Ireland: A recession of the banks, by the banks, and for the banks

As flagged by Paul Krugman, P O’Neill writes on the Irish situation at A Fistful of Euros: you can read it here.    [Unlike some others on this site,  this economist picks his user name from a long Irish tradition, rather than relying on The Wire or former communist regimes for inspiration!]

129 thoughts on “Ireland: A recession of the banks, by the banks, and for the banks”

  1. It is the cost of the banking crisis (and the bubble that preceded it), not the fiscal crisis, that leads me to doubt Johnthe’s cheery Optimism. I think the drag exerted by the incontinent banks is going to continue to suck money out of the economy.

    In particular, I think that crossing the 22 bn line (a figure we were given only a few months ago) has been incredibly damaging. Cross enough lines in the sand and they cease to have any meaning.

  2. Those results mentioned by Gavin … we’d need someone who’s been following the auctions to tell us whether the big difference in the bid to cover between the 4 and 10 year tells us anything.

  3. @Frank

    The difference in bid to cover between the 4 and 10 year doesn’t really tell you anything because there will always be more demand for the short dated paper. The important thing is that demand between the two bonds was stronger than in past auctions. The yield is of course high but acceptable in the current climate. Spain also had a good auction.

  4. How much of the auction was taken up by domestic and how much otherwise. ? Theres no point congratulating ourselves if we are selling bonds to ourselves…if we are.

  5. Why not we need the money – perhaps not the debt but we need the money supply to remain somewhere above zero, yes.

  6. The blogger (possibly still a communist judging by Sinn Fein policies), points out that (i) the banks are running insolvent companies, and (ii) the tax take is stagnant despite recovery. Are these two items linked?

    Not only is the tax-payer bailing out the banks, but the banks are getting the benefit of the losses of insolvent borrowers such that get the benefit of tax-free earnings generated by such companies (as any profits are swallowed up by loan repayments on the companies’ balance sheets). It is a brilliant ploy.

    It is all too much.

    – Loan too much so everybody is insolvent.
    – Give yourself massive bonuses and enjoy the trappings of respectability and wealth.
    – Get working people and their chldren to subsidise you over generations with their taxes.
    – Avoid having tax deducted from your borrowers income which all goes to you by keeping them and their debts and losses alive.
    – Keep your job (bar one or two sacrificial lambs).
    – Return to profitability and decent bonuses within 7 years.
    – (Keep your eyes peeled for people bearing tar, wooden poles and ropes.)

  7. What I wonder is how much of it is being taken up indirectly by Frankfurt. Healthy demand at high yields is the now-usual signature of ECB intervention to support debt issuances, yes?

  8. Willem Buiter suggested recently in a paper that there is huge scope to increase the base money within the ECB – it just requires the fiscal jurisdictions to inject political presssure into Frankfurt cloisters.

    Personnaly I think Frankfurt is surprised at the lack of poltical pressure and is buying now just to keep the system going.

  9. About the auction:

    Irish banks will have the option of buying Irish government bonds but it would only make economic sense if the banks cost of funding would be lower than the interest received on the bought bonds.

    I’m guessing that Irish bank bonds are trading at a price of Irish government bonds + a risk premium (loss sharing). If that is the case then any Irish bank buying Irish government bonds would make a loss equal to the risk premium.

    NAMA bonds might either be used to buy the Irish government bonds or to pay back debt (expiring issued bonds not refinanced).

    Shrunk balance sheets for the banks and reduced money supply in Ireland? Deflation?

  10. @BL

    And I suppose Spain just sold all the bonds to themselves as well. There is no evidence that the buyers of most of the Irish Government debt in this auction or in previous auctions were Irish banks. According to the NTMA in July, 80% of Irish long term debt was held by international investors.

    @Annoym

    There is no evidence that the ECB are buying Irish or any other debt in great numbers. The numbers I saw was they bought 10m last week. Hardly going to move markets

    Guys, it was a good result for Ireland and Spain. The markets have reacted positively.

  11. O’Neill refers also to the other elephant in the room – distressed mortgages. The continuing strategy of forebearance (ie head in the sand) remains and worryingly endorsed by the Financial Regulator…..

  12. We should take P O’Neill seriously. After all, he has had a long interest in the banking sector in Ireland, especially in infrequent, illicit withdrawals of large amounts of cash.

    Was he not involved in an early scheme of quantitative easing in the 1980s?

  13. Increased base money creation by the ECB should be inflationary in the long term – while banks buying goverment debt while using the difference between the base rate and gov yields to recapitalise should be deflationary.

    Any thoughts on the subject?
    The strong M0 and M1 figures point to this while m3 is static or declining overall in the euro area.

  14. The guy who wrote that post has been blogging under P O’Neill for seven of eight years. Very interesting takes on things. Also writes on Irishelection.com and bestofbothworlds.blogspot.com. Worth subscribing to each.

    Not sure where the comment about people using names from The Wire or communist history on AFOE came from. Most use their real names over there, some use old pseudonyms, but none of which I recognise from The Wire. It’s the same site where Edward Hugh, the self-taught economist who predicted the EU downturn, blogs. Well worth a subscription.

  15. Zhou,

    Which communist policies of Sinn Fein?

    Nationalisation?

    Or there recent Plan for supporting young Entrepreneurs. If thats communist you must be right of Milton 🙂

  16. @ Gavin S

    The numbers I saw was they bought 10m last week. Hardly going to move markets

    I’m certainly can’t deny the possibility that Ireland had a genuinely good auction for reasons unrelated to the ECB. However, we all know that the only reason the Eurosystem ever buys Irish government debt is precisely in order to move markets. It can move them directly, or it can just signal its future intentions to the rest of the market. A small ECB purchase now will be understood as a signal that the ECB is willing to make large purchases later if necessary, no?

  17. @ tull mcadoo

    How natural, then, that one of Mr. O’Neill’s old comrades later rose to a board position in BoS(I). When it comes to criminal behaviour involving Irish banks, we know how the banks themselves strive to keep a strong base of in-house expertise.

  18. What has to happen for bond yields to become unsustainable? The 10-year yield is over 5% this morning. If this trend continues into next year and taxes don’t improve, at what point will things topple over? In the case of Greece wasn’t the yield on 10-year bonds rising to more than 5% the trigger for emergency intervention by the ECB/IMF? If the banks soak up even more money over the next year, and no one believes the corner has been turned on under-performing loans, will the NTMA be able to raise any money? The days of default and debt restructuring seem close and perhaps they should be brought closer by folding up some of bottomless pits that are absorbing exchequer funds. In the world outside DoF and NAMA it is called liquidation.

  19. anonym – please dont troll. Run along to another site if you wish to write drivel bordering on libel!

  20. Zhou says:

    Not only is the tax-payer bailing out the banks, but the banks are getting the benefit of the losses of insolvent borrowers such that get the benefit of tax-free earnings generated by such companies (as any profits are swallowed up by loan repayments on the companies’ balance sheets). It is a brilliant ploy.

    Good comment. I am afraid, you are on to something there. The ploy you speak about, spells great news for lending institutions – but is lousy news for anyone trying to maintain the independence of a daytime occupation. BOH.

  21. @ Zhou,

    You have consistently proven, time after time here at the Irish Economy blog, you ability to conceptualise the entire system, and not just get lost in the data and the stats. I don’t want to detract in any way from the superb numerical analytical skills demonstrated by many contributors to the Irish Economy blog. But what your contributions repeatedly show, is the requirement for talented systems thinkers, who can temper the more analytical tendencies of the statistical scientist. I appreciate the contributions and the effort as always. BOH.

    http://www.irisheconomy.ie/index.php/2010/08/16/ft-article-on-german-growth/#comment-64963

  22. @Woohoo,

    welcome to the site. I don’t think it is trolling to point out that the original Pee Neill had connections with people who relieved banks of large amounts of cash. Ironically, some of them allegedly went into property development only to repeat the process.

