing to do. Didn’t we ban normal short selling on the Irish bank stocks – I don’t remember if that ban was actually lifted. That was probably wrong and ill thought out, but allowing naked short selling seems to me to be closer to insanity than banning it?
@ Aidan
repo markets and bond futures will go ballistic tomorrow morning. And who do you think is generally on the other side of a CDS price (or indeed a bond price, a futures price, a repo etc) – a market maker who is constantly taking on naked long and short positions. They wont be able to show two way prices anymore to people looking to genuinely hedge a position. Liquidity will evaporate in the morning and the cost of hedging a position will spike. Lots of foreign investors are gonna decide investing in the Euroland is no longer viable. This is the stupidest decision i’ve seen in quite a while.
Race? Or nations? Why would such a gap happen? Conspiracy is just the masons/Knights way of keeping “riffraff” down in the gutter?
@ EB,
Lots of foreign investors are gonna decide investing in the Euroland is no longer viable. This is the stupidest decision i’ve seen in quite a while.
Building on the comment by Brian Woods above, I began to turn it around the other way. I compiled together a blog entry to play around with the concept of credit hunting as like whale hunting in the 19th century. It is not a matter of the ‘whales’ coming to our shores. But rather where our whaling vessels now have to travel further afield, into new oceans which aren’t fished out completely, and spend a lot longer on such voyages, which ever increased gamble and risk. But follow the hunted, the fleet will do, until alternative sources of credit can be found gushing out of the ground. Like the Pennsylvania oil strike in the 1850s signalled the end of the great American whaling era. In other words, we have to learn to generate the credit needed to fuel the economy, here on our own soil, instead of doing it the Nantucket-er way. Bond markets be damned.
On another note, it was interesting how the NTMA bond auction was 3 times oversubscribed yesterday, but at less attractive rates. Maybe those nearby fishing grounds still have something to offer? BOH.
Dark Pools. Sounds conspiratorial to me! Perhaps Mr Eoin Bond can comment? Why eschew the exchanges? Why trade in pools? Super hedge funds? Who is trading?
@Eoin
There’s something coming down the line in Germany. The protection is being put in place early. I think it’s the German parliament. It’s going to be a bit sticky about funding the bailout funds; the terms will be stiff. Likewise the financial services tax may be bigger than the markets expect.
Given the scale of the changes, it is something big that is about to happen.
@ All,
For instance, to offer one example of where something ‘comes to you’, rather than having to go hunting for it – the RTE Prime Time team, and many other media outlets, already have the agenda set for their program on Thursday night. It is simply a matter of gathering together ‘a panel’ to try and discuss matters. The media has a constant shoal of suitable prey, which swims in its direction, each day, day in and day out.
But we should not assume, or try to impose that sort of analogy on the way we think about credit hunting. With credit hunting, the skills involved are to flush out the prey from its own native habitat. That is my two pennies worth at least. BOH.
I know this thread has wandered way off topic. On re-reading, it seems to me that Morgan has completlety torn up and dismissed the stress test used by Elderfield and Honohan in calculating the capital requiremnts of AIB and BOI. Is Morgan now downgrading the “Elderfield” stock.
At the very least, there could be a table setting out the reasons for doing so.
@ Tull,
Good question, and very worthy of some thought. BOH.
61 replies on “Morgan Kelly on VOX: Whatever Happened to Ireland?”
@Philip
“in contrast to Greece, Ireland’s woes stem almost entirely from its banking system, and could be swiftly and permanently cured by a resolution which shares the losses of Irish banks with the holders of their €115 billion of bonds through a partial debt for equity swap.”
All agreed – let’s just do it then and get it over
Wow…debt at 140% of GNP?
Both Ireland and Denmark were outliers in Europe by guaranteeing existing unsecured bank bond debt.
Ireland extended coverage to interbank deposits and existing and new senior unsecured debt. It also guaranteed covered bonds and even subordinated debt.
The ECB explicitly recommended on October 20, 2008 that government guarantees on interbank deposits should not be provided.
Wouldn’t the unlimited deposit guarantee have sufficed in the short-term at least rather than surrendering every chip on a night of panic?
An admirable summary. I have suggested that those who pumped up the banking bubble did so deliberately, possibly with the connivance of others. The extended guarantee therefore was just part of it?
Aidan: I agree!
