S&P Downgrade Irish Debt, Put on Negative Watch

“In our view, the loans that NAMA is acquiring have limited liquidity and cannot readily be sold in the near term. NAMA applied a haircut of 52% to the nominal value of the first €27 billion in assets it acquired from the banks. We view these loans as having value, and as recoveries occur in the medium term we expect them to be available to pay down general government debt. However, based on the information available to us, we would not expect recoveries to amount to much more than €16 billion (10% of GDP) over the time frame that our ratings address. As and when recoveries on NAMA’s assets materialize, we may revise our forward-looking estimates of Ireland’s gross and net general government debt.”

What time frame do their ratings address?

The key asset underpinning the Irish banks is loans backed by property. As long as property values continue to decline, the cost of rescuing the Irish banking system will continue to climb.

The prospects of Irish property values bottoming in the near future are extremely low given:

a. rising prospects of a US double-dip;

b. the danger that the slow-motion bank run now underway in Greece speeds up and triggers another Eurozone crisis; and

c. accelerated deleveraging in Ireland as foreign banks exit.

The debt-deflation process underway here will only end – in my opinion – when property values have fallen as far below their true worth in the bust as they arose above their true worth in in the bubble.

But that bottom appears to be a long way off. And thus we may not yet have seen the last downgrade of Irish government debt.

So we are paying 5.5%. What rate of interest would signal the markets being effectively closed?

@George

The big question is are the markets open to the banks.

S&P project a debt-GDP ratio of 113% in 2012.

Morgan Kelly projected a debt-GDP ratio of 115% by late 2012 in his IT article in May.

frank fahey just on newstalk saying nama discounts were too steep and have hurt the banks!

When the minister for finance gave the fateful decision to give the banks an unlimited guarantee, and in particular extending it to Anglo and the INBS he just bankrupt the country. He spent 50 bn he didn’t have and got nothing but piles of worthless liens and shares in return. You can’t get anything more systemically important than that.

Everything since then has just been a dance with the enevitable. NAMA transfers more bad or doubtful debts to the government in the hope that the rating agencies won’t spot the obvious.

The productivity of the Irish nation is not enough to cover the additional tax required to cover these debts particulary since this will need to accompagned by a simulatenous severe cutback in goverment expenditure of the order of 10 bn per year in order to balance the books.

What we have seen is a huge transfer of wealth from the Irish people to the bondholders and deposit holders of Anglo.

They also think that the stability program deficit target can’t be achieved. Which is probably not news to the European Commission.

Interesting to note that this move by S&P comes against a background of more glum perspectives for sovereigns. See http://v3.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127080 , a Moody’s report on European sovereigns. The key warning is: “Those countries that are facing persistently strong deleveraging could experience renewed negative pressure on their ratings in the future, depending on how long the process lasts” (p5). The glum views are based in part on pages 6/7: “Fiscal consolidation – the impact on growth is likely to be negative. Of greater importance from a rating agency perspective is whether the fiscal stance will continue to be a drag on economic growth for years to come”. And Moody’s argues that it will, especially as professional advice is being ignored. Quick and full adjustments to lower levels of income and wealth are needed (page 8). But governments are dragging their feet.
At the same time, an ECB working paper set out to prove that elevated budget deficits are deleterious for long-term growth prospects. http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1237.pdf A much studied topic, and a hard one to crack. This research will provide more ammunition to central bank governors to try to persuade recalcitrant sovereigns cut their huge budget deficits, for the good of their citizens, and for that of the European taxpayer
In relation to Ireland, I’d be concerned that there is too much focus on banks (much of the S&P appraisal is bank-related). The long term perspectives for the public budget however is the key concern. Substantial, permanent and long term measures to bring public revenues and spending into line with the prospects for national income would be very welcome news indeed. Welcome for buyers of public debt, and for tomorrow’s taxpayers.
So much for those on this chat that reckon SOE governments can spend their way out of the hole – that hole is ever deeper!

It is hard to know how many warning signals are required before the government, a plethora of commentators and academic consultants realise that their ‘stabilse the banking system’ (most respected bankers would not even consider Anglo Irish a bank – it had little or no deposit accounts) through an unaffordable bailout, ‘stabilise the public finances’ through deep deflationary cutbacks, and hope in an act of faith that ‘cutting wages’ will somehow improve our illusive ‘competitiveness’ and in turn support employment creation. History will judge that the wrong options have been pursued in terms of the banking, public finance and jobs crisis.

The most important thing about the truth is that it’s useful.
There’s some money to be made on shorting these things at the moment.
Most worrying thing is that Ireland is small enough to fail – and is being set up as the stinkiest PIG of them all with it’s unregulated banks.
We are being pushed to bailout! let’s do default instead. The games afoot!!

@Ciaran O’Hagan,

Many thanks for providing the broader EU perspective. Do you have any snese that the markets, via the ratings agencies, are putting pressure on the institutional EU – in the guise of the Van Rumpuy Task Force – to get its act together and make some decisions on fiscal governance, debt restruturing and financial governance and regulation? The stability fund has been established and registered in Luxembourg under the direction of the redoubtable Dr. Regling, but is it really operational? Are voters in the core EZ countries, particularly those in Germany, prepared to take the hit to their pension funds and banks that will be required to bail out the fiscally incontinent PIGS?

It seems we are in a ‘phoney war’ at the moment. Obviously not expecting answers, but I expect there would be interest in your views.