  23. @ All,

    A full year ago now, I put my thoughts about the banks as operators of private companies into a blog entry, I named Development as Freedom. As per the name of the book by Amartya Sen. I wrote:

    If that was the case, men would be throwing themselves willingly off of scaffoldings every week in order to claim the compensation. The banks would not last more than a week as property developers.

    I know it is an extreme assertion to make, but it has some usefulness to describe the relationship between an Irish bank and a builder. Many of the Irish builders had been insolvent and trading for years. If an ordinary small business attempted to behave in that manner, they would simply cross over the line, of what is considered to be irresponsible trading. But Irish lenders knew of the real situation of Irish borrowers in the construction industry for a long time, but were in no rush to move. Effectively, an Irish bank was a builder, with an intermediary clown inserted for mere theatrical effect. I am sorry if that sounds inflamatory. But it is not too much of an exaggeration. Maybe minister Eamon Ryan & company are right. Maybe it was high time, to blow all of that into the open. With the current strategy, we do have at least a little bit more transparency. I would enjoy a banter with Gurdgiev & company some time, on that point, but I feel it is worth making the point for the sake of argument. BOH.

    http://designcomment.blogspot.com/2009/07/development-as-freedom.html

  24. Are we not slipping into the usual – and, for the Powers That Be, politically convenient – “bash the bankers” routine? Given a lax, to non-existent, bank supervision and financial regulatory regime, historical demonstrations that assuming moral hazard was valid (that taxpayers would foot the bill if things went pear-shaped), permissive land use and planning regulations and successive governments implementing pro-cyclical and incontinent fiscal policies, the behaviour of the bankers was perfectly rational. They are in business to make money and all the signs were pointing in only one direction.

    Why should we expect them to put the public interest – or “corporate social responsibility” or “ethical behaviour” or whatever the latest business school bumph is – before profit and personal reward? That’s what government is/should be for – and that’s why we elect them. And now that the bubble has burst why should we expect bankers to behave differently (pace Zhou, “It is all too much”)?

    Are the businesses they’re effectively running covering variable costs and making a contribution to fixed costs? I suspect most are and this makes economic sense while the prospect of eventual salvation exists.

    The end-game for Ireland’s banking system will be played out in Brussels and Frankurt when some sort of debt restructuring mechanism is cobbled together. Until that happens we’re in “kick the can down the road” limbo.

  25. @Paul Hunt,

    I agree.

    The end game is going to be interesting & I suppose it is anyones guess what might happen. My guess is that no restructuring will take place until after the shareholders are wiped out completely. It seems that the shareholders won’t be wiped out any time soon & therefore I don’t expect any restructuring to happen soon either.

  26. @Gavin S – ‘a good result for Ireland’!
    Indeed – which ‘Ireland’ do you refer to?
    Elite/official/establishment Ireland?
    Or,’Jane and Joe citizen of Ireland plus their grandchildren who are and will be picking up the tab for this borrowing/banking/developer/nama/benchmarking/deregulated and political schemozzle created in large part by the aforementioned elite/official/establishment Ireland ?

  27. What was most striking for me was the second photo. The comparison of the footwear. A poor Palestinian man in sandals versus a Jewish woman with military boots. A stupid Jewish women who thanks to the economic system lords it over the man. Why ?

    Israel use to hide this stuff very successfully. Now the younger generation wants to show off and they show off their values. It’s fascinating. How long more can Israel stumble along in this way?

  28. Paul Hunt says:

    Are we not slipping into the usual – and, for the Powers That Be, politically convenient – “bash the bankers” routine?

    Good point. It is important to unpack issues like credit flow, and credit availability. As I took the trouble to illustrate in a blog entry yesterday – that one of the major stumbling blocks in Ireland today – is to re-build the trust between employer and labour. This is not going to be easy, as the relationship became so sour during the course of the Celtic Tiger, when labour developed an insatiable appetite for wage inflation. A lot of the problems in relation to credit availability in Ireland, are related to the fact that employers have had enough. They want to back away from the risk of wage inflation permanently if they can, and source as much of their labour outside or Ireland if they can. In truth, we dropped the ball there.

    We have to be careful not to get carried away in our contempt for banks, when we deal with the credit flow issue and the employment creation issue. Because the banks may comprise a portion of the problem, but not all of the problem can be explained in that way. But the issue of banks operating in the private economy is valid. The blog entry which Philip Lane linked above speaks about the involvement of banks in the Irish economy since the bailouts started. But it is important to note, the banks participated deeply in the operation of companies prior to 2008. In short, it is important to define problems correctly and solve the right problems, instead of getting blindsighted by our own rage. BOH.

  29. Dow Jones reports Governor Honohan as saying in Beijing today that Ireland’s deficit will fall to 3% of its gross domestic product by 2014 if the economy grows as expected.

    Expected by whom?

    The CB does not publish medium term forecasts and FT analysis recently showed that the forecasting record of the BoE was poor.

    We of course don’t know what the strength of the recovery in developed countries will be in 2013/2014 and the Department of Finance likely has given little thought to the structure of the public finances beyond the next Budget.

    With 2014 a long way off and the DoF fazed by such challenges as the complexities of a property tax, it is like the Little Dutch Boy with his finger in the dyke, waiting for some good news.

    So why expect lenders to take the medium-term assurances with great seriousness?

  30. @Jesper,

    Thank you. I think you’re right that speculating about the nature of the end-game is probably futile, but htere are significant risks.

    Since any deal will require treaty amendment and be applicable on an EU-wide basis – even if applied to the PIGS initially, there is a risk that Ireland will come out of it less well than the other PIGS. The rest of the PIGS have sovereign debt issues compounded by some dodgy banks and developers; someone on this board described Ireland as an aggregately insolvent banking system with a sovereign bolted on.

    I also suspect the institutional EU retains some residual annoyance with Ireland for going into orbit unilaterally with the blanket guarantee since getting it down safely has consumed time and resources – and particularly as they have been compelled to authorise the Anglo capital transfers.

    The institutional EU has also been indulgent of the Government’s attempts to maintain the optical illusion that it retains national sovereignty in these matters – in marked contrast to Greece.

    These factors do not augur well for the interests of Irish citizens. A recognition of the pit that ireland is in and acceptance of the EC/ECB/IMF supervision that is being applied to Greece might be more painful in the short term but would be far better in the medium to longer term.

    But hey, if a deal can be struck that allows the Government to spin a victory out of the jaws of defeat what matter if citizens are compelled to shoulder the burden indefinitely?

  31. @BL

    Will ye be doing a “What you could buy with €29bn” for next Sun’s Bus Post?

    “Anglo may impose a net cost to the government of about 22 to 25 billion euros (18.1 billion pounds to 20.6 billion pounds), to which can be added about 4 billion mainly to cover one small building society,” Irish central bank Governor Patrick Honohan said in a speech to Renmin University in Beijing.

    http://www.irishtimes.com/newspaper/breaking/2010/0817/breaking38.html

  32. @Paul Hunt
    “Are we not slipping into the usual – and, for the Powers That Be, politically convenient – “bash the bankers” routine? ”
    Only because that’s where the money’s gone…

    Wait until NAMA starts to actually make losses or the stress tests fail…

    Roll up, roll up, everyone get’s a turn.

    @Jagdip
    No mention of the rest of the banking system then? We still expect to get 7 bn back? And the rest that we haven’t yet put into AIB? Or EBS?

  33. @ Brian Lucey

    “Zerohedge ain’t buying the story”

    Zerohedge appears to be suggesting that the ECB bid directly via the auction, no? Given that the ECB cannot in fact do this, i’m not terribly moved by his comments or insight into the Irish bond auction. More’s the pity that you didn’t seem to realise this either, and, as Gavin noted above, decided to just go with some idol speculation on there being heavy domestic bank activity in it. Still, keep up the good work and hitting the hack economics websites Brian…

  34. JAgdip
    Ronan and I only deal in tens of billions now…. a mere 4b is a detail, a bagatelle, a minor bump in the road.
    35b I say here and now, for the total cost of Anglo-INBS.