Off topic:
Word is that the oil spill in the gulf is 2 or 3 orders of mag worse …… than reported! This has implications not just for oil running out (!) (it won’t) but for the whole of the south of USA and Carribean as H2S is poisonous and other volatiles may be released etc. Another Katrina? This is enough to move the markets …. not the Euro, for once.
Those graphs are as clear as the light of day and a welcome antidote to the bluster and obfuscation that have surrounded, and still surround, the valuation of property in Ireland. As suggested by many on this forum and elsewhere, accurate publishing of prices and better bankruptcy laws, together with a proper bank resolution scheme and some form of debt for equity swap for bondholders are the solutions on the horizon that are becoming clearer each day as the ash from the 2007 eruption of Mt Hubris settles.
The new GM, 61% owned by Uncle Sam, reported net income of $865m in the first quarter today, compared with a $6bn loss by the old GM, in the same period last year.
While global sales grew by 24%, interest expenses dropped by $863m as a result of the shedding of debt.
The Obama task force pushed GM into bankruptcy last June, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.
That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.
All this happened in “the land of the free.”
As for Ireland, it certainly wasn’t the home of the brave and there wasn’t a huge risk invloved as would be the case in exiting the euro and launching a confetti currency at a time of peril.
“and could be swiftly and permanently cured by a resolution which shares the losses of Irish banks with the holders of their €115 billion of bonds through a partial debt for equity swap”
If what you are currently doing isn’t working…. I just wish someone would get on and do it. After an initial bit of a flurry, the dust will have settled and people will have moved on after six months. Ireland taking this step is not going to be the end of Western civilisation and capitalism as we know it.
Morgan Kelly makes two net points as far as I can see:
1. The bank recapitalisation figures and losses are probably greater than even the current estimates.
2. The current approach to the banking problem will end up with the State labouring under debt levels of Greek-proportion (though not necessarily with the same structural deficit and socio-political strains), which could leave Ireland in need of financial rescue.
One wonders is Morgan Kelly of the opinion that we would be better off if the markets gave us the thumbs down and we were forced into a default on the Guarantee leading to debt for equity swaps.
Morgan Kelly does not propose a mechanism for bringing about debt for equity swaps so one wonders does he see it happening by the sovereign negotiating with bondholders. It would be interesting to know how Morgan Kelly sees the sequencing and legal procedures playing out.
I note that Alan Dukes said that Anglo had to advertise to find subbies to buy bonds back from in the past. Does the same problem as to the identity of senior bond-holders apply or are they as identifiable as depositors?
zhou: You are being disingenuous. The guarantee expires in four months. Force a debt for equity swap then.
Of course Anglo had to advertise. When the government is giving such a sweet deal, the bond holders will push back as much as they can.
BTW, do you have any arguments on point number 2? If continue what we are doing, will we be Greece in 2 years?
Morgan is the only economist who seems to have noticed that our GDP is 20-25% higher than our GNP and that we pay our domestic bills out of GNP not out of GNP, eg bailouts for the well connected gambling classes.
EVERY OTHER EU country has a lower or similar GDP than GNP except us ( and did someone say Cyprus ??? ) and therefore the true picture is only obvious as a % of GNP not as a % of GDP.
Once the morkesh run the debt numbers rebased in GNP we are truly in the proverbial smelly outhouse 🙁
Ignoring the obsessional “litres of blood from the banking wound” I find considerable comfort in this piece from the greatest doomsayer of them all. He states that we are on course for 3% fiscal deficit in 2012 (hard to see that) and that (ignoring the litres of blood) our overall Debt/GNP ratio will be quite healthy.
@Garo
1. I am not being disingenuous. If the money that can be lawfully demanded prior to the end of the guarantee is lawfully demanded then failure to pay up would constitute a default under the Guarantee.
2. Will we be Greece in two year’s time? I don’t know. Neither does anybody else. It is not clear that the markets would lose confidence in Ireland if our debt figures were as bad as Greece’s if we had implemented the necesary austerity measures an were experiencing healthy growth. We may or may not be subject to contagion at the same time.
@BW11
I agree with you. Morgan Kelly is remarkably sanguine on the public finances given his bearish view of the banking system.
The article also reads as if the final 200-300 words are lopped off. His assessment of the banks’ post NAMA losses is greatly in excess of the CBs stress test. In fact reading between the lines, is he calling out Honohan and Elderfield for being too optimistic.
