The Very Bad Luck of the Irish / Irish Miracle – or Mirage?

A downbeat assessment to be sure. There are 6 ways out this hole in which we find ourselves:

1.Fiscal pain – increase existing taxes and/or reduce existing government expenditure. This is more or less in the government’s control, though the EU is firmly positioning itself in having a greater say in our affairs.
2.Increase GDP. Sadly this is not within any government’s control – they can control a reduction in GDP but they can’t control an increase which will in any event be partly determined by international factors. They can try to influence a recovery in GDP (eg credit initiatives and regulatory reform)
3.Reduce interest charged on government debt (make ourselves look less risky and more attractive as a borrower). By behaving in a fiscally responsible manner, the government can seek to influence rates positively but again many factors will be outside its control and may be international in character.
4.Issue new money (we gave that up with membership of the euro – we’re now one of 16 voices, and a pipsqueak compared to France and Germany). The government can seek to influence but we’re a small fish in a big pond. Ultimately the constitution of the ECB and the Growth and Stability pact will work against any monetizing of debt that would have an inflationary impact.
5.Default. The government can certainly do that, but in the short term there would be a crash in GDP – despite others being fans of Argentina’s default in 2002, it is the case that Argentina is only now getting back to its 1998 GDP and it saw massive social upheaval where poverty rates were over 80% and to this day Argentina has issues with obtaining credit.
6.Bailout (free money! Brilliant! Except we could wave goodbye to our borrowing ability and the interest on our borrowings would rocket). The government can ask but there’s no guarantee the IMF or ECB will say yes. We would also need to have far more protesters making faces at the four or five Gardai on the gates of Leinster House.

Withdrawal from the euro would enable us to control money supply and interest rates. What would happen though to our euros in our bank accounts? Who would want to exchange them for punt nuas (or whatever we may call them)? A new currency not widely accepted with a strong risk of depreciation against foreign currencies. Our inflation would rocket for imported goods (petrol for consumers and raw materials for pharmaceuticals for example), pensioners would see their savings wiped out, our international reputation would take a beating and where would that leave us with the existing MNCs and potential MNCs?

Default would mean we’d have to instantaneously balance the books because no-one would lend us the money to cover the deficit and we wouldn’t have access to international capital markets for some time.

The only real solution is fiscal pain. And the only question is how the burden is shared in a way that is timely, efficient and fair and just as importantly doesn’t stifle growth. Deep down we all know that we have to balance our books, our income has to equal expenditure. Also, our borrowing costs are nowhere near Greece’s and we’re some ways off Portugal and Spain so there’s something to the government argument that we’re being viewed favourably internationally (though it’s certainly not as rosy as the government would have us believe).

I don’t agree with a lot this government does, in particular I wonder how much political and reputational considerations impact upon our dealings with the banks, but I do support the broad direction of fiscal tightening and behaving responsibly together with initiatives to stimulate GDP.

I don’t understand why we should be disregarding the profits of foreign ccompanies when they employ so many people in this country. The GDP/GNP debate is far from clear.

Jagdip Singh

It is inaccurate to say that outside of the euro we could set our own interest rates. Lenders are not stupid, at least outside of Ireland. They will expect the currency to drop like a stone if the rates are not twice those of the EZ. Therefore they will not lend. Until the rates are far higher than now.

After all, what about Ireland inspires confidence? Leadership? Prospects? Better performance than other competing borrowers?

The article is plain and the truth hurts. Ireland must raise taxes and the sooner the better. Everyone will be working as hard as they can as they know what is around the corner. Leave it a few more years and those with peak earning capacity will have analyzed the Japan mess and applied it to Europe. They will have moved and their capital and future with them.

Others will game the system. Corruption does not ever stop of its own accord! Semi-states making money for their managers. The rot marches on and will spread. This is the issue. How can anyone trust Greece? By supervising everything they do.

Ireland is already on the lintel, with a lot of momentum. What can keep us from entering the sin bin? Interest rates depend upon perception of lenders. Every such article reduces Ireland’s attractiveness for investment. We need SPEED! More Taxes now, less taxes in future!

@Pat

I was referring to domestic interest rates which our Central Bank would presumably set if we took back our currency. Rates on international borrowings would presumably reflect currency risk (I would have said high) or the interest rates of lenders if denominated in the lenders’ currency.

Intelligent fiscal pain = raising taxes and reducing expenditure in a way that is

(a) timely – ie we do it now and not hang around like the PIGS
(b) efficient – consideration of Laffer curve, collection costs, avoidance and evasion
(c) fair – means different things to different people, capacity to pay, progressiveness, competitiveness for example come into play

The trick is fiscally tighten without stifling growth (too much) and that needs fairy dust.

@jadip singh – ‘Also, our borrowing costs are nowhere near Greece’s and we’re some ways off Portugal and Spain’

In common with much commentary over recent weeks the blithe, complacent belief that we’ve somehow broken free from Spain and Portugal in the perception of the Sovereign Debt markets ignores the facts!

Irish 10-Year: 4.6% ; 5-Year: 3.6%
Spanish 10-Year: 4% ; 5-Year: 2.9%
Portugese 10-Year: 4.6% ; 5-Year: 3.5%

I should add that these tenants who don’t work for MNC are less likely to work at all since the MNC supports the dysfunctionality in policy (via its presence in IBEC – please don’t dare to challenge this…. IBEC supported benchmarking QED.) that ensures small business costs are too high. So MNC and others function in the Irish economy like resource companies in the third world.

@ John

its impressive that you were able to find an Irish 5yr cost of funding, given that we dont actually have a 5yr bond outstanding!! (deliberately left open so the banks can issue govt g’teed into that space).