  35. @hogan,

    That’s why I’m advocating the EC/ECB/IMF regime a la Greece. It would put some manners on the bankers, get things in shape for what ever end-game plays out at the EU level, force the restructuring of the state, semi-state and sheltered sectors that the current Government has neither the will nor ability to address – and which any alternative would equally lack – and add the necessary capability that (as the good Zhou has frequently pointed out) the DoF seems to lack.

  36. PS
    After that stunning success this morning, we now bask in the luxuriant sub 300 BP land we are used to inhabiting….297 which is of course a whole order of magnitude different to 301…

  37. @ All,

    Why is everyone so interested in the question of Irish banks buying NTMA bonds? The real concern, is NTMA buying the bonds of Irish banks (such as Anglo).

    To work with that diagnosis theory, and view what implications it may have, I even invested the time and effort in developing my very own conspiracy theory. The remarkable thing is, after putting in the creative effort, I would shocked at how many things the theory could explain. BOH.

    http://designcomment.blogspot.com/2010/04/why-ireland-is-more-like-cuba.html

  38. RTE is reporting on the web that Governor Honohan stated in Beijing that the costs of saving INBS will also rise.

    Curious then that BOI and AIB both claim to have a handle projected loan under-performance. Poor old taxpayer hit again and again without end in sight.

  39. @BL

    Zerohedge ain’t buying the story
    http://www.zerohedge.com/article/irish-cds-tightens-20-bps-after-successful-bond-auctions

    Is this where you get your information from? Explains the selling the deposit book moment. As Eoin says above, maybe you can explain how the ECB bought bonds on the primary market and maybe you can also point out to your source that if he is going to talk about bid cover ratios, he should really check allocation levels. It wasn’t allocated on a 50:50 basis like the last auction in May which explains the difference. But hey why let that stop a good story about how the ECB are breaking the law.

  40. Prof Honohan when appointed to the CB and issued his report on the Banking Crisis was the pinup here. It seems that now that he is in a position of responsibility both here at CB and on the ECB Board and needs to be careful in his statements he has fallen out of favour here. Little Dutch boy !!!!!!

  41. @ Brian/Gavin

    CDS levels are actually more like 275bps right now (i just got a 270-280 live price). Yeah its still very uncomfortable, but there has been a material improvement from last night’s 306 high print. I’ll give Brian a pass on this though, Bloomberg is pretty poor at updating CDS levels intraday for some reason. But Ireland is actually the marginal risk factor driving risk appetite to better levels this afternoon, all as a result of the auction. I know good news doesn’t sell well round here with most people, but real facts are probably more useful than idol speculation imo.

  42. By Abigail Moses
    Aug. 17 (Bloomberg) — Ireland led a decline in the cost of
    insuring against losses on European bonds after a surge in
    demand at government debt auctions eased investor concerns that
    the region’s sovereign deficit crisis will worsen.
    Credit-default swaps on Ireland dropped from a 17-month
    high, falling 30.5 basis points to 272.5, according to data
    provider CMA. That’s the biggest decline since June 9 and
    follows nine straight days of increases. Contracts on corporate
    derivative indexes fell from the highest levels in four weeks.
    Investors bid for more than five times the amount of the
    2014 securities offered in the Dublin auction that raised a
    total 1.5 billion euros ($1.9 billion). Concern that slowing
    economic growth will exacerbate Europe’s deficit crisis prompted
    speculation that bond buyers would shun offerings from Ireland
    and Spain today.
    “The success of the auctions is what’s driving the
    market,” said Suki Mann, a London-based credit strategist at
    Societe Generale SA. “There was concern they wouldn’t get their
    funding away, but obviously the markets’ concerns have been
    misplaced.”
    Bidding for Ireland’s 2014 security compared with offers of
    more than three times in a May action, the National Treasury
    Management Agency in Dublin said today. Demand for a 2020
    security fell to a bid-to-cover ratio of 2.4, against 3 in July.
    The yield premium investors demand to hold Irish 10-year bonds
    rather than benchmark German bunds declined.

  43. Err…Eoin.
    A bit of the old messanger shooting there? ZH says what they say. I didnt say if I agreed or disagreed with it. And while the ECB per se are directly unable to buy are you saying that if they wanted to take the bonds up they couldnt/wouldnt find a way?

    No idea what the hack economic website gibberish is about…off the meds again are you or drunk with the massive success of us only paying 300bp not , god, 310 or 320bp over benchmark 🙂 Feel free to ignore blogs, rumours and grey literature. The rest of the world dont…ever heard of sentiment analysis…?

  44. @ Brian Lucey

    “And while the ECB per se are directly unable to buy are you saying that if they wanted to take the bonds up they couldnt/wouldnt find a way?”

    Weak, very weak. At least provide us with your suggestion of how the ECB would do this (no doubt in league with the Irish banks…).

    “off the meds again are you”

    I see my “farcical” comment from the other day has struck a nerve. Excellent. 🙂

    “Feel free to ignore blogs, rumours and grey literature.”

    Given that this is at times a rumour filled (by you mainly it seems) blog, im not exactly ignoring it am i? Im just pointing out where rumours would appear to be completely baseless in fact, but which are being portrayed as reality (ZH says “most likely”). And as i said, shouldn’t you have realised how baseless the ZH story was (allowing for you coming up with an answer to my question above)?

    But you keep reading that sort of stuff and im sure it’ll provide plenty of inspiration for another one of your snappy one liners. Keep ’em coming.

  45. There’s fairly extensive commentary on the auction results by now. Bloomberg, etc.

    http://www.bloomberg.com/news/2010-08-17/bund-yields-stay-near-record-low-as-investors-await-auction-of-irish-debt.html

    Some commentators mention the reduced bid to cover ratio on the long dated bonds when compared to previous auctions but these are not large volumes and it’s August, so probably no point in reading too much into anything.

    For Ireland to cover the current annual funding requirement we have to launch approx €2 billion every month, although there’s some solid prefunding in place for 2011.

    If we get the borrowing requirement down we might well be fine, if we don’t we won’t. That’s the key issue….how not to have to keep borrowing huge amounts.

  46. @Gavin S, @Eoin
    “Zerohedge appears to be suggesting that the ECB bid directly via the auction, no? Given that the ECB cannot in fact do this, i’m not terribly moved by his comments or insight into the Irish bond auction.”
    The point is not whether the ECB is sitting at a table bidding directly; it is whether it has placed a bid through one of the primary dealers – i.e. it is operating through the primary bidding mechanism and so participating in the auction. Sheesh.

    Indeed, how long would you say they’d have to wait until the bonds become secondary? The Fed has been buying new issues as short as a week after they are issued…

    At this stage, we just don’t know where the ECB sit. As you (Eoin) pointed out on the “we just don’t know” thread, there are good reasons for them to do both – buy in the secondary to support financial institutions, buy in the primary to support sovereigns. In the Covered Bond program purchase program, the ECB bought at both primary and secondary markets and produced a monthly report of what they did. We haven’t yet seen the same transparency for sovereigns.

  47. @ Paul Hunt

    i agree with you, this sort of verbal spat is rather pointless (though im sure entertaining to some!), and i apologise for doing it on the pages of a site that deserves better. However, when Brian Lucey, one of the most vocal and recognisable voices on the Irish banking/economic crisis, continues to peddle inaccuracies like the “ECB buying into Irish auction” story above, i feel a need to vent on behalf of those of us who are trying to paint a more accurate feel to the other side of the story. This is the only outlet i have, unlike the various and regular media avenues which Prof Lucey likes to use to further his viewpoint.