There is also no discussion of the quantum of senior debt that could be burned. It must be greatly less than 115bn if you take out the under 1 year, govt guaranteed and collatoralised stuff. A quick ring around would get to a more accurate figure.
There is also no discussion of the mechanism for defaulting on senior debt & swapping debt for equity. The actions of the EU/ECB in the last week would seem to imply that this would be verboten.
All in all, I am mildly disappointed at this article by the most authoritative voice in Irish academia on the bust.
@ Tull & BWII
“There is also no discussion of the mechanism for defaulting on senior debt & swapping debt for equity”
Pretty sure i’ve been harping on about that exact point for a little over a year now. But hey, lets still claim that this is the answer to all our banking problems, right?
Morgan Kelly said,
Irish banks were lending 40% more in real terms to property developers alone in 2008 than they had been lending to everyone in Ireland in 2000, and 75% more to house buyers.
I thought that sentence packed a lot of punch and a good overall analysis of events. The crucial thing it shows is how the same lending institutions were playing the game from both sides simultaneously. Should we try to be vigilant of that going forward? BOH.
I am just looking at the graphical representation of that one sentence, shown as Figure 1. Bank lending to households and non-financial firms as a percentage of GDP (GNP for Ireland), 1997 and 2008.
A picture does say quite a lot, doesn’t it? BOH.
Morgan provides his usual incisive analysis of Ireland’s crisis. But the sting is in the tail. Although he uses the (uncharacteristic) euphemism of a debt-equity swap, as others have noted his proposal amounts to default on the sovereign guarantee. (This proposal is very different from the idea of imposing losses on long-maturity bank lenders once a guarantee expires in the context of bankruptcy or explicit bank resolution authority, an idea that I support even if the sums saved are relatively small.) Any offer of a swap would simply be laughed at without a credible threat of default on the guarantee to back it up.
Putting aside any ethical qualms, the idea of a near-term restructuring is not mad if we think a broader sovereign default is ultimately unavoidable. Why put the country through the pain of meeting obligations if our reputation is going to end up shot in any case? However, Ireland has already shown an impressive political capacity for deficit reduction—a point actually underlined by Morgan when he predicts reaching the 3 percent deficit target by 2012, a year ahead of schedule. His pessimism comes instead from a high estimate of the ultimate cost of the bank bailout, clearly getting no comfort from Patrick Honohan’s careful examination of the balance sheets.
The explosion of spreads over German bunds the week before last did show the markets were not ruling out an Irish sovereign default. But I think the fear was illiquidity rather than insolvency—effectively the possibility of self-fulfilling expectations that Ireland would not be able to roll over its debt at some point. While we are not out of the woods, the EU/IMF/ECB package has dramatically reduced the chances of a bad equilibrium taking hold. With the odd emphasis on the cost of funding Ireland’s contribution, I think the post-package commentary has greatly underestimated how much Ireland is a beneficiary of this new lender-of-last resort capacity.
Of course, if the wholesale markets think there is any real chance that the government will heed Morgan’s advice, then there will be a run on Irish banks—“guarantee” be damned. Looking at Ireland’s proven capacity for deficit reduction, its liquidity and term-structure management and the new funding facility, I do not share Morgan’s extreme pessimism on solvency. While calls for professional economists to don the green jersey are offensive and counterproductive, it is still worthwhile for those who think Ireland is solvent to say so.
A well written succinct piece without doubt.
I like the conclusion which appears to challenge the Governor of the Central Bank’s assertion that the banking crisis is manageable, depending on how you define the word ‘manageable’ of course!
“This debt would probably be manageable, had the Irish government not casually committed itself to absorb all the gambling losses of its banking system. If we assume – optimistically, I believe – that Irish banks eventually lose one third of what they lent to property developers, and one tenth of business loans and mortgages, the net cost to the Irish taxpayer will be nearly one third of GDP…”
I hope this article’s conclusions are reported in the press…
John McHale said,
With the odd emphasis on the cost of funding Ireland’s contribution, I think the post-package commentary has greatly underestimated how much Ireland is a beneficiary of this new lender-of-last resort capacity.
Good point.
Not to mention the fact that euro weakness may give Irish export industry a nice nudge in the right direction, which it badly needs. We will have to wait and see though what kind of inflationary targets the ECB is willing to put up with in the medium term. It should bear a lot on Ireland’s situation I should think.