Irish 6-Year: 3.642% ; 2-Year: 1.815%
Spanish 6-Year: 3.1826% ; 2-Year: 2.029%
Portugese 6-Year: 3.874% ; 2-Year: 2.461%

So we’re just under Portugal, and a bit over Spain. A lot of volatility though at the moment with the ECB buying…

@ MH-FF: “… … they are no substitute for a strategy that recognises that the first step is to begin with a serious reality check.”

A reality check? Now what would that be? Anyone who seriously thinks that our current legislators are capable of such behaviour – needs a reality check themselves!

I expect a very nasty economic/financial shock sometime. This may, just may, give rise to some reflective behaviour. Though my money would be on a disasterous attempt to ‘restore’ the business-as-usual model. We’ll see.

Want to do something positive? Stop polluting our freshwater supplies. Its a priceless resource – and we should have plenty to spare if we would only mind our ways.

B Peter

@zhou
“I don’t understand why we should be disregarding the profits of foreign ccompanies when they employ so many people in this country. The GDP/GNP debate is far from clear.”
The salaries are included in GNP. The profits, taxed at 12.5%, are in GDP, i.e. they are the difference between the company transferred in cost (MNC (to use a random example) pays x mn for for the components of wonderdrug) and the transferred out cost (MNC charges y mn for the wonderdrug tablets). Both transferred in and transferred out costs are intra-company – so it is, for example, MNC US –> MNC Ireland –> MNC UK –> customer.

So the benefit to Ireland is twofold – one in terms of corporation tax on the profit, two on the salaries. Both count as GNP as they stay in the country. The remaining profit is exported, so the 77.5% that counts in GDP is without ‘use’ to the Irish economy.

Some companies, like the pharma ones, add value while they are here. Others add little more than a bit of corporation tax and a few legal and accounting fees. The usage of GNP in the Boone & Johnson piece is, I fear, entirely accurate.

I do think they underestimate the cost of leaving the euro. As we have noted on here before, it is likely that you can only leave to a better currency; you cannot go to something that is likely to be devalued.

A missing link in the chain of ‘how-to-get-out’ reasoning, though, is the introduction of government scrip to pay public service salaries. Supposing you could go to California IOU levels and introduce a national currency that was used to pay public salaries and taxes. It would, effectively, be a second, national only currency. Would it be possible to also limit certain commercial transactions to this currency? The payment of bills to the state (tax, hospital charges, etc.), residential property transactions? Could it have a second interest rate?

Given that any attempt to leave the euro is likely to result in a dual currency system arising, it surely makes sense to look at what a dual currency system would involve? There are plenty of examples of it, the Turkish lira was for a time subordinate to the USD for ‘big’ or ‘international’ transactions, as was the Korean Won or the Indian rupee (for example, there was separate foreign currency flight availability with foreign currency tickets preferred to rupee tickets).

@Yoganmahew –

you cannot go to something that is likely to be devalued.

That can’t be true. Dollarisation can only occur if you can get Dollars (or Euros), and the only way to get them is to export to a hard currency area (our path to recovery).

The Deutsche Mark was born in a Germany where the existing currency could not purchase imports (the Reichsmark). Germans had every incentive to use Dollars, but the D-Mark succeeded in the end, becoming one of the soundest countries in the world and, in the process, the Germans one of the best exporters.

Not the best article, to be honest. Ignores the sequences of unemployment and government austerity, Ireland’s trade performance over the past three years and the obvious fact that 2/3s of Irish workers don’t pay enough income tax. Let alone the even more obvious fact that Google, IBM and Microsoft, for example, each employ thousands of people in Ireland, which suggests something a little more than tax avoidance

Seems more like an article that knew its conclusion – “Forget Greece, Ireland is an example of why the eurozone won’t work” – than a well-thought out piece of research.

(On reflection, I appear to be agreeing with Ronan eile.)

Yoganmahew
An excellent explanation. There are unaccountable spinoffs also, some of which are +ve and some -ve. Loss of personnel to overseas etc.

Ronan Burke
Correct, but alarmism is very appropriate, don’t you think? The article is written by strangers and presents the situation from their point of view. FDI is vital and as I have said before, it is going to be very helpful in the eventual recovery. But that recovery is being delayed by NAMA, Land policy as a whole and by a doctrinaire refusal to raise taxes. But that is inevitable while the current leadership holds sway. How much longer do you want this to go on? There are more losses and there will be more, until all the false capital, created by shadow banking, derivatives that amount to naked credit fuelled bets, etc is destropyed. Destroyed, I tells ya! All investments will be therefore reduced in value, but the greatest losses will be in fiat currency. As most paper investments are measured in such currencies, the losses are going to dwarf those already suffered. Then the recovery can begin.

The warfare is simply competition between those who know this and who want to save/make the most capital. Everyone else is just collateral damage. Over-production has occurred and that includes infrastructure. We have done this by borrowing from our own future. There is therefore a reduction of capital in that future. We are now living in the future of 2007. Sadly we are still living beyond our means.

Remember the end of Weimar? Wheel barrows worth more than the contents in marks? When shoppers had to buy essential items first as by the end of their shopping, the prices had risen so that they could no longer afford those? This sort of inflation has recurred but only in badly run economies. The west will avoid this, but the investment in tools and useful articles may be better than in gold ETFs or anything that depends upon the solvency of any other party. No one can be assumed to be solvent. Buying white goods? Remember that as the vendor goes into examinership or liquidation, then the item even though yours, becomes their asset to be shared out in the settlement of all debts ……

Things will get that bad in some countries. Now explain why it cannot happen in Ireland?