    @ Hogan

    the ECB cannot participate directly through the primary auction process AT ALL. It can only participate in the secondary market. Therefore it cannot effect the issuing yield or the bid to cover. This is what ZH had directly suggested (“the ECB overbid”). Im not actually making any claim about what the ECB may end up doing in the secondary (i’d guess that they made about 50m in purchases last week and they’ll start to make a good few of small purchases just to keep it flowing), but the suggestion by ZH is categorically wrong.

  48. @ Hogan

    re “tighten” – yes, that the other oddity of the ZH article, it kinda has a “everyone in the market is completely wrong” tone to it, which, like i say, is based on a misunderstanding of just what the ECB can or cant do on government bonds (they can buy covereds in the primary, but sovereigns only in the secondary).

  49. @ hoganmahew

    It may only be a matter of form in practical terms but it’s inconceivable that the ECB would purchase freshly minted bonds.

    Executive board member Jürgen Stark is even opposed to purchases on the secondary market.

  50. @Eoin,

    No problem. I seek to embrace the light and repel the heat.

    It may be that the increase in and volatility of the spread reflects the behaviour of some bored traders in a thin market peeved that others are sunning themselves on the beaches and acting like some Enron traders of a decade ago – “Now which state’s retail electricity market are we going to f**k wth today?”

  51. @ Paul Hunt

    that definitely happens ahead of a big syndicated bond issue (which was being rumoured about last week) – you sell the bonds into the auction and then buy them back at a much higher yield. It’s easy work for the primary dealers (especially at the moment when very few countries are willing to cancel or pull an issue), and the issuing sovereign essentially knows that this is how the game works.

  52. @ Mr. Bond

    Zerohedge appears to be suggesting that the ECB bid directly via the auction, no?

    I had noticed this too. However, there are two reasons not to get too indignant about it. First, sad to say, just because something is obviously, explicitly forbidden by TFEU doesn’t mean that it won’t happen, these days. See for example the EFSF. (And that’s not even to consider the less-easily-answered question of whether the ECB’s sovereign digouts fall foul of Article 123’s prohibition-of-monetary-financing language.)

    Second, I wonder precisely how not-direct all of the ECB’s buying was. In an extreme situation, one could imagine the ECB, for example, making some ‘phone calls before the auction to share its plans to buy x much 2014-maturity 4-year Irish bonds at such-a-price – from third parties, of course! – on the day of the auction. This would be “very direct” to some people’s minds, while intended to be indirect enough to hopefully keep the ECJ happy. Now, I don’t expect that either of these things has happened. But it’s the kind of stuff that a 🙂 famously excitable fringe blogger might speculate about without being obviously wrong.

    (Third, in the past both Reuters and FT journalists covering the ECB have failed to take note of Article 123, so it’s not exactly as if ZH is setting a new low here.)

  53. @ anonym

    first things – i respect your “well, what if” comment, which though full of a lot of guesswork, at least had a dose of humility and skepticism on both sides in it. People could learn from you.

    secondly – on the substantive issue of could the ECB buy this way? I simply don’t see how they could, it would represent a massive change in how they have been operating in the government bond markets in recent months. As Michael Hennigan notes, some of the ECB members aren’t even on board with how they have been dipping their toes in and out of the secondary market recently, so for them to start showing form prices/orders ahead of an auction would be a inconcievable move at this point. At most i would reckon the ECB could say to some big dealers “listen, we’re not going to let the secondary market collapse, so you can buy-in knowing that we’re keeping an eye on prices”, which was essentially the point behind last week’s minor forray into the market. If nothing else, the market loves a good gossip, so if they were putting out promises to buy up big chunks post-auction, trust me, people would very soon know about it.

    thirdly – did you just say that Brian Lucey references, with some sort of implied respect, famously exciteable fringe bloggers? Interesting.

  54. @anonym
    Yeah, that was what I was badly getting at – how secondary is secondary? A month? A week? A day? Hours?

    Article 101 is reasonably clear:
    “1. Overdraft facilities or any other type of credit facility with the ECB or with the
    central banks of the Member States (hereinafter referred to as ‘national central
    167
    banks’) in favour of Community institutions or bodies, central governments,
    regional, local or other public authorities, other bodies governed by public law, or
    public undertakings of Member States shall be prohibited, as shall the purchase
    directly from them by the ECB or national central banks of debt instruments.

    2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the
    context of the supply of reserves by central banks, shall be given the same
    treatment by national central banks and the ECB as private credit institutions.”

    I presume you mean Article 103 when you refer to 101 above?:
    “1. The Community shall not be liable for or assume the commitments of central
    governments, regional, local or other public authorities, other bodies governed by
    public law, or public undertakings of any Member State, without prejudice to
    mutual financial guarantees for the joint execution of a specific project. A
    Member State shall not be liable for or assume the commitments of central
    governments, regional, local or other public authorities, other bodies governed by
    public law, or public undertakings of another Member State, without prejudice to
    mutual financial guarantees for the joint execution of a specific project.

    2. If necessary, the Council, acting in accordance with the procedure referred to
    in Article 252, may specify definitions for the application of the prohibition
    referred to in Article 101 and in this Article.”
    http://www.ecb.int/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf

    Note the caveat in Para 2 of Article 103… Article 252 allows the Council of Ministers to approve the Commission’s rewriting of the rules on the hoof.

  55. Looks like the Wall Street Journal (link below) is coming down strongly on the side of Eoin in the epic Eoin v Lucey debate. They run 3 stories on Ireland today, headings for which are:

    “Strong Irish Auction eases Eurozone Fears”

    “Ireland Passes Bond-Market Test”

    “Were Irish Fears Overdone?”

    Some of the credit for the change in sentiment must go to Ambrose-Evans Pritchard, who defected from the pessimists (on the Irish economy) camp in his Daily Torygraph column yesterday. Morgan Kelly next?

    http://europe.wsj.com/home-page

  56. Very well put together blog post by the author P O Neill. Reading the blog’s ‘about’ section reveals that it is a site of people who generally say they are centre left. No doubt this actually means they are for the centralisation of power in brussels and the further blunting of democracy.

    “History teaches us that trouble lies ahead when a regime is free to break its own laws with impunity, when it is supported by a puppet court, and when its people are powerless to get rid of it. That is what the European Union has become, and the only way out is the door.” – Lord Pearson

    Witness the breaking of euro laws in relation to the euro bailout.

  57. @ Gavin

    i actually only saw the full results now (im not in the office, in fact im about to hit the beach again…) and the allotments vs bids – the total bids on each bond were more or less the same. Brilliant. Multiple errors on the ZH story now, and these are being repeated on here. For clarity…

    4.0% April 2014
    Total Amount Allocated (million) – 500.0
    Lowest Price Allocated – 101.050 = yield of 3.661 %
    Highest Price Allocated – 101.310 = yield of 3.579 %
    Weighted Average Price – 101.158 = yield of 3.627 %
    Lowest Price Allocated in Full – 101.080 = yield of 3.651 %
    Bid to Cover Ratio – 5.4
    ================================================
    5% October 2020
    Total Amount Allocated (million) – 1000.0
    Lowest Price Allocated – 96.700 = yield of 5.430 %
    Highest Price Allocated – 97.450 = yield of 5.331 %
    Weighted Average Price – 97.034 = yield of 5.386 %
    Lowest Price Allocated in Full – 96.700 = yield of 5.430 %
    Bid to Cover Ratio – 2.4

  58. Eoin, I have seen it reported the same way by some media outlets as well. So bloody lazy. Amazing how many experts there are now. Heard Joan bruton on the radio last night talking about how bond trading desks work! It was the strongest auction of the year demand wise between the two bonds. Nobody is claiming that it was a great day for Ireland or that yields are going to collapse on the back of the auction but it was a good result for the ntma. And for Spain for that matter. That’s all I was saying when I made the initial comment but I forgot you can’t make any sort of positive comment on this site. Enjoy the beach!

  59. @Gavin S.

    Sorry, that’s Joan Burton!