I cannot believe, looking at Morgan Kelly’s figure one on the VOX article. The behaviour of the German economy between 1997 and 2008, was nothing like that of Portugal, Greece, Spain or Ireland. It was so dangerous for our small island to get caught up in that madness of aggressive wholesale borrowing by banks. Remind me again, why it makes sense to to try and save an Irish bank Oh yeah, it costs more to wind them down. BOH.
“It depends on what the meaning of the word is is” William Jefferson Clinton!
‘manageable’ is more flexible!
@Bond. Eoin Bond.
“Pretty sure i’ve been harping on about that exact point for a little over a year now. But hey, lets still claim that this is the answer to all our banking problems, right?”
The question is why nearly 2 years into the crisis we still don’t have that piece of legislation that could save us billions.
@John McHale
Small point but we haven’t actually reduced the deficit yet, all we have done is stop it growing.
Yes, we have done far more than the other PIIGS but that is because we had and still have far more to do.
I notice on May 16th 2010, Simon Kelly wrote in the Sunday Tribune, Selling our sovereignty in the name of Europe.
http://www.tribune.ie/business/news/article/2010/may/16/back-to-business-simon-kelly-/
@ DE
“The question is why nearly 2 years into the crisis we still don’t have that piece of legislation that could save us billions.”
Fair point, and one i have made myself. However, in Kelly’s article above, there is absolutely zero mention that we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes. It’s a bit like saying i want to date Cheryl Cole, without admitting i dont have any of the necessary qualities to do so (money, good looks, fame, etc). But like i said, lets keep suggesting that someday she’ll be Cheryl Bond and im sure it’ll turn out ok…
Btw, a question i’ve asked before – in an era with relatively low taxes and incredibly low relative interest rates, as well as far more dual income households than previously, does the “House Price divided by Earnings” ratio still make sense? Shouldn’t we really be using something more like “disposable after-tax household income minus interest payments” as the divisor? For instance, while the ‘secondhand house/industrial earnings’ graph in M Kellys article almost quadruples from 1995 to 2006, the ‘affordability index’ that used to do the rounds (think its EBS) only ever really doubled from recollection, and is already back to historic norms/averages.
@ Dreaded,
Clearly forcing losses on bond holders would save us billions but how much, and what mechanism would be used other that to tell them that they are not getting their money. It the little details like these that are missing from the calculus. What happens if Allianz or Dexia says no!
I’m no economist but…
Wouldn’t it be optimum to default once we’ve balanced the books? i.e. pretend we’re going to pay the guys that are lending the money until we don’t need to borrow for our day to day spending.
Perhaps a better analogy would be, that the small wound is a laceration to the hand. The hand in question is that of a sergeon. Hence once we fix the small wound, the patient is in far better shape to sort out the big wound for him/her-self.
http://www.businessweek.com/ap/financialnews/D9FOIHH80.htm
http://www.irishhealth.com%2Farticle.html%3Fid%3D17320
While we talk, hospitals are reducing services …… Tighten your belts, you have been living too well. Who cares if the poor have to suffer? They are only little people, who do not matter.
Keep those lifeboats for the gentlefolk
“incredibly low relative interest rates”
No Mr Bond, I expect you to DIE!!!!!!!!!
Tut, tut. Relative interest rates have NEVER been larger~! That is why folks are not investing. Negative numbers your weakness at school?
When housing is falling at 1% a month, what is the relative interest rate if rates charged are 3% pa? 15% Doofus!
Celtic Phoneix (sic)
Thinking like that got us into this mess! There are no short cuts to wealth. If you want it, work for it. If you want it, would you borrow? Please reflect and learn from this massive experience.
tull mcadoo
That is when we find out who is sovereign! Clever investors know to avoid a set up. The pumping in the last three years in Ireland was clearly such. I will remind you this is not sovereign debt.
Mr Bond
We still love you, but comments like that do undermine most of your statements on anything economic or mathematical. Sorry!
@ Pat
You’ve taken on a fairly impolite and at many times rude bent of late. Possibly playing well with the other kids was your weakness at school? A little bit of decorum and people may not just assume that your wild-eyed conspiracy-theorising about all kinds of anything & everything undermines absolutely EVERYTHING you say.