I stated unequivocally in my article entitled “Time to rethink bank rescue plan” (Irish Examiner 20th August 2010), that a correct analysis shows that Anglo’s loan losses will rise to not less than €36bn (i.e. 50% of its total loan book of €72bn) and that INBS’s loan losses will rise to not less than €6bn (75%-80% of its property development and investment loan book).

In fact, I would go further! Based on extensive professsional experience in the area of property loans work-outs and recoveries, I would add a further 15% loss margin respectively (i.e. €5.4bn for Anglo and €0.9bn for INBS) to those above-mentioned levels of predicted losses. This additional 15% loss margin is based on the unassailable reality that there is increasing negative paralysis in the property market arising directly because of bottleneck / clogging-up of the loans recoveries process as a result of that process being funnelled into one large stagnating proerty loans reservoir, namely NAMA.

Also, bank credit has contracted viciously as a result of huge under-capitalisation at the banks and huge nervousness amongst depositors. In fact the entire Irish Banking Sector is totally dependent on continuation of the all embracing State blanket guarantee for the liabilities of the Irish owned banks.

In the cases of Anglo and INBS, both should be closed. All bondholders would bear the consequences of the shortfall of assets to liabilities and depositors would be protected ahead of Bondholders even if this meant passing special legislation to address this supe-extraordinary situation.

What is alarming and indeed depressing at this point in time, is that the loans recoveries process hasn’t even got under way yet, 24 months after the crisis! In addition, the banks remain woefully under-capitalised ! And the boards at the banks haven’t yet been fully cleaned out and the senior bank managements haven’t yet been replaced and infused with energised new leadership!

It’s Time indeed to rethink the bank rescue plan!

What we need to do is:–Re-capitalise the 3 viable banks, AIB, BoI and EBS, at adequately at the right levels …€10bn, €6.5bn and €1bn respectively. That makes a total €17.5bn re-capitalisation requirement. Then present €6.5bn of that total re-cap bill to AIB and BoI bondholders (we might allow the bondholders a token very small debt for equity swap). We, the State would provide the balancing €11bn re-cap amount by way of a zero rate State Banks re-Cap Bond Issue thereby nationalising the banks for a temporary period of say 5years…. and we would reverse the NAMA loans transfers, while at the same time tasking the nationalised banks to get on with loan recoveries at the steeply written down values, within dedicated loans recoveries divisions at the banks!

This correct Banking Sector Recovery Action Plan could be commissioned and implemented in weeks rather than months!

As a Nation…have we got the collective Will to do what’s right?

Peter Mathews

@B he/they must have the day off

@Brian L,

JtO, bending Edgar M’s ear on another thread, has announced he is the Carolinas.

JTO has made very good contributions on the domestic economy and is right to be optimistic about exports, production, GDP growth, etc.

“What will sink us”, as Morgan Kelly said, will be the bank bailout and Nama. JTO has stayed away from commenting on these issues.

@tull mcadoo

Least Cost Anglo Solution – Prepared by P. Mathews on 21st April 2010

Close down Anglo with immediate effect. This solution could take 4-5 years to complete.

Summary Cost of Close-down:-
€bn
Loan Assets (which includes €35bn NAMA listed Loans):- 65

Other Assets – Loans to banks 7

Total Assets for Recovery 72bn

Maximum realistic achievable recoveries from €72bn assets:-

Loans to banks at Dec 2009 (100%) 7bn

40% Recoveries from Loan Assets at Dec 2009
= 40% X €65bn 26bn

Total Cash Recoveries for Distribution 33bn

Order of Distribution:-

Customer Deposits (Women & Children ! / State G’tee) 27bn

Surplus 6bn

Apply Surplus to next Creditor Liabilities in Priority Order:-

Bank Deposits (ECB Emergency + Others) 33bn

Which leaves Bank Deposits relying on the Sept ‘08 2 year
State Guarantee to Sept 2010, in the sum of:- 27bn

As things stand, the State would be legally and morally bound to stand over in full this amount of €27bn (assuming, of course, that none of the Bank deposits were made prior to Sept 2008). To keep Anglo open along the lines suggested by KPMG would cost hugely more, at least €17.4bn more, than this €27bn. Why? Because Senior Bondholders at €15.1bn and subbies at €2.3bn, following super-extraordinary legislation for winding up Anglos (and INBS) would receive no distribution.

Note:- The State would have no legal or moral obligation to the Bond Investors in Anglo.

Bond Investors for many years promoted and argued the Doctrine of de-Regulated Capital markets as being the most efficient etc. The Financial Institutions, Banks, Stockbrokers etc argued strenuously for minimum direct supervision and regulation. That was their Creed and they insisted that counter-party regulation and counter-party appraisal operated superbly well. That’s why the Bond holders must accept the consequences of their Creed and Doctrine, their own poor appraisal and judgement in subscribing for and investing in the Senior (€15.1bn Dec 2009; was €17bn in 2008) and Subordinated Bonds (€2.3bn Dec 2009; was €5bn 2008) issued by Anglo. There is no valid argument whatsoever for the Irish Citizen /Taxpayer to pick up the tab, legally, morally or commercially for this €17.3bn Bond holder loss.

George
Being optimistic re exports of low employing high-tech mnc’s while ignoring Nama-anglo-bond markets makes as much sense as saying youve a lovely garden when the roof is ablaze

@Peter Mathews

“There is no valid argument whatsoever for the Irish Citizen /Taxpayer to pick up the tab, legally, morally or commercially for this €17.3bn Bond holder loss.”