    She’s the one who predicted this time last year that the population would fall by 500 thousand in 2010.

  60. Over 70 comments and counting. More than half of them from people who have never participated in a bond auction. I suppose it is a free country.

  61. Tull says:

    Over 70 comments and counting. More than half of them from people who have never participated in a bond auction. I suppose it is a free country.

    But the original post 70 comments back, was about banks running private enterprises in Ireland, not about bond auctions. The fact that we somehow got onto bond auctions and ran with that issue instead, I guess, has much to do with the day that is in it. I.e. The bond auction was all over the media news this afternoon.

    It is fairly good evidence to the fact that blogosphere and mainstream media have symbiotic relations, with bi-directional influence on each other. BOH.

  62. 2014 is not that far away. What do we do then when we have to pay these things back?
    Lending is not donating.

  63. Eureka,

    The 2014s will be replaced in due course by other bonds. The beauty of National Debt is that you never pay it back just roll it on to the next generation and let them deal with it.

    @Paul Hunt,
    be careful what you wish for. A Greece like deal would probably accelerate the fiscal adjustment in Ireland..perhaps no bad thing. As you say the national herd of white elephants might be culled.

    There would be nothing in it in terms of debt foregivenss. I think that is fools gold. In fact there is a 10bn provision for bank recaps in the Greece deal. Would that be a bankers bailout?

  64. @tull mcadoo,

    I understand the reasons for your caution. Be assured they were in my mind when I advocated the EC/ECB/IMF option. Last year I argued very strongly for popular pressure to force a change of government. I simply could not believe that this lot – which were up to their armpits in creating the mess, did not understand how they had created it, seemed to lack understanding of the severity of the crisis and had an atavistic ability to avoid and deflect any blame – could resolve the crisis in the public interest. It needed a purging of the stables.

    What I failed to realise is that, since that fateful Sep. night in 2008, the institutional EU has been in charge – unprepared, blundering, hamstrung by internal political divisions, inadequate institutional arrangements and a deep-seated democratic deficit and being forced to react to forces beyond its control, but still making the final decisions.

    The Government has played a blinder in conveying the impression that there has been no diminuition in national sovereignty; the institutional EU was and is prepared to tolerate this fiction once the Government implements the policies whose principal thrust and objectives are decided in Brussels and Frankfurt. Within the broad parameters set by Brussels and Frankfurt the Government has been left with detailed implementation and the spin required to secure some public acquiesence. This has long between the bargain between the institutional EU and badly governed member-states such as Spain, Portugal, Italy and Greece – with Ireland flitting in and out of this stellar assembly.

    The institutional EU gets what it wants in terms of EU-wide policy implementation; national governments can maintain the optical illusion of exercising sovereignty and being in control of how much they pool with other member-states; many citizens go along with this charade because they enjoy better governance than they can produce locally; and the institutional EU can gloss over the democratic deficit by being seen to devolve implementation responsibility to national governments and parliaments.

    Either unaware or just simply careless of this grand bargain, Greece went too far; and it has been stripped of its sovereignty. Much of the heated debate – here and elsewhere – over the last two years was predicated on an assumption that Ireland retained and was able to exercise more sovereignty than it actually enjoyed. Government spin was successful and the EU tolerated it, but, in reality, the parameters of the ‘grand bargain’ had changed very much in the favour of the institutional EU – even if, initially, it had very little idea how to deal with, and most certainly didn’t want, this increased responsibility. But it has managed to play the bad hand it has been dealt reasonably competently.

    The Van Rumpuy Task Force – which is simply the institutional EU with a specific focus – is charged with setting the parameters for the end-game and minimising the possibility of a future repetition. And this end-game will include some process of debt restructuring. My contention is that, with a focus on saving the banks, preventing a collapse of property prices and fiscal adjustment – and really nothing else, Ireland is ill-prepared to secure the best deal in this end-game.

    And that’s why I advocate the EC/ECB/IMF option. The process of democratic governance has failed – that’s why we’re in this mess. What remains of it has been stretched to breaking point and thoroughly abused to enact the policies mandated by the institutional EU. There is much, much more that needs to be done to secure a more rapid recovery and a more prosperous future.

  65. Embedded irrecoverable loan losses in Anglo are at least €32bn (not the admitted €24.35bn) and will rise to not less than €36bn. Embedded irrecoverable loan losses in INBS are at least €4bn (not the admitted €3.2bn) and will rise to not less than €6bn. Fundamentally, that’s why both Anglo and INBS should be closed down. Further details in relation to close-down consequences (they have been considered and presented to an Oireachtas Committee) are not being discussed here.

    AIB needs €10bn (not the admitted €7.4bn) re-capitalisation now, to cover its Property Development and Investment loan losses. BoI needs €6.5bn (not the admitted €3.65bn) re-capitalisation now, to cover its Property Development and Investment loan losses. EBS needs €1bn in re-cap. That’s a total immediate re-cap requirement of €17bn for the 3 viable banks.

    These 3 banks should be re-capped at this level without delay and temporarily nationalised…. for the sake of the country. The absurd situation at present is that these 3 banks couldn’t even open for business without the State’s Blanket Liabilities guarantee. And yet the Sate has had negligible influence on these 3 institutions since September 2008! Astonishing!

    What should, of course, now happen (it should have happened soon after the Blanket guarantee was put in place) is that Bondholders in the 3 institutions should be directed to contribute to this re-cap at a level of say €6.5bn in appropriate proportions. [As part of this restructuring, the State might offer bondholders a small (token) debt for equity swap]. The State would invest the balance of €11bn by way of a State Banks Re-Cap Bond issue (zero coupon).

    The State’s earlier investments (€3.5bn each to AIB and BoI) plus the “fresh” €11bn, making a total of €18bn, would be more than recovered with a profit / gain in 5 years time by sale of the investments in the 3 institutions. An undemanding €3.5bn – €4bn level of normal maintainable annual profits for the combined 3 institutions multiplied by a 6.5 times P/E gives a valuation range of €22.75bn – €26bn. All three “viable ” banks would thus be transparently and successfully nationalised temporarily (5 years) for the purposes of their full rehabilitation / re-booting.

    NAMA loans transfers should be reversed (fundamentally this is merely accounting book entries). Recoveries Divisions in the Banks to be tasked with loans recoveries / restructurings / work-outs etc, at the re-cap fully written-down amounts. This Banking Sector Re-Capitalisation Action Plan will, of course, entail full bank boards clean-outs and major senior management changes plus some infusions of new management with excellent leadership temperaments . Perhaps senior NAMA personnel can be re-deployed into the Banks Recoveries Divisions to provide fresh operational leadership.

    All of this could be put in place very speedily (weeks). This type of robust, transparent re-capitalisation of the Banking Sector is what is needed for the hugely necessary asset price and rental levels corrections to take place to repair our economy. Unless this happens there will be no recovery in the overall real economy, the economy that produces and distributes and exports goods and services and supports jobs and employment.

    Peter Mathews

  66. @Peter Matthews,

    Throughout this crisis, you have presented an analysis and advanced solutions that strike a chord with interested and concerned citizens. For that you deserve much thanks.

    However, I fear what you propose – sensible and all as it might be – assumes a degree of national sovereignty (which Ireland no longer possesses) and a totally neutral and passive reaction from the international bond market (which is extremely unlikely). In so far as my limited understanding allows, what you propose seems to make sense, but my view is that it could be implemented only in the context of full international support and direction from the EC, ECB and IMF.

    It is time for the feeble and inept to stand aside and allow the fit and able to perform in the public interest.