Over the course of 2000-2008 were interest rates, both real and nominal, not at historically low levels? Were they not, in real terms, more or less negative in Ireland? With some form of quasi-QE now being used in the Eurozone, will real interest rates not likely be negative in the coming years?
@eoin bond
But saying we cannot impose losses on bondholders because we don’t have the legislation is a very flimsy argument IMO.
The point is we should have that legislation now, because imposing losses in its absence would be difficult.
But when someone such as Kelly suggests we impose losses on bondholders I take it to mean we do everything necessary to allow us to do that first, including introducing the bank resolution scheme
@eoin
“Btw, a question i’ve asked before – in an era with relatively low taxes and incredibly low relative interest rates, as well as far more dual income households than previously, does the “House Price divided by Earnings” ratio still make sense? Shouldn’t we really be using something more like “disposable after-tax household income minus interest payments” as the divisor? For instance, while the ’secondhand house/industrial earnings’ graph in M Kellys article almost quadruples from 1995 to 2006, the ‘affordability index’ that used to do the rounds (think its EBS) only ever really doubled from recollection, and is already back to historic norms/averages.”
The EBS index only showed the mortgage affordability double because the average term was continually pushed out. So while 15 years ago the average first time buyer may have purchased over 20 years the average is probably now over 35 years
Mr Bond
I am wholly chastened by your righteous rebukes so in amends find some stuff on haircuts.
http://boombustblog.com/reggie-middleton/1757/#free%20haircut%20model
By the way, I assume you agree that interest rates are no longer negative? I suggest that you verify that whenever they were negative there followed some interesting times!
Bondholders are legally pari pasu with depositors, so default on bondholders and you must default equally on depositors triggering a massive call on the government guarantee scheme.
Change the law so that the banks can torch bondholders ahead of depositors? That would have to be done retrospectively and then we have no legal basis at all and Ireland inc. would be a pariah in international commerce. Hey, we need international commerce more than anyone. There is no silver bullet to the banking crisis.
@ Tim Morrissey,
[Erase my earlier post if needs be]
@ Tim Morrissey,
I have to agree with that. Also, I thought that Morgan Kelly’s comparison of the Irish housing bubble to that in Arizona and California was very relevant. Given the fact the American housing bubble burst before ours did, and the fact that parts of the United States are looking at 25% default of residential mortgages, I would say there is a lot more to come here in Ireland. Jon Ihle reported something in the Sunday Tribune newspaper, about the project that Karl Deeter is currently involved in. I am sure that a return to a realistic market in the residential sector would be helpful to all. What Morgan Kelly observes about the Dublin market – prices at 17 times average income – was useful to remember. In other words, houses ceased to become something you simply lived in, during the bubble years. Houses became something else entirely. Furthermore, the estate agents in Dublin who sold those ‘articles’, which cost 17 times the average income, had re-invented themselves as something beyond simply auctioneers and estate agents. They probably began to think of themselves as masters of the universe. I can honestly claim to have fallen to the temptation of believing about myself for a period. It has humbling to realise now, that my skills are the least in demand in this new era post 2008. I am not worried about that, but it is important once and a while to look at a newspaper. You see entry level public service jobs advertised at between 30 and 40 thousand euro per year. Clearly, there is a lot of bottom-ing out still to happen in the Irish residential market. We will go back to being a poor country in Ireland for a time, and that seems to be the psychological road block for a lot of people on this island today. BOH.
http://www.tribune.ie/business/news/article/2010/may/16/mortgage-body-mulls-negative-equity-loans/
I think the reference to 25% mortgage default in the US is entirely misleading. In the US you are legally entitled to walk away from a mortgage – why wouldn’t you if you were in negative equity? In Ireland the mortgage is legally enforceable and the property is merely collateral security, a completely different contractual arrangement. Sorry, Morgan, this is one prediction that won’t come to fruition.
@Brian Woods II (there are two of you?) – “this is one prediction that won’t come to fruition”
Yep. Debt slavery for life in Ireland instead.
Chap by the name of Locke, John., made up somethink about Private Property. Very innovative. Something to do with food production and all. Now that we are technologically very advanced ‘barbarians’ we have a new ‘food’, its called Credit. So we make Debt the new private property. Very innovative.
Taddsey bit of a problem. Food stops growing at a specific point. Now debt on the other hand! What did Einstein have to say about Compound Interest?
