Ten Year Bond Spread at New High

A bad day in the sovereign bond market. Irish ten-year bond yields are up about 25 basis points, hovering at about six percent. Spreads over German equivalents are at about  370 basis points, well above the levels that prevailed in May prior to the announcement of the EU-IMF bailout fund.

Just reporting it, so don’t shoot the messanger. It seems worthy of discussion. Is this a temporary overreaction to relatively minimal news (WSJ story on the stress test deficiencies and some other stuff) or is this the markets catching up with the grim reality of the fiscal situation? The beginning of the end or a great buying opportunity for Irish sovereign debt?

119 replies on “Ten Year Bond Spread at New High”

Grim reality imo. Unquestionably. Far too many dirty secrets for anyone’s comfort. Paddy Power will soon be offering odds on blood on the snow in the new year I’d imagine. As Neil Young once eloquently put it – ‘Everyone Knows This Is Nowhere’.

Wallets Full of Blood: Roscommon Death Trip

As Krugman said (in the opposite context) the bond market only matters if it tells you what you want to hear. The FF spinners will probably find some reason why the rise in bond prices is actually a good thing and then run with it to RTE where it will get a “fair and balanced” hearing.

I won’t be investing in National Solidarity Bonds at 4% though I suppose they may be safer than bonds.

Saw Brian Cowan on the news. So shifty he could’t look at the camera. Meanwhile Brian Lenihan has started mentioning his cancer again. Anything to avoid dealing with the crisis.

Bailing out the bankers and speculators has cost us. Now we all sink because of the greed of a few!

Not very technical but the sentiment out there is not helped by all the unbelievable negativity in the media. Yes the financial world is on crisis but the grass us still growing, new babies are being born life goes on we are not in the midst of a world war. Time to focus on what we’ve got and stop being so negative about what we don’t have. Actually think a lot of realism has hit home compared to when everything was booming

@ Karl

its a culmination of around 6 shocking weeks of bad PR (management of the situation), bad fundamental data (bank results weren’t great) and bad analysis or understanding by independent parties/The Market.


1. Its bizarre that we still don’t have either (a) a final bill (within a margin of error) or (b) a final plan for Anglo
2. Its bizarre that we still don’t know what happening with EBS
3. Its bizarre that we still don’t know what happening with INBS

We should have had answers on all of these well ahead of the the end of the g’tee.

4. why did we wait until now to get the g’tee extended? Couldn’t this have been done say before the start of September, before the “1mth-to-go” clock started ticking?
5. in combination with the above, the market has completely misread the issue of the so called “25bn September Wall of Worry”. The real figure requiring refinancing this month is more like 12bn (reduced to 8bn after IRNW did 4bn short term yesterday), and ECB repo could easily be accessed via huge amount of new eligible assets on bank balance sheets (incl NAMA bonds)
6. why is the AIB asset selling taking so long? This has been on the cards since the start of the year, so why have yet to see even one of their 3 primary non-core assets reach an agreed sale?
7. the S&P analysis was at best incomplete (no acknowledgement of the asset side of NAMA or any of the bank bialouts) and at worst faulty (extremely high and unexplained loss figure for Anglo).

All of these – massive government inaction, drip drip losses at banks, drip drip news/losses at Anglo, misunderstood analysis on bank refinancing req’s, debateable analysis on NAMA/bank bailout costs by S&P – have combined for a one way flow of negative sentiment on Irish bonds. The fact that the NTMA had to make comments on its own after the S&P analysis, rather than via the DoF, is perhaps a sign of growing communication problems within the government, at least over the summer break, or that some people have lost focus after what was, admittedly, a good performance from all involved with communication an “Ireland recovery” story theme in the first half of the year. Resting on laurels seems possible.

The key is to get as many of these issues off the table over the next 3 or 4 weeks as is possible, so that the focus can start to shift onto the budget and the normalisation of the Irish banking sector, hopefully allowing some decent front running of the 2011 issuance either in Nov or early early New Year.

Noruma are suggesting that it is a great buying opportunity for Irish Bonds http://ftalphaville.ft.com/blog/2010/09/07/336206/mmm-european-yield-stew/

But, in economics, things tend to happen very slowly then all at once. I’m sure there is a trigger somewhere that will drive this very quickly over the edge. Just spotting it will be the trick.

For example, on politics.ie today there was a thread started titled “Has the run on Ireland begun” at 9am. It has had over 45,000 views since.

It is stuff like that that produces banks runs, and once they start..