International bondholders and depositors are entitled to assume that the regulatory system is not run negligently or corruptly.

Fear of the aggressive litigation that would follow default may be one reason why citizens are being made to pick up the tab for anglo.

Still and all the biggest thing that sticks in your throat is that the government who presided over the various and by now well documented causes of this disaster are still insitu, freely dishing out their illconceived solutions to problems they created. It’s akin to a husband beating his wife half to death, then telling the doctors and paramedics how to treat her.
oh and given our unusual situation regarding the number of multi national companies we house i believe we should just be honest with ourselves and use GNP. the fact that intel and google are sending massive profits back to the US does not help our situation here. pretending it does is just more heads in the sand folly.

@BL “Credit-default swaps on the senior debt of state-owned Anglo Irish Bank Corp. increased 13 basis points to 581, according to data provider CMA, meaning it costs 581,000 euros ($733,400) annually to insure 10 million euros of the lender’s bonds for five years. Contracts on the bank’s subordinated notes rose 100,000 euros to 1.8 million euros upfront and 500,000 euros annually.”

@Peter
It is great to see a solution. Thank you!!!!

@Tull
“it counts as sovereign debt” – sovereign is bankrupt so cannot pay.
Don’t understand rolling over comment.
Access to capital markets is already screwed – they would be happier with restructuring.
I have no masters in Brussels or Frankfurt.

@BG
International bond holders have no more a right to assume regulation than every mortgage holder in the country. Caveat emptor and vive la republique!!

Can we all relax. AIB need to complete the sale of it’s crown jewels first.

Then we can proceed to panic stations with the remnants. Shouldn’t be too long now, tick tock.

Wish Colm and the boys over at AIB would hurry the fu(ck up!!

Not funny I know but given that shortly humour may be all we will have what is one to do?

@tull mcadoo

Your suggestion leads to the startling conclusion that, as a direct result of the government’s mis-handling of the Anglo case and its appallingly flawed NAMA / bank rescue (bail-out) approach, the government has effectively STOLEN €17.4bn (i.e. €15.1bn Sen Bonds + €2.3bn Sub Bonds) from the citizens of the State!

To put it in Lady Bird simple terms… A NAMA fraud and a €17.4bn (Anglo) theft have been delivered to the citizens of Ireland by an appalling self-serving FF led government dependendent on its collaborator Green Party partners in the destruction of the Irish economy.

What a record!

@Peter Matthews,

Bank bond investors bought in on the basis of continued and emphatic assurances by successive governments (freely elected by Irish citizens) – and by the relevant statutory bodies – that domestic banks were properly regulated and adequately capitalised. Any dissenting voices were pilloried.

I’m surprised you seem surprised at the outcome.

@ Peter Matthews

The ECB and Ecofin would force Ireland into the EU/IMF support mechanism, currently used by Greece.

They would not accept a default at this stage.

What could Ireland do? Tell them PFO!

Default would have been opportune in the months following the guarantee, if bondholders hadn’t been included. It was a time of ferment in internatioanl banking.

Anglo is now a State bank; if we did snub the ECB, what would be do if the markets shut us out of the debt markets?

The idea of getting these people into a room, to issue an ultimatum, is now fantasy stuff.

The EU/ECB and IMF have a sovereign debt mechanism.

@ Peter Matthews

One other relevant point is that Ireland like Greece, is ovrwhelmingly dependent on foreign lenders to buy its debt. Some 80% of the debt is held overseas.

So there is no big domestic base to squeeze in teh evnt of a bond strike.

30% of UK gilts were held overseas in 2009; just over half of Spanish general government debt in Q4 2009 was held outside the country.

@Michael Hennigan

Michael,
Ireland is not Anglo Irish Bank….it never was.

The sins of the son are not for the account of the father….even if the father temporarily gave a Blanket time limited (2 years) guarantee.

Clearing up a mess is always going to require hard work and telling the truth. It should not be avoided. Bond Investors will then be clearly reminded and therefore clearly understand the true situation. Remember Anglo will be closing down because it FAILED a SIMPLE REALITY.

@ anonym

Default post Sept.

@ Peter Mathews

Peter,

There are plenty simple realties in the economic crash tragedy.

1) The Government would be perceived as defaulting if Anglo defaults.

2) Trichet et al would hardly agree to have their sovereign crisis bluprint unravel.

3) We have to return with the tin ponny in the springtime for more funds from the same type of lenders.