  67. Peter,

    I think your proposal is lacking in detail in several crucial respects.
    1. we do not have more clarity on where your recap numbers for the viable 3 come from. Several have tried and failed to understand where you are getting them from.
    2. Direct the bondholders. I think you are missing the point that we have lost our sovereignty to Brussles and they do not do debt-equity swaps.
    3. In any event post the restructuring the 3 viable banks will still have a dependence on wholesale funding albeit smaller yet you have just burnt the providers of said funding…good luck with that project.
    4. A State recapped bond fund with a zero coupon…borrowed from where/whom
    5. I very much doubt that AIB/BOI/EBS would make anything like 3.5bilion. The combined cleaned up balance sheet would hardly stretch to 200bn generating profits of perhaps 1.5-2bn. (ROA of 75-100 basis points)

  68. @Tull
    Is this right.
    I borrow 1000 now and have to pay back 1050 in 2014.
    In 2014 I can’t pay this back (because I’m still broke) and I now have to borrow 1050.
    And so forth.
    The way borrowing is meant to work is that I take the 1000 and do something productive with it that enables me to pay back the money and still have some left.
    Borrowing without growth is a spiral that ends in crisis.

  69. @ Peter Matthews

    I agree with Paul Hunt that the time for your solutions has passed.

    There is already a 3-yr EC-ECB-IMF rescue system in place and it would be weird if the other EU members allowed Ireland to unilaterally stick it to their bondholders.

    The credit situation is going to remain fragile until a global recovery takes hold and it’s also inevitable that the banks will have to shed staff.

  70. Eureka,

    You tax everything that moves and slash current spending to generate the cash to pay the 4% coupon. After the 2014 matures, you sell a new bond hopefully still with a 4% coupon and repeat the process ad in finitum.

    If you do not run the economy for the bondholders you end up in a bit of a mess. The best thing to do to avoid this would be to cut the deficit ASAP.

  71. @ Eureka

    Can’t you see it? Your grandkids will be paying 70c in the Euro tax whilst their salaries will be a minute fraction of pensions of the clowns who created this whole mess in the first place.

    Get the kids out now before it’s too late…….

  72. @Peter Matthews

    What should, of course, now happen (it should have happened soon after the Blanket guarantee was put in place) is that Bondholders in the 3 institutions should be directed to contribute to this re-cap at a level of say €6.5bn in appropriate proportions. [As part of this restructuring, the State might offer bondholders a small (token) debt for equity swap]. The State would invest the balance of €11bn by way of a State Banks Re-Cap Bond issue (zero coupon).

    Are you referring to only those bondholders who fall outside the guarantee? Presumably we cannot direct the holders of guaranteed debts to do anything as they hold our guarantee?

    What do you estimate the value of such unguaranteed bondholders to be?

    Recoveries Divisions in the Banks to be tasked with loans recoveries / restructurings / work-outs etc, at the re-cap fully written-down amounts.

    How does one guarantee this will happen?

    How do you legislate for this in the context of international agreed accounting standards?

    How does one police it thereafter? Banks and bankers have failed despite being given such directions before. They have not being accused of lying but rather of being in denial. Even Anglo, which has been nationalisaed and has a new CEO, hugely underestimated the NAMA write-down.

    What sanctions can one enforce against the banks if they fail to write down the loans?

    How so we get banks to write down all loans sufficiently and credibly? Credibility is key to future private investment. Telling them to do it and making it the law that they should do it will be no good if people do not believe that they have actualy done it!

  73. @Peter Matthews

    What would be the impact on the EU interbank market if the Irish Government unilaterally made substantial amounts of bondholders write off debt owed to them by Irish banks in the next 6 weeks?

  74. @Michael Hennigan, Paul Hunt
    Regrettably I think you are right. For once “we are where we are” is apposite. The bank money is spent. Only some slight modifications to NAMA might be possible, but even these risk upsetting the dung cart.

    The focus must now be on two things:
    – where do we go from here?
    – who do we give the wedgie to for putting us in the position we are in?

    The nature of the guarantee was incredibly foolish. It damaged the european banking systems and limited the movement that other EU governments had, not just our own room for manoeuver. We are being left to stew in its consequences, with the odd bone thrown.

    On where we go from here – it is likely the state will have a number of financial institutions in whole or majority ownership. Some of these will be categorised as ‘too big to fail’ within the Irish market. The solution would appear to be to dismember them and recombine them with the salvagable bits from the other banks. It may well be that the individual parts of the banks/BSs are worth more than the sum and can be sold quickly (producing some cash flow for the state) while the toxic rumps can be wound down over an extended period if required.

  75. @Tull
    “You tax everything that moves and slash current spending to generate the cash to pay the 4% coupon. After the 2014 matures, you sell a new bond hopefully still with a 4% coupon and repeat the process ad in finitum”

    So you end up with a high tax, poor infrastructure country.
    Economic growth is probably inversely related to tax and directly related to the quality of infrastructure. So that formula depresses economic growth rapidly, depresses the people more and makes funding even more difficult.

  76. Is it possible that some limited consensus is beginning to emerge? Wrt the banks it appears to remain a case of ‘kicking the can down the road’ until the institutional EU (in the guise of the Van Rumpuy Task Force) comes to agreement on some process for fiscal governance, debt restructuring and financial governance and crisis-management.

    Obviously, continuous vigilance is needed re the can and how it is kicked down the road, but I would contend that the institutional EU is more tender of the interests of Irish citizens in this matter that their elected government is – and will keep it in line.

    Fiscal adjustment must continue: Governor Honohan seems to express the consensus (Philip Lane has already posted on his latest Eastern offering) – “the impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending.”

    What remains is significant restructuring and reform of the state, semi-state and sheltered sectors. And there is no domestic political insight, capability or willingness to tackle this in any of the political factions. With EU and IMF backing and direction the Greeks are making significant progress in this area. Irealnd needs similar support and direction and the political classes are incapable of providing it. Bring on the IMF.

  77. @ PH

    While I agree with your contention that the current government in Dublin is little more a Vichy-lite regime, I would not be sanguine on debt restructuring. The Bondholders want their money back. Better to crack on a do the right thing to full fill that goal. This involves selling assets, including the national herd of white elephants plus some of the “strategic NAMA land to middle eastern potentates. It also involves squeezing more cash out of the exchequer- cut spending.

  78. God bless us and save us.
    We must bail out the FIRE sector – why.
    What has a banker ever done for me.
    The IMF is a collection of bankers – bankers can only make money by reducing capital – why do want your country to reduce its capital base ?

    If we are to keep debt money this country needs massive fiscal spending or we will again become a agrarian society with moving statues everywhere.
    Ask yourself why bankers always go for effeciency savings over capital creation – because it reduces their profits as they have to have a larger capital reserve.
    I mean after 40 years of deindustrialisation in the west we should now easily recognize the parasitical nature of the beast.

  79. @tull,

    I recognise that you are much more knowledgeable on bond market matters than I am. I remain convinced, however, that the eventual Van Rumpuy package will include some measure of debt restructuring, but the likliehood is that it will be focused on the ‘common or garden’ sovereign debt problems of Spain, Portugal and Greece. Ireland has placed itself in a very different category and any possible relief available will be very limited. It may be nothing more than the provision of a secure framework to allow the orderly wind-down of liabilities already assumed.

    And I agree that this makes it all the more important to remove the drag imposed by, and to unlock the potential buried in, the state, semi-state and sheltered sectors.

    But do you honestly see the current Government – or any possible alternative – having the wit and gumption to tackle these sectors effectively? It doesn’t give me any pleasure advocating it, but I see no alternative to the application of the full force of the institutional EU and the IMF to break the logjam.

  80. @Keith Cunneen,

    You are perfectly entitled to your view of the IMF – and indeed in the past it was justly reviled for its behaviour, but I have observed little criticism of its actions in rescuing non-EZ EU member-states during the current crisis or of its role in Greece. There is also evidence that, as an institution, it has learned from past interventions where it did not over itself in glory. It now plays an effective role in rescuing governments from the malign impacts of fiscal incontinence and from capture by vested interests. It is from the latter the Government needs rescue and the political process is incapable of doing so. The IMF is the only effective alternative.