Recovery in industries means concentration in Ireland on fresh water, land policy and food production. Look carefully at the Dutch. The great thing about humility is that it encourages effort!

@Mack
“That can’t be true. ”
The D-mark succeeded because it was better than the Reichmark, not because it was better than the dollar. We could not immediately go to a punt nua from the euro, as the punt nua would be weaker than the euro and the reason for us going would be to devalue. Who is going to say yes to converting to punt nua in those circumstances?

@Yoganmahew –

The D-mark succeeded because it was better than the Reichmark, not because it was better than the dollar

The Reichsmark was worthless, so traders, businessmen would have wanted Dollars so they could purchase imports – that’s what the D-Mark was competing against. It was the equivalent of launching a new currency into an environment were citizens provided a hard currency. I’m sure it took time to build up trust & a reputation etc. But they succeeded over the long term. And learnt a few valuable lessons too, I’m sure.

Who is going to say yes to converting to punt nua in those circumstances?

Irish citizens with huge debts for a start, long term unemployed with no prospect of a job for a second.

I presume you’d convert all debts internal and external into the new currency (if that’s legal) – a default for sure, but markets are forward looking. After that, if you want Euros you would have to earn them, by trade.

The public sector would be paid in Punt nua – if businesses and citizens insisted on being paid in Euros internally – we’d have to export a lot more to make up the short fall from reduced government borrowing. You might not want to be paid in Punt Nua, you just might not have a choice.

I imagine life would be pretty tough for a while, imports would become expensive (but citizens debts might be eroded significantly). Our exporters should become ultra-competitive with a weak currency.

As long as we learn our lesson – and we should be learning a new one at the same time about the value of having a sound currency – we might be able to run a hard currency sometime again in the future.

I’m not suggesting this wouldn’t be incredibly painful – some projections for our future are pretty bleak (this article, Morgan Kelly, David McWilliams etc.) Can we tolerate persistent long term unemployment, emigration, endless years of austerity, if we don’t return to growth?

I’m not in favour of leaving the Euro by the way, the idea that it can’t be done is wrong (perhaps you guys mean it can’t be done painlessly – in which case I agree). Also, some of those screaming the loudest about the strictures the Euro imposes may actually stand to lose the most, should we leave.

@Jagdip Singh – “So any national contingency plan that is developed beyond a rant?”

Your comments are too intelligent to suggest that you are a betting man…. but if you were a betting man…. what do you think the factual answer would be to this question? For me, it would be ‘no’ but that’s just a guess.

Perhaps we should move to the US$. Or even the UK£. It would save a lot of printing as they all seem to be printing plenty of it.

@ Ronan.

The fact that enterprise that account for c. 20% of total output, “employe thousands of people” in Ireland – we are talking c. 2% of total employment, is highly indicative of simple tax haven flows.

Add to that the fact that these industries typically have little interaction with the wider Irish economy, if the Input/Output Accounts are to believed.

@ Jagdip Singh

“Does anyone know if there is a State-developed contingency plan for implementing a new currency?”

Our record in national project management is very poor and planning for a state of emergency would unlikely happen before Doomsday.

@ all

Without the MNC sector, the economy would likely be comparable with Albania.

There is a tax haven aspect such as Microsoft’s two massive money processing machines which operate from the offices of Matheson Ormsby Prentice.

The big concern is that employment in IDA-supported companies is back to 1998 levels and was almost unchanged during the bubble.

On a reality check, policymakers conflate the MNC sector with the native one and brag about “Irish” exports for example when the native
performance has been so poor.

Ten years ago, Ireland used be in the top ranks of countries for a range of factors broadly termed “competitiveness”

In the latest IMD scorecard, Ireland is down to 21 and Malaysia is at 10 with its island neighbour Singapore at No. 1.

As regards Ireland’s prospects, as in some other countries, there is a state of denial regarding a reality that living standards were elevated on the back of asset and credit bubbles.

So rather than implementing serious reforms, we’re aching for painless panaceas like a new currency; debt restructuring and more foreign aid.

There is going to be no manna from heaven but it’s depressing when an aspiring Taoiseach thinks a new Constitution is what should matter.

http://www.finfacts.ie/irishfinancenews/article_1019736.shtml

@ the two Ronans: I broadly agree with your assessment of the Boone and Johnson article. Some of my appraisal is below.

Boone and Johnson: “The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money.”

I always wince when this idea is rolled out: it’s obvious that there is
a net saving when one considers the subtraction of one individual’s
income tax contribution from one individual’s reduced (gross) public
sector wage. It’s better for the government to collect 50% of 70,000e
(which is 35,000e) rather than 50% of 90,000e (which is 45,000e)
because though the Govt. forgoes 10,000e in tax revenue, it saves
20,000e in current spending.

(A related mantra, though not rolled out in Boone and Johnson, is that
the Exchequer can suffer from fiscal austerity due to the lost
multiplier effect of foregone expenditure. I have three words for
anyone who carries that torch:

“Paradox of Thrift”: http://en.wikipedia.org/wiki/Paradox_of_thrift

This idea was popularised by the same man who popularised the idea of
the multiplier effect: one Lord Maynard Keynes. IMO, it’s better to
avoid a debt-trap spiral rather than hope that individual actors will
spend their money in a fashion that would bolster “domestic”
*emphasise domestic* demand).

Boone and Johnson: “Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity.”

I do agree with this statement. The tax base badly needs to be expanded.

Boone and Johnson “Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before now declining ever more rapidly.”