@ Scorpion
“Is is possible that…” My understanding is that rather the opposite occurred. Indeed the EC at the time, and still today, continues to surprise me in its permissiveness of national initiatives, at the expense of greater competition and the founding ideals of the EU. In 2008, a historic decision was taken that Irish banks would not have to compete and would not see any interests sold off. A large part of the troubles today stems from that decision not to allow the losses be taken (so reminiscent of Japan, and in contrast to the US). That decision was taken across the capitals of Europe, with the connivance of a weak EC. .
Ireland, like other EU states, was, and remains, largely sovereign in these areas. I’d still hope that the EC can play a greater role in putting a brake on the ambitions of governments across Europe to push their national interests. Idem for the ECB -its policies proved largely accommodating, with ever more unfortunate consequences (see here if you have a Bloomberg NSN L7GDFR0D9L36).
As for the foreigners “to share in the pain”, as you put it, that is beside the point. We can see similar lines of reasoning today in some of the populist Greek press, peddling the line, it is “all the fault of the perfidious Troika”. So it is time for the xenoi to pay the cost.
.
@ Michael Hennigan You can read here the statutes of the EFSF http://www.efsf.europa.eu/attachment/efsf_framework_agreement_en.pdf Ireland’s cash position is very strong. That can allow it avoid the EFSF for quite a while, even in a worst case scenario, should it so wish to. I see no circumstance in which a sovereign can be obligated to make a request for support. Policy options will always be numerous. I don’t see much of a link to support for the banks.
“Some x% of the debt is held overseas”, you say. Categories of debt differ. That matters for this discussion. Resident or non-resident – the interest is essentially the same. And like I wrote above, the interests of the taxpayer and the holders of government bonds are almost identical – both want to see a modest burden of public debt and future liability.

Morgan Stanley – Sovereign Subjects Ask Not Whether Governments Will Default, but How

http://www.scribd.com/doc/36402437/MS-Default

I think we need more analysts like Peter Matthews to keep plugging away at this, making the rational case to limit the taxpayer exposure and place the losses where they belong (as much as possible) with those who owe them.

@ Michael Hennigan:

Sovereign default / EU bailout are now surely inevitable. Irish bonds are being bought by the ECB, what more proof do you need?

@Ciaran Daly

You are correct. Professionally, Brian Lenihan has failed miserably as Minister for Finance. The economy continues in a tailspin. The Banking Sector is now out of control. Mr Lenihan’s Department of Finance has been appalling. Its silence and ineptitude quite astonishing!

Ciaran Daly
There is no inevitability about any policy choice whatsoever. There are many shades of grey between taxes, levies, possession, acquisition, appropriation, conversion, usurpation, seizure, etc. And the term you prefer to use will depend on which end of the stick you are on. Sovereigns have immense power, despite attempts to claim otherwise. And potentially many, many choices, for better or for worse – sometimes much worse, as we have seen over the past two years. There is still some flexibility however. And the issues at stake ought to be requiring quite some thought and preparation.

Following on . . . California is the richest large country in the world. So you don’t need to be poor to irk creditors. Even Greece is fairly rich compared to many troubled debtors.
At the other end of the scale, one large sovereign in Europe -in pre euro days- levied all bank accounts overnight to make sure it would make a bond redemption. It got kudos from investors, but probably even won some votes (most voters were probably under the levy limit). We even saw Fannie and Freddie CDS triggered, without US sovereign credit falling apart.

The first thing that must be done is to quantify how much interest payments are leaving the country to pay external bank paper.

The patient is bleeding all over the shop but the nasty cut from the sovergin gash does not fully explain the huge pool of blood on the floor.

I ask again – it should be possible to publish these figures and we could at least diagnose the problem holistically instead of banging all the time about the sovergin brain – it needs the body and heart to pump the around wealth around before it can tax the system.

@ Ciaran

Peter Matthews -spare me. His numbers do not stack up so he resorts to the usual snake oil salesman trick of accusing his opponents of theft. He is little more than a candidate for Liveline.

@Tull
doesn’t seem very nice. He has offered a solution – where is yours?

Eureka,

On reflecion, the comment is intemperate & I take it back.

I don’t believe default on senior bank debt in the context where we require access to capital markets is a feasible option. Obviously, if there is a general EU wide resolution model with debt restructuring then the equation changes.

The lack of bank regulation in the first place put us on this course. The decision to award a blanket guarantee to Anglo compounded the error. It leaves us saddled with an intergenerational debt burden.

@bg

“International bondholders and depositors are entitled to assume that the regulatory system is not run negligently or corruptly.”

People with billions to lend surely have the price of a paperback book that might inform them of the tyoe of party that has run this state for most of the last 25 years? Would they not have the price of a few international phone calls that would get them through to a few business or political journalists? Are these guys to get a fool’s pardon as well as our own politicians, bankers and economists? Gimme a break.

@ Ciaran O’Hagan

Ciarán,

I didn’t wish to imply that Ireland currently needs a bail-out.

To cut to the chase, if Ireland was to default on Anglo debt – – in effect a Eurozone member defaulting on the debt of a sovereign-owned entity- – what in your opinion would the the reaction of:

1) The ECB and the EU

2) The implications for future debt raising

As regards: “Substantial, permanent and long term measures to bring public revenues and spending into line with the prospects for national income would be very welcome news indeed.”

In the absence of a strong international recovery, this is not likely to happen.

There is no constituency for significant reform and this is why the involvemnet of the IMF would be a positive move in my opinion.

The messenger is not infallible but we could benefit from taking a serious look in the mirror!

http://www.finfacts.ie/irishfinancenews/article_1020427.shtml

@Peter

I will give you full marks for your call on the credit cycle and on the disaster facing Irish banks but I fundamentally disagree with your views on resolving it. Specifically
*haircutting senior debt is not a policy option that our EU masters are comfortable with due to contagion effects across the system. That may change some day but not in the short term
*in any event the Rating Agencies would downgrade every bank & no one would lend senior debt to Irish banks for a number of years until re-rating. result deleverage.
*putting the bad assets back to the banks is not on at this stage. I would respectfully suggest they would then all be downgraded due to worries over credit quality. Lumpy corporate deposits would flee and senior debt would not be rolled over. It would require some form of Asset protection scheme for this to work.
*nationalisation is not good for the sovereign. We see that with Anglo.
*default on state guaranteed bank debt is not smart.