In my simple mind these yields are building in a very large probability of default/restructuring. It’s not just that 3.8% p.a. over 10 years amounts to, say, 30%. This would assume 100% loss given default. Given that actual default/restructuring should have a much lesser effect than 100%, it looks like the bond markets are building in a near certainty of a default/restructuring at some time in the next 10 years.

LBJ on inheriting the war in Vietnam. “If you think there have been problems so far, I can only suggest you hold on for the next round.”

I’ll do what nobody else does and make a prediction (in the short term)
Spreads will relax significantly tomorrow and the NTMA will off-load its Thursday debt pretty easily.
If I’m right the hypothesis being supported is that ECB will strategically buy Irish bonds to lead the market for a while in the hope of avoiding a bailout scenario.
If I’m wrong then….who cares, I’m wrong

It is most likely a reaction to an article in the Irish Times last week by a prominent Irish economist who advocated that Ireland default on its debt, even though Ireland has no difficulty repaying that debt, and even though interest repayments on that debt as a percentage of GNP (note: GNP, not GDP) are much lower than they were 20 years ago, and even lower than were 10 years ago at the height of the Celtic Tiger era (see figures below). I shall not, of course, name that prominent economist, but it is the same one who, on this very site back in December 2009 (link below), expressed a wish to see the Irish economy ‘experience a painful crash’ as this would advance his political objectives.


I think the reaction would be the same in any country. If the Financial Times carried an article by a prominent British economist advocating that the UK default on its debt (which, as a percentage of GDP, is roughly the same as Ireland’s), their bond yields would rise too. It is how markets work. For reasons totally beyond my comprehension, the Irish Times is viewed abroad as a prestigious paper. If it carries an article by a prominent Irish economist advocating that Ireland default on its debt, what on earth do they expect to happen? Do they think that no one will read it or react to it? If I wrote an article in the Irish Times announcing that I was planning to default on my mortgage, I’d get short shrift from my bank if I popped round a week later looking for a loan.

If we wish to discuss these matters intelligently, it should be done on the basis of hard cold facts. Unfortunately, these are rare in the Irish media, and not too conspicuous by their presence on this site either. However, we are fortunate in having Finfacts. While I disagree with Michael Hennigan on lots of matters, full credit for his Finfacts website, which often has valuable information the Irish media ignore. Tonight, it has come to the rescue yet again. I won’t give a link to it (easily googled), as posts on this site get held up (by the software, not the moderators) if they contain two or more links. But, the Finfacts website tonight gives some very interesting figures on Ireland’s debt interest repayments as a percentage of GNP (note: GNP, not GDP) between 1990 and 2014:

1990 8.4%
1991 8.1%
1992 7.5%
1993 6.8%
1994 6.4%
1995 5.7%
1996 5.4%
1997 5.3%
1998 3.9%
1999 3.1%
2000 2.3%
2001 1.9%
2002 1.6%
2003 1.5%
2004 1.3%
2005 1.3%
2006 1.2%
2007 1.0%
2008 1.0%
2009 1.9%
2010 3.4%
2011 4.2%
2012 4.6%
2013 4.9%
2014 4.9%

So, in 2010 Ireland’s debt interest repayments as a percentage of GNP (note: GNP, not GDP) are just over one-third of what they were in 1990, and even in 2014 will be just over one-half of what they were in 1990 (and 1990 was itself well past the peak of the debt crisis back then, the figure was even higher in the 1980s).

At the end of the day, defaulting on one’s debts is a moral issue. It might be moral for a person/country facing starvation or total ruin to default on their debts if the debt interest repayments took up 50/60/70%, or whatever, of their income, but not when they take up 3.4% of their income, which is the case with Ireland in 2010. My mortgage interest repayments are considerably more than 3.4% of my income, in fact hey are about 10% of my income. Am I entitled to default and tell the bank that I don’t intend to repay them? Would it be a moral thing to do? And, if I did, could I expect anyone to lend me money in the future, given that I had refused to repay a debt that I could easity afford to repay?

Given that Ireland’s debt interest repayments as a percentage of GNP (note: GNP, not GDP) are much lower in 2010 than in 1990, why is there so much talk from economists about defaulting now, when there virtually none was back then? My answer would be that there was a much higher class of economist in Ireland back then, both intellectually and morally. For starters, we didn’t have economists back then who expressed a wish to see the economy ‘experience a painful crash’.