If your future required income has to increment by 0.0x%, and x has to be greater than growth rate of your debt interest – how in hell are you going to crank up enough income – into the future, given that the Biosphere is scarcely 2 Km thick! Defeats me.
@ BW II,
Thanks for pulling me up on that point, which is indeed a very good one. BOH.
@ BW,
The point you make about barbarians and credit is noteworthy. I made a comment on Liam Delaney’s recent thread on behavioural economics, where I cited the example of human cooperation in order to capture wild game for protein, or later in the 1800s, to supply markets with fuel to light up houses in the dark. There was a deep relationship between the whale fleets operating out of Nantucket (starting point in the voyage of the Pequod in Herman Melvilles classic, Moby Dick), and the emerging American economy post the war of independence. Today we hear about the EU’s problems with bond spreads etc, and we hear expressions used like ‘wolf pack’ and so on. Clearly, there is some basis in what Brian Woods has described about ‘credit’ being the new food. I think the point was expressed several times by Brian Lucey on the panel on the Frontline with Pat Kenny yesterday evening. The fact that Ireland will have to send its Pequod out of harbour very shortly, in search of the great white whale. BOH.
http://www.irisheconomy.ie/index.php/2010/05/14/behavioural-economics-business-and-policy/#comment-51435
@John McHale
I agree that Morgan Kelly is sanguine about our structural fiscal deficit and our relatively low levels of public debt. I think it is right to emphasise our solvency.
“…the idea of a near-term restructuring is not mad if we think a broader sovereign default is ultimately unavoidable. Why put the country through the pain of meeting obligations if our reputation is going to end up shot in any case?”
Assuming this was the choice (and I am not sure that it applies given the remedial action on the public finances), Ttis is quite a decision for a Minister to have to make. Do we go for a defacto default now for fear of having to go through a worse de-facto default in 2-3 years time? Or do we tough it out in the hope that we will be able to get through it without defaulting at all? Option no. 2 might look better to a lawyer whereas option no. 1 might look better to an economist or business man.
However, there are added complications.
(i) Could a de-facto default on the Guarantee insofar as it affects Anglo cause a run on BoI and AIB?
(ii) Could this in turn spark wider financial market contagion in Europe?
(iii) Could it spark sovereign debt contagion?
(iv) Will any of our European neighbours ever speak to us again?
The answers may be – no, no, no, yes. However, the great powers of inertia and fear mean that we will never find out. Instead, we are likely to stick with the EU herd so that whatever happens we will all be in it together to some extent. This is why we joined the EU. However, we have seen how selfish the larger members can be.
In the meantime, we also face the risk of doing everything right and then being subject to sovereign debt contagion in a couple of years time. Would we remove ourselves from such contagion, and from being the source of such contagion, by getting our strike in now?
The solution might be if the EU decides that Anglo must be dealt with as per Morgan Kelly in order to lance one of the EU sovereign debt boils. In that scenario, we could revoke the guarantee insofar as it affects Anglo bondholders and at the same time the EU could announce that it stands ready to help us protect AIB and BoI. This approach would minimise the risks of immediate contagion and of future contagion. It would minimise damage to our international relations and to intra-EU relations generally. Most importantly it could minimise the pain which the people of Ireland will suffer.
Of course, a huge amount of wealth might be destroyed. However, seeing as nobody knows who the bondholders are then perhaps we needn’t worry?
Again, I would say that the above comments are based on Morgan Kelly’s analysis. I note that the Governor of the Central Bank has said our position is not so grim. I also note that Morgan Kelly agrees witht he fiscal adjustment and accordingly any risk of sovereign default must be seriously reduced as compared to the current Greek crisis even if we do end up with Greek levels of debt.
@zhou_enlai
“I note that the Governor of the Central Bank has said our position is not so grim.”
What do you think the reaction would be if the Governor of any Central Bank came out and said their countries position was grim?
@Eoin
“we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes. It’s a bit like saying i want to date Cheryl Cole, without admitting i dont have any of the necessary qualities to do so”
Is it really? The bank guarantee is just a law. So we could pass another law repealing it. Then Lenny gets on the horn to the subbies, petrol cannister and match in hand….
@ Ribbit
the government guarantee is but one issue (and ive always been dubious about the “we can just repeal it” – under EU contract laws, could we just do this with no liability?). We don’t have any legislation dealing with how to restructure a failing bank without having to literally liquidate the corporate entity. I assume you’re not suggesting liquidating AIB and BoI? Remember, Morgan Kelly has gone far beyond just suggesting bond losses at Anglo, he has said we should do it across the entire banking system.