    And wrt to ‘reducing the capital base’, I think you will find posts by Colm McCarthy on this site explaining the need to de-leverage the state balance sheet.

  81. I disagree with selling the semi-states to bail out the banks.
    The state has had to intervene because the private sector could not run operations with vital socioeconomic functions. Now we plan to replicate that disaster in other sections.
    Short-sighted and ill-considered.
    The phrase “knowing the cost of everything and the value of nothing” comes to mind

  82. This situation is maddening.
    A typical decent working class Irish bloke will work for 200euro+ on the factory floor if you eliminate his debt and give him transport options that do not require a car.
    Meanwhile a lower middle class technician can survive on 300euro + no problem if you also eliminate his debts.
    If we default on our bank paper we will immediatley become super competitive – Cork is now a ideal town for light manufacturing being compact and having close links to Western Europe.
    Now unbelievably Germany is extending industrial links to China while we deindustrialise to some agrarian fantasy land along with Iberia.

    The Banks are a pox on us and yet we stand like good catholic boys taking this buggery from a bunch of Jesuit educated functionaries.
    Unbelievable

  83. @Eureka,

    Fair enough, but it’s not necessarily a quid pro quo – even though it is convenient for some to see it this way.

    The state is ultimately on the hook for semi-state borrowings, but the risk and exposure are contained by statutory limits on semi-state borrowing and the preference of the semi-states (and their regulators) to extract cash from their customers as an alternative to increasing debt. Any state liability for semi-state borrowing tends to be more than matched by state equity in these businesses. Shifting the liability and selling the equity to the private sector (ideally pension and infrastructure funds) would significantly deleverage the state balance sheet and generate a cash pile for the NPRF or for genuinely productive new infrastructure investment.

    However, you are perfectly free to view the semi-states as being as wonderful as they claim they are and have them remain in the state sector.

  84. If Mr P O’Neil’s fable about the farmer and the bank is correct isn’t that a violation of some anti competitive law? Why is there no investigation? That’s so unfair to all the people that were subjected to investigations and sanctions.

  85. @Paul
    Hadn’t seen the extra point re deleveraging. Thanks for that.
    I’m not saying semi states are wonderful – just saying privatization brings very very serious dangers. Some things should just not be privatized. There’s no inherent profit in them yet they are essential for wealth generation elsewhere.
    So selling semistates to bail out banks is very very high risk. (The banks will probably own them anyway – hurrah)

  86. Apropos posts on tuesday on the bonda auction, my copy of the FT delivered from Singapore has a headline: ‘Ireland forced to pay high bond yields’

    A Padhraic Garvey from ING Financial Markets is quoted as saying: “Ireland had to pay high rates to attract investors…”

    Nobobody told him about the ‘green jersey’ fraternity!

    @ Keith Cunneen

    You need to update your braindrive on the IMF.

    It’s currently run by a former French Socialist finance minister, Dominique Strauss-Kahn, who has provided inspired leadeship during the financial crisis.

    It is of course not run as a charity.

  87. @Michael Hennigan
    Ah yes the famous banker two step – first give the populace too much debt to over consume via socialism and then call in the debt under a “conservative” banner.
    Priceless.
    Besides the post war agreement was to have the American IMF headed by a European and the European world bank headed by a American.
    The figurehead is of secondary importance.

  88. @Eureka,

    When you speak of profit I assume you’re not confusing the normal profit required to retain and attact investment and super-normal profit in excess of this. Since most semi-states own specific, long-lived assets, generating this normal profit is a necessary requirement – irrespective of who owns them.

    A common argument is that the state’s cost of funds is lower than that of the private sector and users of the semi-states’ services would end up paying more, but (in normal times) the state’s cost of funds is low because taxpayers are ultimately on the hook and the bond markets believe they will continue to pay up. At the moment the state’s marginal cost of funds is in the danger zone and we shouldn’t be squeamish about doing things that will bring it down.

    But the argument for privatisation is valid irrespective of the level of the state’s cost of funds. There is no reason why the private sector shouldn’t be involved if it is willing to participate and prepared to respond to the incentives and comply with the constraints imposed. This frees resources that the state may deploy in areas where the private sector is less willing and able.

    And I think the banks will be forced to continue shrinking thier balance sheets rather than stuffing them with infrastructure assets that might generate returns less than their current cost of funds.

  89. @Paul Hunt
    One of the concerns I have about deleveraging the state’s balance sheet is reflected in AIB’s failure to dispose of its jewel in the crown assets – the semi-states have a book value greater than their likely sale price. As such, on balance sheet they support the issuance of debt – the state has both income (taxation) and assets (semi-state) with which to repay debt in a crunch.

    It is not a very efficient argument, but it is, I think an accounting point?

    Anyway, I think wholesale sale would be remiss. Coillte, for example, own 7% of the land surface of the country. Would it not raise greater revenue for them to sell piece-meal the smaller land-holdings they have? Perhaps even through ebay! Given the love of land, this could perhaps generate more than a sale of the company in toto.

  90. @hogan,

    You have an accounting point, but I’m looking at things that would get down the state’s cost of funds and selling (some) semi-state assets gets the debt/GDP ratio down, productive investment of the proceeds might provide some assurance to the markets of future debt service capability and do the trick.

    I don’t think wholesale sale as you put it is on the agenda and I expect Colm McCarthy and his colleagues are wrestling with the complexity of the restructuring that will be required before any clear definition of the assets that might be sold will emerge.

    And, for example, there are three valuations of the ESB and BGE on the go – the book value (historic cost), the regulatory value (indexed historical cost) and the valuation for ESOT purposes. I have no doubt that splitting them up and selling, at least, the regulated parts would generate bids well in excess of the book value. This would be a good deal all round, as consumers would be off the hook for paying through the nose for Minister Ryan’s green whizzo schemes.

    But I can’t see anything sensible like this being implemented – irrespective of what Colm and his colleagues recommend. That’s why I say: bring on the institutional EU and the IMF.

  91. @Peter Hunt
    In one of the above you stated that
    “The process of democratic governance has failed – that’s why we’re in this mess”
    On the contary the process of money creation within a private bank is one of the most undemocratic processes around and is the primary reason we are in this mess.
    Getting back to utilities both Banks and power generating/distributing enterprises are utilities and both share the same characteristics in their capital structure although banks express their capital in a symbolic fashion while a power company expresses its capital through its physical infrastructure.
    For some time now both banks and power utilities have been running down their capital and expressing this as a false profit.
    Now both banks and power companies have effectively run down their capital base to near zero and it is no coincidence that they are now a mirror image of crisis – the banks could default on their depositors and the power companies could default on their electricity obligations.
    To get over this problem they have not tried to increase their capital requirements sufficiently but further squeeze their customers by increasing power charges or increasing mortgages and reducing deposit interest.
    If they did the above while increasing capital it would be great but they will not – they want to get back to profitability as soon as possible and therefore want to extract more capital from a already depleted system.
    The central problem now is that there is no capital in a supposedly capitalistic world yet we continue with the fiction that it still exists and extract the very last bit via credit creation.
    In the present non-gold based capital world it is madness to give allow these strategic utilities in the private sector as they have no symbolic representation for capital and therefore it is most profitable to run down these industries to non- existence and thereby destroying civilisation.

  92. @Keith,

    You have a view on fractional banking and fiat currencies and why they don’t work. Most of the rest of us seem to recognise the perils and seek to avoid/minimise them. That’s fair enough, but you’re unlikely to gain many converts.

    Your bank/power ultility analogy might have some validity in Britain (or even in parts of the US) where private equity has hollowed out some balance sheets, but it has no relevance in the Irish context where consumers have being paying through the nose for the last decade for huge investment in power generation and networks.