Go on John….Name that economist!
Remember – Anglo isnt Ireland. So, we must have missed that article on sovereign default.
Was it Ciaran O’Hagan? He was on the radio this morning….

And why did they take four days to read the invisible article? ? I know the US markets were off yday for labour day but i think the Times is available online at midnigh? Its shocking, how slow information acquisition is in the markets isnt it. (Actually, it is – the penny now is dropping, rebounding, dropping again that there might, just might, be a real problem with Anglo….).

There is a weird thing that I can’t figure out but those who buy bonds intertiwned with or the same as those who are owed money through previous bond sales. It is not in their collective interest to force a default through crippling high interest rates, but nobody acts for collective interest (unless you’re the ECB where all roads meet in many ways)

@JTO I guess back then – when the whole country knew that the elite had their own rules – people knew their station. Ah the old days when we actually got to spend some of the capital we borrowed. The Irish citizens or state did NOT borrow this money. It is quite easy to see through the cheap three card trick now look over here logic of the comment above.

By ‘this money’ of course I mean the money borrowed for the purpose of bailing out the bank.


We didnt have black holes (Anglo) and uncertainty (Nama) on the national books back in 1990.

Why dont we run for the safety blanket of the EU/IMF fund? Theyre pulling the strings anyway, we may as well get the benefit of the cheaper credit.

@ Celtic Phoenix
I suspect because it’s politically more difficult for all concerned but….
If Ireland can raise short term credit at less than 5% shouldn’t we just stick with the current course of action anyway?

No, no, your all wrong. BWII on the “default on anglo debt” thread (the one that got all the attention, when we should have been discussing Mystery Guest’s article on “sovereign default NOW, DAMMIT” ) had an estimate of the breakdown of the spread giving me a mere 15/350. Its so good to know that I am much much more important than that. Why, the international markets have hardly started, i mean, stopped, persecuting me since thursday. Now, wheres my white cat….


“my mortgage interest repayments are considerably more than 3.4% of my income, in fact hey are about 10% of my income. Am I entitled to default and tell the bank that I don’t intend to repay them? Would it be a moral thing to do? And, if I did, could I expect anyone to lend me money in the future, given that I had refused to repay a debt that I could easity afford to repay?”

To extend your weak analogy..

Unfortunately you forgot to mention that your day to day expenses are 165% of your income. The only way you can continue to pay your debts is by borrowing, so you are at the mercy of your creditors.

Your creditors, though, are numerous and worry about each other. None of them want to be left holding your debt, so tend to run away at the first sign of weakness.

Relying on them for your day to day expenses is a sure sign of weakness, but insisting on paying a minimum of 15% of your income (GNP) on a big shiney white elephant is unlikely to help matters.

The thing about stats is that they are never terribly good at telling a full story, and your GNP list above leaves out so much that it is probably worse than useless..

I suppose John you think its moral to drive people into poverty to pay for debts they had no role in creating. Our government, against the will of the majority gauranteed the liabilities of this fraud of an institution. To equate this to someone taking out a mortgage and quoting a load of stats about sovreign debt interest rates is just a smokescreen

4. Of course not, shure weren’t the fellows on holiday? I’m astonished we got anything agreed at all without an all night session from our hard-working public representatives.

Speaking of which…
“(3) Financial support shall not be provided under this section for any period beyond 29 September 2010, and any financial support provided under this section shall not continue beyond that date.”

It is a bit premature to say that the guarantee has been extended. The minister has expressed a wish that this be so and has received approval from the EU. In the normal course of events, the minister would have to go to the Parliament to have this ratified by an amendment to the legislation. Or perhaps we are being ruled by decree now?

With due deference to your expertise can I ask this:
The great unknown in all of this seems to be the European attitude/commitment to our present situation.
What would you do if you were the ECB and didn’t want a major political headache with a bill that, in the great scheme of things (European tems) is not that bad?

@a punter

We are not discussing morality. We are discussing investors’ perception of Ireland, as manifested in bond yields.

As the figures I posted above (from Finfacts) clearly show, Ireland has no problem repaying its debts, both those resulting from government spending and those resulting from bailing-out the banks (incidentally, the banks were bailed out in lots of countries). The debt interest repayments in 2010 amount to just 3.4% of GNP.

However, the perception is growing (for the reasons I outlined) that Ireland won’t repay its debts, even though it can easily afford to. I don’t think it is a remotely serious possibility myself, but obviously some investors think it is. This is bound to have an effect on bond yields.