@ Zhou,
I didn’t get around to reading your comment today at all, but thanks for leaving it there – I’ll manage to read it at some stage. Must fly. BOH.
@Zhou
“(i) Could a de-facto default on the Guarantee insofar as it affects Anglo cause a run on BoI and AIB?”
Are you taliking about a run on deposits here zhou? I presume that the guarantee would be left in place for depositors, at least to some degree. Or can the bondholders do a runner also?
@EB
“However, in Kelly’s article above, there is absolutely zero mention that we don’t actually have the legislative or regulatory tools in place to reach his preferred outcomes”
I presume here you are talking about this resolution regime which you guys are pointing out for some time we don’t have.
Is that not what Morgan Kelly means when he refers to:
“…and could be swiftly and permanently cured by a resolution …”
@ Aidan
apologies, we have one very fleeting and vague mention to an as-yet non existant resolution regime, in the very last sentence of a long piece about what went wrong with the Irish banking system and how we should fix it. Quite clearly its the tour-de-force i have not given due credit to.
This isn’t even chicken & egg. Its coming up with a wondferful recipe for a sunday roast chicken and then realising you never even had an egg to begin with. “Oh yeah, that damn resolution thingy, im sure someone’s looking into that…”.
Previously mentioned on here – lots of economic and legally type people need to get together to discuss this further and spell out what should happen…
EB said,
I appears to me, that a considerable weight of project management is required in order to facilitate legislation that comes into play at national level here in Ireland, passed through parliment or government departments etc – which ties up with wider EU and global directives also. What I mean is, during the Ahern years we saw regulators and quangos of all kinds set up with headed paper and websites and so forth, before any legislation was passed to set out parameters for what they would do. You can imagine, to use the building construction analogy, that is like the builders being paid by the hour, and standing around while they wait for the plans of the kitchen extension to arrive to get to doing some real work.
I blogged a while back, a blog entry I called ‘School for Innovation’. If it is the case that to pull down those EU directives, and transform the articles into national statutory instruments, and then furthermore think about the systems required to implement all of that – they clearly, more efficient and creative cross disciplinary cooperation will be necessary. But at the moment, the way it is in universities, we train kids out of third level to sit in their own corner and not transfer knowledge and communication, out of that corner so that other people can get a full picture of what is going on. Fred Brooks wrote a really good book on project management years ago, called ‘The mythical man month’. He has just published a follow up, after many years, which he entitled ‘The Design of Design’. I think I mentioned it amongst the references in my blog entry.
At the moment, the man hours in terms of legal services and economic analysis is costing us a fortune. Which means that many projects which need to happen, and possibly should have happened a long time ago, are simply sitting there. And there is no telling how far the knock-ons from that, in the real economy, extends. I suppose, this is the reason why Fascism gets popular immediately after times of intense economic and social upheaval. If we don’t want to go there, we should think about getting smart instead. BOH.
http://designcomment.blogspot.com/2010/03/school-for-innovators.html
Also,
A good example of where legal binding directives are passed by local government and nothing whatsoever follows up behind that, was the tyre recycling Prime Time investigative episode last night. You know, you had a minister on air, being interviewed, who was learning with interest for the first time, whats actually going on out there.
I worry too about our inate ability as a people in Ireland, to deal with ‘issues’ which are straight in front of our own faces. It possibly takes more effort and creativity to bury the tyres in the ground and avoid detection, than it would to spend the money and create a proper pipeline for recycling. Lets face it, until the green party came along, this sort of issue would not have gained much attention. BOH.
http://www.rte.ie/news/2010/0517/primetimeinvestigates.html
@Eoin
“we have one very fleeting and vague mention to an as-yet non existant resolution regime, in the very last sentence of a long piece about what went wrong with the Irish banking system and how we should fix it. Quite clearly its the tour-de-force i have not given due credit to.”
Quite.
We didn’t have a guarantee until we had one either. Or a nationalised Anglo. You seem to be of the opinion that nothing is necessary unless it already exists?
Resolution regimes are reasonably standard and reasonably well understood. The mechanism by which they are funded, in particular, is fairly common through different states – a tax on assets paid for by the banks.