  93. @Paul
    Here’s the scenario – ESB put up for sale – who buys it?
    A – International Power Suppliers (Powergen) or something – their strategy to maximize profits whatever way they can – so increased prices and decrease costs
    B – Irish based consortium – again into maximizing profit but possibly having to borrow money to make the acquisition in the first place and possible borrowing some of that from the banks (now there’s a thought!). I

    Privatization does not lead to better service or decreased prices. In fact it would be easier to secure price decreases with an efficiently run semi-state company.
    The short term cash generated would be squandered in (guess where …Anglo!). No thank you to privatization!!

  94. @Peter Hunt
    They are paying through the nose because the ESB has been run without any strategic vision for a decade or two.
    It has been primed for privatisation.

    Ask yourself why private companies invest in gas powered stations rather then more diverse and capital intensive power plants.

    The reason is simple- they would have to put up a much larger amount of capital for a coal /hydro or nuclear plant.
    They can also externalise the risk by claiming the rising price of gas is the cause for the rising price of electricity.
    In fact the rising price is due to scarcity due to its inappropriate use in electricity generation when it could be used more effeciently in the fertiliser or home heating / cooking sphere.
    Meanwhile the state electricity company is deprived of capital so that the private players can move in.
    Collapse is only a matter of time in such a system.
    Strategic planning is more then cutting wage costs which are secondary in such a formally capital intensive business and competition is a joke in such a natural monopoly.

  95. @Eureka,

    I suppose we can all develop the scenarios that will generate whatever sweet dreams or nightmares we desire. You seem unpersuadable.

    Getting back to the initial theme of this thread, I fear that behaviour by some bankers – ranging from the reckless to the borderline (allegedly) criminal – though perfectly rational given the incentives and lack of external constraint, may encourage an increased affection for public sector and semi-state companies that their performance doesn’t warrant. Although the government-regulator-semi-state triangle in the energy sector may not be as damaging as the government-regulator-banker-developer quadrangle in the banking sector, it is damaging nonetheless.

    It may be more difficult to ensure efficiently run semi-states than you think.

  96. @Keith, you may need to bone up on the process of electricity and gas market liberalisation being pursued for the last 15 years throughout the EU. You may not agree with it; I have serious problems with certain aspects; but this, unfortunately, is where the game is at.

  97. Ah the only game in town mantra.

    The collapse of western civilisation is looking more and more certain.
    If something is broken you fix it – if the cardinals in Brussels and elsewhere get there way we will be lucky to live in medieval squalor.

    We are better then this.

  98. @Paul
    Not unpersuadable – just unpersuaded. Dismissing scenarios because they are scenarios is not really an argument at all.
    Try again?

  99. @ KC

    “The collapse of western civilisation is looking more and more certain.”

    As Noam Chomsky has shown in his book ‘Hegemony or Survival’ – the masters of the universe are not interested in the sustainabilty, they are interested in more power and wealth.

    Economists and other intellectuals have become the “high priests of ideology” – rationalising and defending policies which are ruinous.

    Worth a read of this chomsky article:

    http://www.chomsky.info/articles/199606–.htm

  100. @ George

    Ahhh Gnome Chomsky , the lefties favourite lefty. The Lisa Simpson of lefties. Pardon me if I do not waste my time.

  101. @Tull
    I do not consider myself left or right – these are false confrontations.

    Marx was wrong – this is not a fight between labour and capital , this is a fight between Labour/capital and the people who control the supply of money.

  102. I think this link is appropriate considering the deterioration of the discussion, particularly at the end.

  103. @ hoganmahew

    Nono, I’m using the more recent Lisbon consolidated numbering. (Remember Lisbon? 🙂 ) The power to specify definitions appears under Article 125 of consolidated-Lisbon. Apparently the definitions which held at least as recently as 12 March this year were in Council Regulation (EC) No 3603/93 of 13 December 1993. Of course this replaces a mystery (“other type of credit facility”) with a mystery (“any financing of the public sector’s obligations vis-à-vis third parties”).

  104. @Eureka,

    The starting point has to be a recognition that the current arrangements linking government, regulators and semi-states in the various sectors are damaging the interests of citizens and the economy. No point moving any further if this isn’t recognised. Next step is reform of these arrangements and restructuring of the semi-states so that, at the very least, they no longer damage the interests of citizens and the economy.

    Only then does any consideration of financing and ownership become relevant. However, in general these two steps are linked because much of the damage to the interests of citizens has been caused by inefficient financing of the semi-states’ activities and investments. Successive governments, even when funds were available, failed to provide any direct financing of semi-state investment. Instead they relied on the regulatory function setting high prices to extract extra cash for financing from consumers and users of the semi-states’ services. Regulators, particularly the energy regulator which has extracted up to €5 billion from consumers that should have been financed by new equity and borrowings, are running out of road. And the Government doesn’t have the dosh to invest.

    If you’ve gotten this far, I think you can see where it’s leading….

  105. @Keith,

    It becomes TOGIT if there’s no engagement. Issuing jeremiads from the sidelines (along the lines of Pte Fraser in Dad’s Army “we’re doomed, all doomed”) usually isn’t very helpful.

  106. @Paul
    I see where it’s going. I don’t think we’ll ever agree on this. I place too much weight on the potential downsides of increeased private sector involvement. I think both of us agree these are there but we weight them differently.

  107. @Eureka,

    I expect we’ll have to agree to disagree. I’l leave you with just one thought. Yes the (private sector) bankers have brought the country to its knees, but policy and regulation encouraged and allowed them to behave recklessly. However, even within the current regulatory arrangements, private sector owners of the current semi-states would not have been able to inflict the damage on consumers and the economy that successive governments have wrought in the last decade.

  108. @Paul Hunt.
    Well I tried my best to identify the flaw in utilities structure and the inevitable crisis that will follow if these sacred beliefs that have somehow become the norm remain.
    I therefore remain very negative about the future – however if these fundamental truths were tackled robustly I believe the entire western world would have a second renaissance.

  109. @Brian Lucey – “35b I say here and now, for the total cost of Anglo-INBS.”

    +1

    When it happens and you are giving the others the “I told you so”, I will back you up. You said it in August 2010.

    I see Prof. Honohan was in China giving a speech that touched on this the other day. I gave a speech (well, a presentation or two) in Beijing not so long ago. They were very polite and appeared to be listening but you could tell they weren’t really taking it in. I wonder what will happen there when the economic miracle peters out? I doubt they will be as placid as the Irish.

  110. meanwhile, back in reality
    “Reuters) – The European Central Bank said on Monday it bought and settled 338 million euros worth of bonds last week, the highest amount since early July and bolstering recent market talk it had ramped up purchases of Irish bonds.
    The amount is well above 10 million euros of purchases settled the previous week but the overall total since the bank began the bond-buying programme in May remained 60.5 billion euros, rounded to the nearest half billion.
    It follows recent comments by market participants that the ECB bought 60 million euros of 2012 Irish government bonds just over a week ago, after spreads over German Bunds ballooned. [ID:nLDE67B1SN] The ECB has not given any details of its bond buying.
    “We have seen some signs of tensions again, particularly in the case of Irish bonds, and the increase in the purchases reflects that,” said BNP Paribas economist Ken Wattret.
    “It looks like the ECB stands ready to intervene whenever needed, but with the amounts we are seeing at the moment we are only talking about small potatoes really,” he added. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
    For a graph of bond purchases, please see:
    http://graphics.thomsonreuters.com/10/EZ_2BNDPR0610.gif
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
    As in previous weeks, the ECB said it would offer commercial banks up to 1 percent in interest to park an equal amount of their own funds at the ECB for the next week, a move that is designed to prevent the bond purchases pushing up inflation.
    It also said it would repeat the process, known as ‘sterilisation’, next week.
    The ECB has said it would buy government and corporate bonds under the programme, but has given no further details, such as how much it could spend or how long it intends to continue buying bonds.
    However, ECB Governing Council member Athanasios Orphanides, has said that while the bank would like to keep the bond-buying option open, there is no need to buy bonds at the moment, and his fellow policymakers have echoed his comments. [ID:nLDE6780Q9]

Comments are closed.