You may say that Ireland shouldn’t repay any debts incurred from bailing-out the banks, because the banks are not Ireland. Fair enough, that is your moral standpoint, and it is no doubt admirable. I could even post here that I agree with you. But, the problem is that investors may not see it as you see it. Given their wrecklessness, it might be perfectly justifiable, moral and proper for Ireland to disown all debts incurred by its banks, slice those who ran the banks into tiny pieces, and feed them to the lions in Dublin Zoo. That would make a lot of people happy. I might even have a good laugh about it myself. But, don’t be surprised if bond yields rose as a result.

Not discussing morals? You started it.

‘At the end of the day, defaulting on one’s debts is a moral issue’.

What your are all missing is the important fact that when Brian Lenihan spoke to Christine Lagarde to explain that he was guaranteeing all of the operations of Irish banks back at the beginning of the crisis he spoke to her in French. He mentioned this on an RTE documentary yesterday. It’s important. You wouldn’t want to antagonise the French by not speaking to them in their language. Mind you he’s the only member of the government whose English is as good as hers so I don’t know why he bothered.

Welcome to the loonatic fringe.

Anyway, I agree with Eureka. Do we know what volume of bonds were traded? I suspect it was tiny. Most of the buyers of Irish debt at the NTMA auctions are buy and hold. There’s a small turnover of bonds daily to set a price, but in general, I reckon Irish benchmark bonds are thinly traded. So the NTMA will get away the next auction at less than current secondary yields, though above last primary issue yields, and it will be hailed as a great success… as all the other issues have been a great success.

They’re always a great success until they stop.


For example, on politics.ie today there was a thread started titled “Has the run on Ireland begun” at 9am. It has had over 45,000 views since.

It is stuff like that that produces banks runs, and once they start..

JTO again:

Yes, indeed.

And you could have added: “It was the hope and intention of those posting the thread that a bank run would result”. Although they are probably delusional in expecting such. The day when international investors are influenced by a loony site like Politics.ie is the day when international capitalism succumbs to international marxism.


Not discussing morals? You started it. I quote:

‘At the end of the day, defaulting on one’s debts is a moral issue’.

They’re not our debts. Simple as. It is straightforwardly immoral to ask the people to pay for them. (That’s the three card trick bit again JTO – mixing up your debts and bailouts). All these bond people you’re frightening us with know that it’s immoral – not that they care – but they do care about uncertainty. It’s the blanket uncertainty that i think is almost visibly driving people around the twist here – and in the markets too.

I don’t think that the caricature of retribution you posit would make the general populace happy. It’s actually a broad brush insult to critics of the discredited government. Unlike the government ordinary people here are not cruel. They’re mighty curious though.

@ Paul
It actually is (genuinely) important.
To speak French in the first instance but then to stress this in a TV documentary reveals a possible flaw in approach – how things are communicated is much more important than what is actually being said.

‘a loony site like Politics.ie’

Ah you mean the one where the increasingly popular opposition political activists thrash out issues? It’s not perfect but it sure beats the blank face of power.

If Irish sovereign debt is effectively underwritten by the ECB and/or EU/IMF, why wouldn’t bond yields increase? Given the tax take, the ‘cost’ of NAMA (fill in the blank), the increasing costs of underwriting bank debt (ditto), current government expenditure, rising unemployment, it would be altruistic in the extreme not to look for a risk premium. To cap it all I read on the web tonight that Mr Cowen, ex Finance Minister, said the reaction was part of the ‘ebbs and flows’ in the bond market. John the Optimist says Ireland has no problem repaying its debts. May be but can it afford any public service for the next six or seven years and avoid problems?

See here for example – finally got the ISE site to do some work for me; Eoin you must be proud! –
ISIN: IE00B6089D15
10 year expiring in Oct 2010
Open price: 102.0896
Close: 100.713

Amount listed: 6,773,583,050
Daily volume: 40,780,000

And this volume is not out of line (click the H button on the link above).

@ JtO Of course, international investors are too busy poring over op-ed pieces in the Irish Times to have time to look at politics.ie. Its a pity they didnt see Dan O’Brien op-ed the previous week which came out strongly against any default.

@a punter

Not discussing morals? You started it.

‘At the end of the day, defaulting on one’s debts is a moral issue’.

JTO again:

Fair enough. I should have said that the international investors are not discussing, or even interested in, the morality of whether or not Ireland should repay debts incurred by its banks.