I agree with the thrust of the above, but only for Ireland after 2002. The Irish Economy pre-2002 and post-2002 are two very different beasts. In his recent Vox-EU piece (Whatever
Happened to Ireland: http://www.voxeu.org/index.php?q=node/5040),
Morgan Kelly elaborates on the “Two Booms”: “Prior to 2002, there was rising employment associated with increased competitiveness and a quadrupling of real exports. Ireland converged to average levels of
western European income”; and this was a positive development.

Figure 2 in Morgan’s article aptly illustrates the madness of the property
boom. Also characteristic of the “Second Boom” is the pro-cyclical
fiscal policy of the Govt. between 02 and 07. And it was not just
pro-cyclical fiscal policy, there was a charade (which Morgan
mentions) based on simultaneously reducing rates of taxation (and relying on property-related taxes) while expanding the public service to an unprecedented level.

It is quite telling to compare the famous Honohan and Walsh (2002) Brookings paper (Catching Up With the Leaders: http://homepage.eircom.net/~phonohan/Brookings.pdf) to Honohan’s new World Bank paper: “What Went Wrong in Ireland”(http://homepage.eircom.net/~phonohan/What%20went%20wrong.pdf): “Irish policymakers neglected the basics of public finance, wage policy and bank regulation.”

Boone and Johnson “Finally, the Irish need to consider seriously whether being in the euro zone is worth the cost.” IMO, it was a shame Ireland broke the link with sterling in 1979. McWilliams constantly suggests that Ireland should leave the euro
(see him give an entertaining talk here @ Google-Dublin:
http://www.youtube.com/watch?v=ZYeFXOpHY4Q) but such rhetoric seems incredibly naive for a commentator who has worked in a central bank and an investment bank. Surely he must realise that a new Irish currency would not last two seconds in current market conditions (despite Germany’s recent unilateral efforts in financial market regulation). McWilliams should peddle a more realistic line of us re-creating the link with sterling (but of course, that may not be a headline that grabs enough attention).

It should be noted that there was some good news for Ireland this week; the Swiss-based Institute for Management Development (IMD) yesterday released its yearly world competitiveness rankings. “It singles out Greece, Portugal and Spain for having a credibility problem based on the fact that
their debts are high while their ability to repay them, based on
growth rates, current account balances and investments, are
inadequate. However, the IMD does not include Ireland in this category
and includes it with other sinners which have less of a credibility
problem but whose debts will limit competitiveness and citizens’
purchasing power.” The story is here:
http://www.irishtimes.com/newspaper/finance/2010/0520/1224270711775.html

It’s heartening to see a distinction being made between Ireland and
Greece/Portugal/Spain! Especially in the week that Obama advisor Paul Volcker says that States should take a leaf out of Ireland’s book: http://www.irishtimes.com/newspaper/finance/2010/0520/1224270711189.html

We’ve already had senior officials from the UK Treasury visiting Dublin…

On a separate note to the Boone and Johnson article, I was just reading a quote from David Begg in an FT article (http://www.ft.com/cms/s/2/67ae51e2-5e35-11df-8153-00144feab49a.html) by David Gardner from last weekend (the article is another review of the Irish situation, which provides somewhat of a link). The following is an excerpt from the Gardner article, including the quote from Begg:

BEGINS – David Begg, general secretary of the Irish Congress of Trade Unions (ICTU), says they lost the battle to stretch out fiscal consolidation to ease pressure on wages and maintain some demand. “We said 2017 was the right time to get [the budget deficit back] to 3 per cent but they said 2013. The compromise was 2014. But that could cast us into a Japan-style debt deflation for a decade.” – ENDS

I can’t make sense of this at all, though maybe I am missing out on some of the context. The reason why McWilliams is talking about the euro is that we don’t have the option of devaluation. If we had the option to print money, we could devalue. However, this is not possible and the mainstream academic consensus is to pursue “internal devaluation”. The rationale is that this will go some way to redress the loss of competitiveness post-2002. Does Begg’s vision for “stretching out fiscal consolidation” give any consideration to the imperative for a competitiveness improvement?

Furthermore, does Begg have any concern that without a wider tax base (which will take some years to achieve) we would amass debt simply to pay for current expenditure. If we pursue his vision of “pushing out to 2017”, we would in all likelihood end up borrowing funds to finance our debt-service.

Also, Japan keeps getting wheeled out as some spectre of doom (by Begg and some others). Japanese banks in the 1980’s behaved much like Irish banks in the 2000’s (financing a massive property bubble which lasted from 1986 to 1991). However, the difference in Japan was that there was a massive (negative) impact on bank lending (which exacerbated deflation). The BIS call this a “negative financial accelerator”: http://www.bis.org/publ/work188.pdf

The scenario in Ireland is different: the Govt. has helped Irish banks in relation to their bad loans (not necessarily in the fairest way re taxpayers) with the intention of getting lending back to normal. The aspiration to get lending back to normal is at least one thing to be pleased about; and this is one reason why Ireland should not be heading for a debt-deflation cycle similar to Japan.

Furthermore, a debt-deflation trap can only occur if growth does not resume to pay off the outstanding debt. Ireland’s experience post-1987 is testament to the fact that growth can resume after a bout of fiscal austerity.

It is not rocket science to appreciate that when one has a bubble in asset-prices, real-economy prices (including the cost of labour) will also froth up: in order to facilitate the purchase of assets at “bubble-prices”. Any sensible commentaor would have recommended (over the course of the crisis) that real-economy prices should move away from “bubble-levels”.