Your accusation of fraud re the Govt does not stand up. Once anglo was guaranteed that was it. The state would also bear the losses. Stupidity, ignorance and hubris, I would accept but not theft.

Isn’t it amazing that when the roles are reversed and Anglo is a bondholder (creditor) to Iceland’s failed Kaupthing bank that Anglo writes down the value of its bonds by 96% from €15m to €0.6m?

And yet Anglo has been redeeming €2.4bn of its bonds at €0.6bn and claiming a profit. That INBS have redeemed €900m of bonds for €611m.

In the Independent article below, they claim

“Kaupthing is currently run by a resolution committee. The role of the committee is to safeguard the value of the bank’s assets and to maximise the recovery of claims on behalf of creditors. The resolution committee holds the powers of the board of directors”

A “resolution committee”? What planet are these people on?

http://www.independent.ie/business/irish/anglo-fails-to-register-euro15m-claim-against-bankrupt-icelandic-bank-2311937.html

@Ciaran O’Hagan
“The interests of the taxpayer and the holders of government bonds are almost identical’

Is that simply a statement of support of so-called free market economics ? It seems to me you are claiming that the best position for citizens to take is to allow the state to be dismantled and its assets to be sold off, to the point where the banks debt is paid fully.

There are at least two sorts of problem with your ‘shrink the state’ approach, if I understand it correctly.

First is the debt deflation which is liable to follow from the reduction in state employment and SMEs dependent on state contracts, especially outside Dublin where there is often little else. This little state needs root and branch reform, but it is also the fundamental pillar of decency in our society. Especially for those who cannot afford to buy decency for themselves. We ignore them at our peril.

Secondly, this crisis was not all generated by the public sector. Our property mess was generated by a nexus of foreign and domestic private interests, and the public sector played only a secondary role. Matt Cooper has a good feel for the ‘connections’ game played in Dublin.

More generally, financialisation of the international economy is extremely problematic. Crises are generated by international finance in the full knowledge that they will have to be bailed out by governments when talil risks kick in. Keep the bonuses flowing, and the devil take the hindmost, seems to be the ethos.

It seems unreasonable and wrong that financiers (of whatever stripe) should be entitled to all of their pound of flesh in such circumstances. The hubris of the Irish state was no greater than that of the people who funded the mess. Crooked bets don’t deserve to be paid.

There are many ways of defaulting from an unreasonable obligation, and emigration will be one of them. I suspect that ‘We can’t pay we won’t pay’ will become the majority refrain, and that a politically tolerable resolution will eventually have to be negotiated by the EC. But not before there is a great deal of trouble, and assuming that much worse does not occur.

Gavin
Dara Collearey seems to be in charge. He was…unconvincing..this am on Morning Ireland

@Zhou

“we would not expect recoveries to amount to much more than €16 billion (10% of GDP) over the time frame that our ratings address. As and when recoveries on NAMA’s assets materialize, we may revise our forward-looking estimates of Ireland’s gross and net general government debt.”

“What time frame do their ratings address?”

The Independent claim (see article below) that the timeframe is 5 years. And although this penny hasn’t dropped at the Independent, if you consult the June 2010 NAMA Business Plan page 10, you’ll see that NAMA plan to have 40% of the loan book paid down by 2015 so is the great mystery resolved by taking the loan book (at NAMA paid prices) of €40bn and taking 40%?

http://www.independent.ie/business/irish/nama-to-recover-just-euro16bn-out-of-euro40bn-spend-on-loans-2312019.html

@Jagdip

My understanding is that you have summed it up perfectly. S&P are not claiming that NAMA will only make €16 billion in total as is been reported in places.

Even for the Independent that is an extremely misleading headline / article.

They readily admit the timeframe S&P are talking about is five years:

“S&P, which competes with agencies Fitch and Moody’s, said the €16bn would be recovered “over the timeframe that our ratings address”. The Irish Independent established yesterday that this was a reference to a five-year period.”

Can no one hint at where I miay see S&Ps analysis without paying 500e?

@ tull
why is it assumed that defaulting or haircutting some debt, namely anglos, would immediately result in a cataclysm for all irish financial institutes? i wonder would the initial storm be worth riding out just so we could be free of the anglo noose around our necks. it would surely be better than the slow death we have had for 2 years and will continue to have for many more to come. i know i am not comparing like with like, but the US basically turned their back on lehmans 2 years ago and backed their other stronger banks to the hilt, obviously the fall out was massive, but their recovery began immediately after it. Maybe it is too late now to de-couple ourselves from anglo and the billions it owes but i do think that would have been the best option initially.

It looks like the bond auction was successful.
Bad and all as the data is from SandP the fact remains that sovereign bonds like Ireland are the only place where investors can make a semi-decent return at the moment. As long as markets remain depressed this is definitely the window for debt restructuring.
We’ve had a scare! This is going to happen again but at the moment international factors are good for us.

S&P have a 5 year horizon but they seem very inconsistent in applying this. NAMA asset flows are limited to the 5 years but Government Debt and NAMA Debt is included in full where they should only really be looking at debt maturing in the next 5 years. By definition, NAMA poses zero credit risk over 5 years. It will use any cashflow to repay debt and whatever debt it cannot repay it will automatically roll it over. They seem to have completely missed the plot on NAMA, it is almost completely irrelevant to Ireland’s 5 year capacity to service its debts.

podubhlain
the relentless slow creep upwards of the ten and the widening gap is not good news.