You have taken a moral standpoint, namely that Ireland should not repay debts incurred by its banks. Same as Brian Lucey. I am taking a moral standpoint that Ireland should. Same as the government, most of the opposition, and most economists. You and I and the others can have a morality debate about it until the cows come home. My point is that the international investors are not interested in that morality debate, and will push up bond yields, even if you romp home as a clear victor in any morality debate with me.

It’s not only a moral standpoint JTO. It is a practical one. ‘Don’t volunteer to pay debts that you didn’t run up’ is very practical advice. I think it is also naive to believe investors are not interested in morality debates – particularly when a government is so incredibly unpopular.


“And you could have added: “It was the hope and intention of those posting the thread that a bank run would result”. Although they are probably delusional in expecting such. The day when international investors are influenced by a loony site like Politics.ie is the day when international capitalism succumbs to international marxism.”

I’m not quite sure what you are getting at here John.

What do international investors have to do with a bank run?

A bank run (as I am and most people understand it) is when ordinary depositors rush to withdraw their savings from the banks because they lose confidence in the banks. e.g. the northern rock run http://static.guim.co.uk/Guardian/business/gallery/2007/sep/27/1/NRockL-8672.jpg

International investors do not matter. Ordinary depositors do, so when a site like politics.ie, which is presumably read by ordinary punters starts getting excited by finance, it is time to worry.

My overall point, to spell it out clearly, is that banking is built on trust and if it does not keep that trust it will fail. The thing that breaks that trust can be something very small.

It’s discouraging how few of the hacks understand the difference between the CIFS and ELG schemes — but as part of the lousy PR job that the government has been on since July, no one is out there explaining the difference.


Bonds are not exchange traded. Volumes today were significant. Anybody see our leader tonight on TV, really rattled.

@a punter

Ah you mean the one where the increasingly popular opposition political activists thrash out issues? It’s not perfect but it sure beats the blank face of power.

JTO again:

Who are the “the increasingly popular opposition political activists” to whom you are referring?

Do you mean fringe groups like the various socialist and left-wing parties?

I see no evidence of their increasing popularity.

Do you mean mainstream FG and Lab politicians?

Yes, they are way ahead in the opinion polls. Almost certain to form the next government. But, you’ll be on here denouncing their treachery a month after they take power. Regardless of anything they say now, and I don’t have a clue what they say now, there isn’t the remotest one-in-a-million cat-in-hell’s chance that they will be one iota different to the FF/Green government in relation to Ireland defaulting.

@the loan arranger
Bonds are not exchange traded.
Do please tell more!

Eoin will tell you I am a very slow study…

Robbie Kelleher (the Davy director, I presume) was on 6.1 news saying that volume was light (though I believe drawing the wrong conclusions from that).

@ Brian Lucey

“So, we must have missed that article on sovereign default.”

revionist history 101 is obviously being taught on here tonight.

For the record – you argued for the revocation of a now accepted to be irrevocable government guarantee. This is de facto default. You either deliberately or ignorantly argued for a default of the sovereigns obligations, but argue for one you did. Lets at least accept what happened then, even though you have since changed you mind now.

@ Hogan

“It is a bit premature to say that the guarantee has been extended.”


From the DoF this afternoon…”The Minister for Finance, Mr Brian Lenihan, TD today announced that the Government guarantee for short term bank liabilities, including corporate and interbank deposits as well as debt securities would be extended from its current expiry date of 29 September to 31 December 2010. ”

What am i missing here? A basic understanding of the English language?

And double huh?

“See here for example – finally got the ISE site to do some work for me; Eoin you must be proud!”

I thought calling people out for no particular reason was only a trait held by Lucey? Seriously, it’s a bad habit, don’t start it yourself.

On Prime Time this evening the government representative, Éamon Ó Cuív, was asked repeatedly by Miriam O’Callaghan “why do you not let Anglo Irish Bank go, before it bankrupts the State” and each time he answered by saying “that would be disastrous for ordinary people with deposits and we can’t allow that to happen.”

If Mr. Cuív actually thinks that the people of Ireland still believe that Anglo Irish Bank is being saved for “ordinary depositors” then this government has moved on from being totally incompetent to now being in a state of complete delusion.

Of course the really worrying part of all this is that Mr. Cuív probably believes that what he is saying is correct.

AFAIK, there is no requirement to disclose price and size of every deal on a stock exchange so there is incomplete price discovery. There is no real investor interest in Irish bonds at the mo for obvious reasons.