For Begg to wheel out the spectre of Japan is either ill-conceived or irresponsible, IMO. He poses the risk of consigning Ireland to a lost decade: not one characterised by debt-deflation, but one characterised by a debt-cycle (of borrowing to service debt obligations) and low levels of competitiveness.

‘Death Penalty’ Needed for Euro Laggards, Slovak Finance Minister Says NSN L2RPIN1A74E9 for anyone with a Bloomberg. A sign of what some of the ministers at Ecofin now might be saying over lunch.
I don’t think this view however will get much support. The European approach so far has been to want to save and preserve all. Welfare has barely been touched, savers are secure and only one bank of any significance so far has been allowed fail in Europe so far. Idem in Ireland in Ireland in protecting its entire domestic banking sector, when it is long past time to think about jettisoning dead weight before the whole boat is pulled down.
This particular story also reflects a more general reluctance of some of the smaller states to extend fiscal transfers to spendthrift states
e.g. “Slovak government backs premier’s reluctance on Greek bailout”
http://www.aolnews.com/topic/slovakia/1273113477427660/?topicid=3028446483

A cursory examination of Irish political and economic history since independence highlights, more than anything else, the flipping from one orthodoxy to the next. We have no tradition of pluralism which, in my view, largely explains how we managed to build up, proportionally, the largest asset bubble/GDP the world has ever seen. There simply wasn’t a strong enough ‘other voice’ in the room.

Now the latest orthodoxy is Fiscal Austerity, and perhaps that is the only answer. However I have yet to read a serious economic proposal on the impact of leaving the Euro, which is an option. And even if there is a convergence that fiscal pain is the only game in town it should not mean that we merely apply this and nothing else.

For instance much of the contraction has been a collapse in domestic demand but at the same time our household savings rate has gone from 1.6% per bust to about 12% now. The scrappage scheme seems to have stimulated the car industry, why not try in conjunction with a reduction in state expenditure, other bigger programs to get people to spend their savings. Stimulate confidence.

Perhaps income tax cuts now need to be applied, what about infrastructure development funded by 50 year bonds to employ the hundreds of thousands of unemployed construction workers, as a matter of urgency a property register needs to be introduced that would bring clarity to that market.

We need to separate in our own minds the reduction in currently public expenditure with capital investment. Perhaps the wages bill is too large, it doesn’t mean that the Govt should undertake a this ridiclous experiment to see if we can deflate our way out of recession. Because we can’t.

In the Irish TImes today apparently Brian Cowen denied that there was a euro crisis. Maybe he knows something the rest of the world of doesn’t. Or else maybe he is trying his minister of Finance approach, put the ear-muffs on, don’t look at the news and never ever read newspapers or god forbid the web.

Non-partisan Economist

An oxymoron of some impact! Like it!

“Also, Japan keeps getting wheeled out as some spectre of doom ”

http://www.independent.ie/business/irish/get-real-and-take-losses-elderfield-tells-banks-2188453.html

So you have no confidence in Matthew Elderfield? I do.

http://www.independent.ie%2Fbusiness%2Firish%2Fnew-mortgage-lending-at-lowest-level-in-a-decade-2188452.html

Yes, Nama is a success! All that money was a wise(acre) investment and I and many others were wrong to oppose it.

Not.

What about that, all you who said NAMA was going to save us?

@Jagdip Singh
I don’t know what the economic cost of cutting Anglo loose would be and I don’t think we will ever know. As for the cost of smearing it over a number of years as against a instant liquidation again I don’t know.

One argument for taking all costs at the moment is that spreading over the years you will have a whole army of legal and accountancy people pouring over this paper for years to come reducing the efficiency of the country as a whole.

I am not suggesting leaving the euro is a good idea, I am just saying it is result that will probably be forced on us because of the choices we made.

When and if we leave the euro or we default an immediate fiscal adjustment will be forced on us which will probably include a halving of the number of civil servants, halving of pensions etc.

The point I am trying to make is whatever the detail of the Anglo/INBS deal we can’t make it – We are not strong enough as a country to make that choice – Just as the Crock Park deal – The government is hostage to fortune.

If the Greeks said tomorrow that they going to spend €10bn going to the moon, and justified it as an economic stimulus or a saviour of the economy and they went to bank machine – The ECB and the international bond holders they wouldn’t get the cash.

@Cearbhall
We need a job stimulus package much, much more than any Anglo stimulus.

If all government debt is owed to people or organisations within the country than the government just acts to redistribute wealth from people with cash to people who don’t. They can adjust the “tax”rate by changing the interest rate they charge themselves.

Krugmans argument is very strong when the economy is competitive internationally. Why “stimulate” Irish people to build color televisions when the poles, with much cheaper wages, electricity and transport costs means they can do it cheaper. Besides a lot of these “stimulus” packages could be against competition law.

If Government debt is largely external and they have no control over interest rates or currency then the debt effectively acts as current or future “tax” (depending on whether they can role over and increase the debt) with the interest liquidity being moved from the economy every year.

The problem with the current Irish debt, private and Government, is that is large and in particular Government is growing every year. They are depending on the international bond markets, that we all love to hate, to give them their shot in the arm every month. The problem when you try to regulate these bond markets the very liquidity that they depend on will be withdrawn from the market.

Apologies but I’m going off topic again here:

Devaluation talk…..

I have to say that my biggest problem with devaluation is the unfairness in all being exposed to reduced purchasing power. There are people who never got the boom salaries and have always (meaning: are still) on internationally competitive salaries but for some reason they need to show solidarity and accept a devaluation. A devaluation would reduce their economically justifiable purchasing power & why is that considered a good thing?