How come irl was able to issue €600m govt bonds today at around 2% (if yields are now above 5%). Is this because the ECB bought them?

@Zhou
Not unrelated to S and P and NAMA – they seem to be saying that this is waht’s expected.
The details seem very sensible.
Important to leave some austerity for after the default though – there’s not much more the country can take. Also good to do it when bonds are attractive relative to other.
So should be doing this carefully crafted default sooner rather than later.

@ JoeJoe

The 5%+ is in respect of bonds that mature in 10y years – – compared with a six months period, there is an anticipation of future inflation and interest rates.

To give a comparative rate for 6 months, the EURIBOR rate, which banks charge each other for borrowing in the inter-bank wholesale market, is 1.139% today compared with NTMA’s rate of 1.978% and the equivalent German bund rate of 0.38%.

I just dont understand what all these comparisions with Germany are about. It seems that a lot of the posters here have never been to Germany. I have been going there for 20 years on business and frankly it is like comparing chalk and cheese even during the “Mirage” of the Celtic Tiger. We export a tonne of butter to them valued at €2,000 and they export to us a Mercedes weighing a tonne for €50,000 and there is no contest. They are the best in the world in just about everything except agriculture. They are a large mature industrialised economy and we are a small backward outpost in Western Europe. So would you look at a benchmark economy more like ours to do your interest margin comparisions and you might stop flapping.

I agree. The constant comparison to Germany in the media is getting tiresome. Especially when german yields are falling to all time lows in a flight to quality. It’s important for the Market but means nothing to the man on the street. What is much more important is how much it is starting to cost us to service the debt. I never see stories about that and it’s much scarier than saying the Irish CDS spreads are 300 bps over german spreads.

@ Michael Hennigan –
“There is no constituency for significant reform”, you say.
Unfortunately there is no other way out. I don’t think the presence of the IMF helps much, and may seriously complicate a resolution. The involvement of the IMF (and the EU) was one reason behind a substantial rise in Greece’s financing costs and the multiple downgrades (even if the agencies attributed it to local conditions). Bondholders had the perception that paper they held was not as senior as it used to be, that their bonds could be used as political football at some later stage. And of course, the aid entailed a long coma for the local bond market. Easier to put markets into coma than take them out sound and safe. There has been very little flow since, and yields are ever higher. All this despite good news on reform.

The implications for future debt raising – most policies that limit the future public debt burden will prove beneficial. The difficulty in this case arises from simultaneously assuring that the contingent liability from the banks remains contained. No use robbing Peter to pay Paul. However there are many different ways of skinning a cat. Professional execution is important, but that is what a government and the public service is there for (you would be looking for some strategic vision as to what is to be saved and what is dross). In this sense, the interests of the taxpayer and the holders of government bonds are almost identical.

What reaction of the ECB and the EU, you ask?
These are not amorphous, but comprise many entities, and a very large number of economists. On the whole, those that have a good knowledge of the challenges would be quite understanding. Ireland got a good deal of stick from some fellow governments when it introduced the blanket guarantee in 2008. They were of course not so much worried about Ireland but by contagion. We need however to understand that going down the Japanese route – trying to save everything and anything – is no panacea.
.
@ paul Quigley. “ It seems to me you are claiming that the best position for citizens to take is to allow the state to be dismantled”.
No, not part o my credo at all” Ireland will exit this crisis well only with a strong state and a stronger government, not weak ones. I’m always careful to accompany calls for cuts in public spending with hikes in public revenues. How that is done is mostly politics (and I’m in favour of a strong dose of income redistribution, but that is neither here nor there).

@ Ciaran

Fair enough mon ami. No Irish state, however, is going to be in a position to address the egregious shenanigans in haute finance. We can, and should, join a Coalition of the Willing.

Sean Whelan on the 9 o clock news could hardly contain himself with excitment about the ‘recovery’. Am I naive to be shocked that the national broadcaster has become an agent of government spin?

@George Orwell

JTO has made very good contributions on the domestic economy and is right to be optimistic about exports, production, GDP growth, etc.

“What will sink us”, as Morgan Kelly said, will be the bank bailout and Nama. JTO has stayed away from commenting on these issues.

JTO again:

Thank you for the compliment, George. What you say about my staying away from commenting on these issues is correct. Very observant of you. As I have said a few times on other threads, I don’t post on banking matters or on NAMA, as I freely admit I know nothing about them. I limit myself to topics I know something about, such as macro-economics, demographics and infrastructure development. I’ve been posting for the last 3 hours on another thread on this site, relating to the construction of a motorway from Dublin to Derry (or, as Brian Lucey no doubt calls it, Londonderry). It would be good if everybody posting on this site stuck to topics that they know something about and contented themselves with simply reading the threads concerned with topics that they know nothing about (in my case, banking matters and NAMA). Incidentally, if you think 4.30am is a bit late to be posting here, it is actually 11.30pm as I’m in Tallahassee, capital of Florida, tonight.