This may be why nothing is happening. With a resolution cost known (e.g. the 25 bn for Anglo and INBS), the fund would start in deficit to the tune of a large amount and would require a heavier payment schedule from the banks than would otherwise be the case in calmer times.
Our German friends, however, seem unwilling to wait for calmer times. It appears that their parliamentary approval of the Greek bailout will be linked to financial market restrictions and a tax for a resolution fund.
@ YM
you see what Ze Germans have done this evening? Insanity is reining there this evening, wouldnt be going to them for advise…
http://ftalphaville.ft.com/blog/2010/05/18/235081/die-leerverkaufer-sind-kaputt/#comments
@EB
Not sure what is the insanity you are referring to Is it the ban on naked short selling? That seems a sensible enough thing to do. Didn’t we ban normal short selling on the Irish bank stocks – I don’t remember if that ban was actually lifted. That was probably wrong and ill thought out, but allowing naked short selling seems to me to be closer to insanity than banning it?
@ Aidan
repo markets and bond futures will go ballistic tomorrow morning. And who do you think is generally on the other side of a CDS price (or indeed a bond price, a futures price, a repo etc) – a market maker who is constantly taking on naked long and short positions. They wont be able to show two way prices anymore to people looking to genuinely hedge a position. Liquidity will evaporate in the morning and the cost of hedging a position will spike. Lots of foreign investors are gonna decide investing in the Euroland is no longer viable. This is the stupidest decision i’ve seen in quite a while.
http://www.nakedcapitalism.com/2010/05/doj-banks-colluded-with-municipal-advisers-to-rig-bids-on-gics.html
The DoJ in USA allege in “wild-eyed conspiracy-theorising” (from Eoin Bond) conspiracy to cheat a client ……….
http://www.nakedcapitalism.com/2010/05/racial-wealth-gap-quadruples-in-since-mid-1980s.html
Race? Or nations? Why would such a gap happen? Conspiracy is just the masons/Knights way of keeping “riffraff” down in the gutter?
@ EB,
Building on the comment by Brian Woods above, I began to turn it around the other way. I compiled together a blog entry to play around with the concept of credit hunting as like whale hunting in the 19th century. It is not a matter of the ‘whales’ coming to our shores. But rather where our whaling vessels now have to travel further afield, into new oceans which aren’t fished out completely, and spend a lot longer on such voyages, which ever increased gamble and risk. But follow the hunted, the fleet will do, until alternative sources of credit can be found gushing out of the ground. Like the Pennsylvania oil strike in the 1850s signalled the end of the great American whaling era. In other words, we have to learn to generate the credit needed to fuel the economy, here on our own soil, instead of doing it the Nantucket-er way. Bond markets be damned.
On another note, it was interesting how the NTMA bond auction was 3 times oversubscribed yesterday, but at less attractive rates. Maybe those nearby fishing grounds still have something to offer? BOH.
http://designcomment.blogspot.com/2010/05/great-white-whale.html
http://www.voxeu.org/index.php?q=node/5056
Dark Pools. Sounds conspiratorial to me! Perhaps Mr Eoin Bond can comment? Why eschew the exchanges? Why trade in pools? Super hedge funds? Who is trading?
@Eoin
There’s something coming down the line in Germany. The protection is being put in place early. I think it’s the German parliament. It’s going to be a bit sticky about funding the bailout funds; the terms will be stiff. Likewise the financial services tax may be bigger than the markets expect.
Given the scale of the changes, it is something big that is about to happen.
@ All,
For instance, to offer one example of where something ‘comes to you’, rather than having to go hunting for it – the RTE Prime Time team, and many other media outlets, already have the agenda set for their program on Thursday night. It is simply a matter of gathering together ‘a panel’ to try and discuss matters. The media has a constant shoal of suitable prey, which swims in its direction, each day, day in and day out.
But we should not assume, or try to impose that sort of analogy on the way we think about credit hunting. With credit hunting, the skills involved are to flush out the prey from its own native habitat. That is my two pennies worth at least. BOH.
I know this thread has wandered way off topic. On re-reading, it seems to me that Morgan has completlety torn up and dismissed the stress test used by Elderfield and Honohan in calculating the capital requiremnts of AIB and BOI. Is Morgan now downgrading the “Elderfield” stock.
At the very least, there could be a table setting out the reasons for doing so.
@ Tull,
Good question, and very worthy of some thought. BOH.