Devaluation brings currently internationally overpaid people into a competitive salary while still allowing them to keep their relative wealth compared to their lower paid friends, neighbours, colleagues.

I can see the attraction for people in positions where it is no longer possible to justify their relative wealth on economic terms. I’m not so sure if others are that interested.

I don’t understand why a person working in a profitable company in Greece should have to suffer the same loss in international purchasing power as an overpaid person in an unprofitable company. There are those who argue for a devaluation, so there surely must be some more reasons for devaluation. Could any of those arguing for a devaluation enlighten me about those reasons?

@ Killian Forde

Perhaps income tax cuts now need to be applied…

So are you proposing that in an unreformed system with a significant waste of public funds, there should be more spending on a short-term stimulus?

There was no increase in employment in the tradable goods and services sector in the past decade while since 1998, the workforce has expanded by 400K and unemployment by 200K.

After the bursting of the property bubble, how can domestic demand support this?

Many of the costs in the economy are still at bubble level and yesterday in the High Court the Quinn Ins administrators requested that its PR firm Hume Brophy be paid €50,000 for work between March 30th and April 30th.

I don’t know how many press releases were issued and press queries taken but it still seems ridiculous. Why are Irish law firms among the biggest earners in Europe?

The cliché about putting lipstick on a pig is apt.

The Irish are very conservative and there is not a big constituency for reform.

@ Jesper

Devaluation can seem like a panacea for spoofers and there is seldom a differentiation between commodity and finished goods exporters.

The UK is not getting a big trade benefit from the fall in the pound and its inflation rate is rising.

The majority of Iceland’s goods exports are fishery related and it can get a short-term benefit from a drop in the currency; in Ireland’s case, the majority of its goods exports are pharma/medical devices and the import content is big. So devaluation, provides no magic wand.

With commodities, a country can sell into world markets; with finished goods, it takes years to develop new markets.

Greece devalued twice in the 1980s without any long-term benefit because the same facts that ked to the devaluations, continued.

Those who propose exiting the euro (while ignoring the resultant mayhem) are playing to the public gallery, suggesting that a Santa Claus solution is available with no impact on existing benefits, salaries.

The minority of private sector workers who are lucky to have a pension would be the biggest losers while public service insiders would not be impacted by the plunge in value of pension funds.

Eat your heart out Ireland.

They are beginning to open the taps in the States.
Bloomberg describes a woman with $5,000 of debt on her credit card, who still owed $8,300 for a past auto loan. She just received $15,500 to buy a new car.
http://www.businessinsider.com/subprime-lenders-already-slashing-standards-to-pump-auto-sales-2010-5
.
Let the good times roll.
Anyone heading for Shannon, lifes’ too short for all this fiscal austerity stuff.

@Jesper

Would that all-knowing market that determines whose salaries are too high (internationally!) and whose are not be the same all-knowing market that decided that Ireland should spend 20 years of national wealth building hundreds of thousands of homes that will remain empty until they are demolished?

Just askin’….

“I don’t have the numbers because the government refuses to publish them”

When someone refuses to release numbers, it gives rise to a suspicion that cold hard facts would undermine their case. If you have nothing to hide, then why not release the numbers.

“but isn’t the rationale that Anglo/INBS being let fail would have a contagion effect on other banks, and therefore lending and basic banking functions, and would harm our international reputation and increase sovereign borrowing costs? These would be the indirect costs.”

Apart from what i said above, this is just argument by assertion. Everyone has an opinion and mine is contrary to yours and unless we put facts on the table there is no way to distinguish them. Do you have any facts to back up your case? Any past instances where the failure of a private entity and a government not taking over private debt resulted in a loss of sovereign credit rating?

@ Pat Donnelly: No oxymoron intended. And plenty of confidence in Matthew Elderfield.

@ Mick Costigan: I don’t think that we are doomed to enter debt deflation. But there is more that we could do to ward off the threat.

I see that Paul Krugman is running with the idea in yesterday’s NYT that the U.S. (insert Ireland if you want) could be turning Japanese. I take no pleasure in saying it, but is he just trying to fly a kite in relation to his “ideal” of more stimulus?

http://www.nytimes.com/2010/05/21/opinion/21krugman.html?src=me&ref=homepage

Japanese banks in the 1980’s behaved much like U.S. banks in the 2000’s (financing a massive property bubble which lasted from 1986 to 1991). However, the difference in Japan was that there was a massive (negative) impact on bank lending (which exacerbated deflation). The BIS call this a “negative financial accelerator”.

The U.S. have been actively addressing the issue of distressed loans in their financial institutions; this is very different to what happened in Japan. While there is no guarantee that lending will recover, I strongly suggest that any further borrowing (by the U.S. or Ireland) should only be for the purpose of lending to consumers, entrepreneurs and existing businesses. A new national bank could be set up if that’s what’s needed: with a direct mandate to lend (but to lend responsibly!).

Let’s not waste any money that we borrow; let’s make the most of it by stimulating enterprise and warding off deflation. A new national bank is not such a cray idea. For one thing, it will introduce more competition, and it may induce the private banks to return to lending sooner than they would have otherwise. Plus, we used to have state-owned lending corporations in Ireland. Does anyone remember the “Industrial Credit Corporation”? It was set up in 1933 by Sean Lemass to encourage investment in industry. We also had an Agricultural Credit Corporation.