While I’m certainly not going to comment directly on banking matters and NAMA for the reasons I just gave, macroeconomic matters do have some bearing on them. So, briefly (as it is getting late even here):

(a) All the figures regarding debt are meaningful only as a percentage of GDP (or, if you wish, GNP). Therefore, it matters what the GDP/GNP growth rate is in the next few years. If GDP/GNP grows at 0pc over the next few years, then debt as a percentage of GDP/GNP will be a particular level. But, even if the debt remains the same, if GDP/GNP grows at 3pc/4pc/5pc over the next few years, then debt as a percentage of GDP/GNP will be much lower.

This time last year, almost all economic forecasters predicted that GDP (repeat: GDP, not GNP) in Ireland would fall by around 3pc or 4pc in 2010. The Dept of Finance, Central Bank, and ESRI all predicted a fall of 3pc. The IMF predicted a fall of 4.0pc in GDP. Standard and Poor predicted a fall of 4.5pc. As is now clear, all of these forecasts have turned out to be of a very poor standard, especially Standard and Poor’s, which is how presumably they got their name. In contrast, I predicted this time last year that GDP in Ireland would rise by 2.8pc in 2010 (my prediction can be found on the site for some time around August/September last). Nearly all economic forecasters have since moved in my direction, with continuous upward revision of forecasts for GDP growth in 2010, although none of them have come as far as me yet (give them time). Ulster Bank were the latest to so only today (or, at least, today if typing this in Tallahassee, but yesterday if reading this in Ireland), They revised their GDP growth forecast for 2010 from -0.5pc to +1.0pc. That’s a massive revision to be done in one go, especially following similar revisions since they forecast a fall or 3pc back this time last year. I’m still sticking to my forecast of GDP growth of 2.8pc in 2010, and even one more quarterly revision of this magnitude, on top of the three of four quarterly revisions most economic forecasters have allready made since this time last year for GDP growth in 2010, will bring them into line with mine.

One can get too nitty-picky about figures, of course, and its possible I’m guilty of this in the above paragraph. But, more broadly, it can be seen that the various factors that are causing the debt problems in the banking sector are also causing a massive improvement in competitiveness, which is in turn leading to exports increasing far more rapidly than was predicted, which is in turn leading to GDP increasing far more rapidly than was predicted. So, take the fall in house/office/industrial premises prices. We can debate how large its been, but let’s say 50pc for argument’s sake. Clearly not good news for the banking sector. But, the converse is that such a fall results in a massive improvement in competitivness, especially as there has been hardly any fall at all in many countries, including the UK.

(b) My second point macro-economic point relates to balance-of-payments. Unfortunately, only two economists in Ireland appear to understand what this is, Ronnie O’Toole and John Fitzgerald. I certainly don’t find much evidence that posters on this site have much of a clue as to what it is. Quite simply, when we talk of ‘surplus’ and ‘deficit’ countries, we are talking about balance-of-payments surpluses/deficits, not government budget surpluses/deficits. Nearly all countries have a government budget deficit. But, in relation to balance-of-payments, some have a surplus and some have a deficit. It is almost impossible for a country with a balance-of-payments surplus to go bust. By definition, such a country has enough savings to fund any budget deficit. Of course, savings and government deficit-funding is a 2-way flow. So, savings in other countries help fund Ireland’s government budget deficit, as is well documented in above posts. But, savings in Ireland help fund other countries’ government budget deficits. I myself am funding Obama’s budget deficit this year, or at least part of it. A country’s balance-of-payments surplus/deficit is a measure of the relative size of these 2-way flows. A country with a balance-of-payments surplus either has enough savings to fund its government budget deficit in its entirety, without recourse to borrowing from abroad, OR the amount of savings from that country going to fund the government budget deficit in other countries will be greater than the amount of savings from other countries that it needs to fund its own government budget deficit. The significance of all this is that nearly all forecasters agree that Ireland is rapidly heading towards a balnce-of-payments SURPLUS. Most predict it by next year at the latest. The improving balance-of-payments situation is the main reason why Ireland continually dumbfounds the doommongers and continually has no trouble selling its bonds, even when useless organisations like Standard and Poor are hurling bricks at her. Its also one of the major differences between Ireland and Greece. As I say, on most economic forecasts, by next year Ireland will be classed as a ‘surplus’ country, in the meaning of that term that is normally applied (ie in relation to balance of payments). Hence, predictions that Ireland is likely to go bust are a nonsense.

I apologise if the above is a bit rambling and incoherent. Typed very quickly after a 10-hour coach trip from Savanna to Tallahassee. I suggest that John Fitzgerald be invited to post on this site on the significance of having a balance-of-payments surplus. He would certainly explain it a lot more clearly than me, but, from what I’ve read of his commentaries, the gist would be the same.

I’d call it stroke city jto.
http://www.ft.com/cms/s/0/ef7fbe7c-b154-11df-b899-00144feabdc0.html
The ft and the trillion euro bond markets are…..unconvinced about our prospects. And, unlike you, they do know something about banking.

@Jto, Brian Lucey and Innocent Bystanders

It seems to me that at the core of the pessimistic-optimistic debate is the simple question as to whether or not our economy can continue to grow while carrying the NAMA burden. JTO you have been very consistent in your analysis of the macroeconomic stats and accurate in your forecasts to date (not that you need to be told that!) and your contributions have been very welcome (your BOP analysis being a prime example). They have also been quite courageous given the uncharitable abuse that you often receive despite your readiness to admit your blindspots. That said, the NAMA problem undoubtedly has serious consequences for our growth potential as Brian Lucey has been at pains to point out. For me the nub of the debate is will NAMA have such a negative effect on the economy so as to make the accuracy of the optimistic short-term predictions irrelevant in the medium to long term or as in the words of the Guv’nor are they ‘manageable’? An unemotional reply to this question by either side which took account of both positive developments in the economy (most notably our export performance) and the Debt funding problem
would be welcome.