It is the banks (or a new state-owned bank) that can ward off deflation; not more stimulus. (Need I mention leakage, the paradox of thrift, deadweight loss or displacement?). Matthew Elderfield, the new Financial Regulator, today said that the banks needed to “face up to reality” and take their losses on property loans now to avoid dragging the economy into a lost decade like Japan. It’s lending that matters: lending can be directed much more easily towards viable business ideas. Unlike stimulus.

http://www.independent.ie/business/irish/get-real-and-take-losses-elderfield-tells-banks-2188453.html

I can only hope that Krugman will consider state-owned lending corporations before he warns us again about “turning Japanese”.

@All
One has to admire Brian Lenihan’s skill in keeping the ship off the rocks thus far. However we are now closing in on the reefs and the storm shows no sign of abating. The Croke Park deal will probably pass. Social partnership and with it both left and right wings of the establishment may thus be restored to office but they will be only a shadow of their former selves. They will be like a discredited monarch who regains the throne but is only kept there as a puppet by force of foreign arms (specifically the threat of the untender arms of the IMF). The current government may stumble on until 2012 when a new one will take over a dreadfully wounded, cynical and bitter country. In the mean time our fates will be decided behind closed doors by the very people who caused the catastrophe. Surely Ireland can do better?

It strikes me that what we need is a conference of politicians, policy experts, business, trade union and community leaders to discuss all these issues openly (and some if necessary secretly). This should be followed by the setting up of a panel from the above to then chart a way out of this mess. A change of government or a national government are also essential. An immediate and permanent infusion of expertise into the civil service and the setting up of a permanent Council of Economic Advisors (or ISBO) must also take place. Basically we need to go onto a war footing, not in order to implement draconian measures but to do what is necessary and pronto.

Ed Harrison continues to hit the nail on the head:

http://www.creditwritedowns.com/2010/05/the-mindset-will-not-changea-depressionary-relapse-may-be-coming-european-version.html

@All
From Niamh Connolly’s report in the SBP:
“A record 41 deputies and senators crowded into an Oireachtas committee on the environment last week to hear dog breeding and animal welfare groups discuss the bill.

All parties agreed that the attendance was far in excess of the turnout to discuss the banking crisis or the National Asset Management Agency (Nama). The meeting was stormy, with several Fianna Fáil TDs rounding on Green Party chief whip Trevor Sargent over the bill’s provisions.”

@ Oliver

I agree with your suggestion for a conference. I have argued on this blog before, as has Pat Hunt and others, for a similar forum, potentially building on the experience of the New Ireland Forum in 1983. With today’s technology, the opportunity for far wider participation is possible.

If there are any benevolent billionaires (unconnected with property and banking) reading this who’d like to fund it, let us know

@ Michael Hennigan,

As to fiscal adjustment, we still have bubble salary, housing prices, public pensions and professional fee levels.

Who really expects the Croke Park agreement to have a significant impact?
Consider the inertia in restructuring the 800 quangos despite the red ink of €400m per week.

As for a jobs strategy, most of those who have an input to what could charitably be termed a ’strategy’, have never worked or lived abroad and don’t have a clue about the challenges in developing export markets.

Well said Michael. A lot of truth in what you have spoken above.

@ All,

Excellent discussion people. Only having a skip down through the comments now. Well done all. BOH.

@ Tim Morrissey,

I may be wrong but I believe the Eirgrid East West Interconnector €600m price is an example of this, and they are overseeing a multi-billion budget in network upgrades over the coming years. They may do a good job on spending this money wisely but I would like to see independent oversight of this.

My instinct, based on my own experience Tim, is that the private sector construction industry in Ireland was diabolical at management of large capital investment programs and such. The public sector is rarely caught out badly on that side of it. Namely because the public sector can afford to put in the ‘brakes’ in the design and consultation process – which the private sector doesn’t have the luxury of doing – because the bankers are always clipping at the heels of the private sector companies.

The net result I feel, is that the public sector jobs, due to their lethargy in doing projects on a day-to-day, turn over basis, lack sufficient skills in screwing down prices in smaller components of the project. That is, a private sector company turning over a lot of work gets wise to how to manage small items of the budget. So we have this perception, which is justified, that on public sector projects you can get away with a lot of over pricing. On the other hand, the public sector projects rarely get the overall strategy wrong. You don’t see tonnes of ghost estates, empty hotels and half completely office blocks built by the public sector. The private sector has been guilty of getting the big picture very wrong in terms of financial management. As I suggested, as a result perhaps of an under-developed private sector in Ireland coming under too much pressure to perform by the lending institutions.

The lending institutions could never put that pressure on the public sector projects. Because the public sector sources its finance for projects in a different kind of way to the private sector. BOH.

@jesper
I take your general point that high inflation would unfairly benefit the over paid and over indebted.
I don’t understand why a person working in a profitable company in Greece should have to suffer the same loss in international purchasing power as an overpaid person in an unprofitable company”
You have a stange view of how an efficient jobs market should operate however. An unprofitable company may need a good financial contoller (for example) even more than an profitable company. In an efficient market demand drives wages.
Sure if your individual performance makes your company profitable you will have a good argument when asking for a pay rise (or smaller pay cut) but you can’t expect a pay rise if your companys profitability is due to others.
This is what caused our wage competitiveness problem. For example ESB and the government awared pay unsustainable pay rises to staff because they had the cash not because each individual could justify their salary.
Bottom line, if your employer could sack you and find someone else to do your job (to the same standard) for less, then you are overpaid.
I’m been idiolistic of course, the jobs market is far from efficient in this country.
The most demoralising manifistation of this inefficient jobs market is when your boss is an incompetent baffon but is paid twice you salary with excellent pre 95 pension simply because he has been there so long. Actually sorry unemployed people who know they would work their asses off, but can’t get a look in because those on the inside have organise together a lock in.