FT editorial (as linked by BL):

“It is time to staunch the bleeding. As Irish state guarantees near their expiry date, some banks will not be able to refinance their balances. The government should prepare insolvent banks for forced debt-for-equity swaps, which would instantly recapitalise the banks in question and cap the government’s exposure. This cannot be done frivolously; European institutions are exposed and EU partners must be consulted. But someone must put an end to the practice of handing banks blank cheques. Some Irish pluckiness would benefit us all.”

in august : our 10y bond yield has +68bp while german has -57….so the fall in the bund is NOT all thats driving spreads.

@ JTO

Re the balance-of-payments surplus, which is largely related to the multinational sector, that uses non-repatriated profits for inter-company lending ex-US, how does that benefit the domestic economy?

@Michael Hennigan

I really don’t understand the point you are making. Obviously, I have failed to convince you. Fair enough, there is no reason on earth why you should listen to anything I say. But, here is what John Fitgerald of ESRI said a few months ago in the Sunday Tribune:

“In the current crisis, what makes Ireland very different from Spain, Greece and Portugal is our forecast balance of payment surplus – the people of Ireland are collectively net repaying foreign debt. With further tough fiscal action on the way and depressed consumers, the surplus will inevitably increase, as will the related repayment of debt. There are few examples in recent history of countries with balance of payments surpluses going bust; debt repayment and insolvency don’t normally go together.”

That is more or less what I said in part (b) of my post. But, he has put it much more succinctly and much more clearly. I repeat my call that John Fitgerald be invited to post on here to explain the significance of Ireland becoming a ‘surplus’ country (his forecast, not mine) in relation to such items as creditworthiness, likelihood of going bust, etc. At least he understands these things, which is more than can be said for 95pc of the posters on here.

Further thoughts

If ESRI BoP forecasts are credible and if the MNC aspect is not a serious distortion then JTO has a very important point. We are not living beyond our means unlike the other PIGS. If we are not living beyond our means how can default be on the cards?

So you want professor John fitz to spend time defending the views of an anonymous poster on a blog he seems to rarely frequent? Oookkaaay…
Have you tried emailing john.fitzgerald@esri.ie ?

@Brian Lucey

I’d certainly be delighted to see Professor Fitzgerald elaborate, for the benefit of posters here, on the views that he expressed in the Sunday Tribune article which I quoted, and which paint a radically different picture to the one given by most posters, including most academic economists, on this site. The fact that his views on this issue, as expressed in the Sunday Tribune article, seem pretty similar to mine (and rather different to your’s) is of no importance.

Given that it is in such short supply, we really need to make use of whatever expertise exists among Irish economists. It is abysmally obvious that the vast majority of posters on this site, including most academic economists, do not appear to know the difference between the balance-of-payments surplus/deficit and the government budget surplus/deficit, a matter of vital importance when discussing a country’s creditworthiness or likelihood of going bust. Hence their increasingly absurd pronouncements to the effect that Ireland is likely to go bust at the very moment when it is becoming a ‘surplus country’ in the usual meaning of the term ‘surplus country’ in economics (ie referring to the balance-of-payments).

But, if Professor Fitzgerald has little interest in posting on this site (and, given the level of ignorance displayed on this site, who could blame him?), you can grasp the essential points from part (b) of my first post above, although I’m sure that Professor Fitzgerald would explain them much more clearly than I do, and probably sufficiently clearly for even you to understand them, a task that is way beyond my capabilities.

I would direct you to the comments posted by the other Brian, Brian Woods II. I’m not quite clear if he agrees with my views on this issue (possibly not, and no harm in that), but he does at least say ‘JTO has a very important point’. It is precisely because of its importance that I thought it would be a good idea to have someone of status, who actually understood the issue, to post on it.

Oh well, much as I’d like to continue debating this with you, I’m off now to spend the evening in the New Orleans French Quarter, where I hope to make a modest (very modest) addition to Ireland’s balance-of-payments surplus at the casino.

I see Jody Corcoran in the sindo reads here…indeed, quotes from here without attribution and in a manner that makes it look like he interviewed the quoted. That’d be Ciaran o’hagan and myself. Hi jody!

@PQ A very interesting link though one must be wary of anyone boasting an “alternative take”. Of couse we are actually heading for surplus despite the transfer pricing, nonetheless I take your point that the complexity of our BoP would caution against taking too much comfort on this score. It also casts some doubts on the credibility of Holohan and Fitziee in hailing this as a big plus. But JTO is right in asserting that this is a much more important debate than S&Ps silly and naive calculations.

@BL If you didn’t actually talk to Corcoran, he should be ashemed of himself for implying that he did so, which I agree is how I read the article. I am even more annoyed that he didn’t quote me!!

@all

re Sindo article

proof that you shouldn’t believe everything you read in the papers

@ JTO

You refer to John FitzGerald, who is possibly a clever economist who like most people speaks with wsidom and sometimes doesn’t.

You then suggest “95pc of the posters on here” are ignorant.

So do you believe that the bulk of the surpluses from the activities of Pfizer et al are kept in the domestic banking system?