@ Ciaran Daly/Mick Costigan

So what is the case: new public jobs programmes and an unreformed system of bubble-era costs or begin reform of the public sector and the sheltered private sector while adding new programmes?

Like James Carville, David Begg may be wary of bond traders but last year’s proposal to stretch fiscal adjustment to 2017, without any reform, looks even less credible today.

1. There are a a large number of State job incentives and the addition of a State investment bank, can have only a marginal impact.

2. Credit availability will continue to be a problem and the Government cannot set credit criteria. Last year bank lending in the US grew at the lowest rate since 1942.

However, as Morgan Kelly points out in the IT today, the Government can have a major influence on the health of the banking sector.

3. The Government has rubber-stamped a flawed Innovation Taskforce report which commits the State to eventually spend treble the current science budget of €1bn. It could be called a “make work” stimulus program.

The jobs targets are fanciful and the politicians are afraid to appear ignorant by questioning the vested interests in the universities.

The few successful spin-outs from university research like Stokes Bio, will be acquired by overseas interests before there is any significant value added for Ireland.

The big secret is that the output of all the thousands of new high tech firms — the majority of the 25 to 30% that will survive say 10 years will have less than 10 employees – – will be dependent on one big customer: the public sector.

4. A well governed competitive Ireland will need a jobs strategy, seeing the world as it is evolving and not through the prism of marketing spoofery.

However, when the biggest milk processor, Glanbia, tries to spin off its low margin Irish dairy operations, so that it can expand abroad while adding little value to the Irish economy, one can wonder about the difficulties ahead.

Glanbia’s counterpart in New Zealand, Fonterra, is responsible for more than on-third of international trade in dairy products and 25% of NZ earnings.

Wonder why Glanbia’s plan was met by silence from Irish policymakers?

@ Michael Hennigan,

In relation to Glanbia, how big is their pension hole? Perhaps that is one reason why they are trying to expand abroad. Money has to be generated to fill this hole.

With high energy costs in Ireland, is it any wonder that industry is looking elsewhere for growth.

@ Pat Donnelly,

Not too sure if I understood your last post correctly, are you saying that spending 2/3rd’s of all tax revenue on social welfare is not enough?

@Pat Donnelly
If you want to make sure growth becomes negative and never really restarts, raise taxes now.

What needs stimulus, or at least permission to try to grow, is the efficient private sector. Raising taxes won’t help that.

Meantime, to cut the burden on now and the future, other costs do have to fall.. Govt can cut spending by decree and yes, social welfare costs will probably have to fall. Local govt costs, energy, etc., should fall too. Raising taxes won’t help that either.

The Irish economy and Irish government finances are not going down the toilet, they’re already flushed. While we should definitely have a witchhunt to find the culpable, we need to think of a practical future too. What you need now is to make it possible for someone to start to create the water (wealth) that can help rinse us off. Raising taxes won’t help that at all.

Sporthog
You seem to miss my point. What was my point? I can then address your concern on wasting taxes to keep plebs from burning down your homes.

@ Pat Donnelly,

Raising extra revenue is one thing, but spending it prudently is another.

Just one example,

How much money has been spent on renting pre fabs for schools? Renting prefabs for one or two years is fine, but for longer terms it does not make sense.

This country operates on short 12 month cycles, all short vision. Taking long term costings into consideration does not happen. It’s all about trying to balance the books for this year, and we will worry about next year when next year comes around. In the short term the books are balanced, in the longer term the taxpayer pays dearly.

Except this time the country has run out of road.

While I have regard for those people who have worked hard, contributed to society and are now retired, social welfare has become a monster which is devouring this country. Is it really necessary to give out free TV licenses? If it is politically impossible to take back medical cards can the arrangement between the state and GP’s be rewritten. Instead of a GP obtaining X euro per medical card visit the GP receives X euro minus 20%.

66% of all taxes going to Social welfare is unsustainable. Something is going to have to give.

http://www.nakedcapitalism.com/2010/05/schama-are-the-guillotines-being-sharpened.html

The French Revolution occurred after John Law (a Scot,possibly in the pay of the English) had destroyed the middle classes, all banks had failed and they were mostly paupers competing with one another against skilled artisans who spoke differently and had no love for the bourgeois.

There was also an unfortunate cliamtic circumstance which may explain why those who micturate upon us are so strongly telling us it is raining: a mini ice age which caused crops to fail and some years to have “no summer”. As I believe that AGW is more of the same, there may arise the perfect storm! We have moved on since then but we shall see how much we have moved on as this massive social experiement unfolds.

Interesting times!

@ Michael Hennigan

At some point policy makers are going to have to re-read Keynes and start printing money because although the austerity measures might lower deficits they will also lead to lower GDP and higher unemployment which in turn will lead to more problems.

Good article in the Gaurdian by Dean Baker on this subject last week:

http://www.guardian.co.uk/commentisfree/2010/may/17/keynes-danger-deficit-reduction

Especially for Sarah C:

http://globaleconomicanalysis.blogspot.com/2010/05/padded-pensions-and-what-to-do-about.html

But the Americans are without Ruth.

Jagdip Singh says “Issue new money (we gave that up with membership of the euro – we’re now one of 16 voices, and a pipsqueak compared to France and Germany). ”

My understanding is South Africa introduced a second currency and operated a ‘dual’ currency system for many years. I think the two currencies were called the Financial Rand and the Commercial Rand. So there might be a way for Ireland to introduce a second currency for internal use, and keep the euro for external trade.

Sort of like how the ecu co-existed with francs and marks.

Perhaps not practical but interesting to contemplate.