The odds on a a Greek like solution are rapidly climbing. I would expect an emergency budget with an accelerated fiscal adjustment, the rapid completion of NAMA, the nationalisation of AIB and some official funding commitments for 2-3 years at 5%. JTO is right-not a cat in hells chance of default. That is years away if at all.

O Cuiv now waving a copy of Tuam Herald on primetime (to explain proposed workfare scheme). Do international investors read that too?

“What am i missing here? A basic understanding of the English language?

And double huh?”
The Dail – it doesn’t exist until the Dail votes on it.

“I thought calling people out for no particular reason was only a trait held by Lucey? Seriously, it’s a bad habit, don’t start it yourself.”
Eh, I was giving you a hat tip that I had managed to do something for myself (at your prompting many moons ago). It was meant as a compliment…

Mind you, see what @a loan arranger says about off-exchange trades… so we have no public record of volume?

“Increasingly popular opposition political activists”…you know the ones who throw shoes and eggs at…..you know ex Bristish Priministers ….
Great stuff. Strike a blow for Ireland and all that malarkey. Won’t get into that though now.

I have always enjoyed your posts JTO. And, because of your posts I learned a new word the other evening – Panglossian. (Then I learned it’s derived from a character in a play so it is kind of equivalent to calling somebody Simpsonian (if you catch my drift) -so a bit disappointing!).

Anyway. Morality of default – not really at issue. It’s akin to murder in self-defence. You never want to do it but if you have to then…..

Still think we’re going to be ok enough though. The crash is coming but we will be buffered to some extent by membership of the Euro. It won’t be pretty but it’s in nobody’s interest to have us fail disastrously. So let’s just brace ourselves and make sure that we have something left to walk away with

@ Hogan

apologies! Thought you were suggesting i would be proud of the volume, which was an odd thing to claim! Again, apologies!

But yes, vast majority of bond trades are off exchange, bank to bank or customer to bank. In fact, i completely forgot some are actually done ON exchange! But on the private to private trades, for instance, i know a French bank sold 45mio of Irish bonds in one ticket to the ECB today by themselves, as just one example. ECB was moderately agressive today volume wise.

“It is most likely a reaction to an article in the Irish Times last week by a prominent Irish economist who advocated that Ireland default on its debt, ”

I enjoy reading your posts on the site and you are great for excellent ananlysis on stats.

But to suggest that BL’s Time Op-Ed piece had anything but a minuscule effect on the bond market is massively exaggerating his influence. (No offense BL!)

And as LorcanRK has pointed out there is more than interest as % of GNP to the repayment of debt.

“7. the S&P analysis was at best incomplete (no acknowledgement of the asset side of NAMA or any of the bank bialouts) and at worst faulty (extremely high and unexplained loss figure for Anglo).”

I don’t think it is that difficult to see where S&P came up with the €35bn cost for Anglo.
The provisions on the non-NAMA loans at 17% are woefully insufficient and that is where most of the additional losses are going to come from.

Hi all

I’m in the US and read the WSJ this morning (normally never would). The article was quite prominent – top right hand corner. I can see how it would have contributed to alarm. Of course, the infamous fundamentals help too.

Cue – Jaws theme…..the IMF circling! eeep.

@ DE

well, you may have some figures down on paper which you’re more than willing to share with us, but S&P aren’t. They refused to show their figures to any bank that asked for them. They just produced a figure. Which is odd, cos ratings agencies are usually very keen to offer their analysis for scrutinty. I’m not suggesting something weird or unscrupolous, but simply that they went against their usual standard in not explaining their figures. And as i said, the entire analysis had flaws or questionable attributes throughout (asset value at ZERO).


No wonder the Taoiseach looked shattered. He is going to have to tell Jack and David that the Croke Park deal is off. Does Minister Lenihan get to be the first Minister for Finance since Earnest Blythe to cut the old age pension & it will not be by a shilling either.

“well, you may have some figures down on paper which you’re more than willing to share with us, but S&P aren’t. ”

I posted up some on figures on the site a few days ago analyzing the non-NAMA loans using info from the Anglo accounts and NAMA discounts.

“And as i said, the entire analysis had flaws or questionable attributes throughout (asset value at ZERO).”

I didn’t think that was what they said about the assets. They don’t value them at ZERO they just aren’t allowing us to net them down from the GGD because they weren’t liquid.

The bottom line is that 17% IFRS discount is nearly close enough to reality. Anglo has enough capital to absorb losses on the NAMA portfolio if the discount is circa 60% but it will then have nothing left to absorb the losses on the non-NAMA loans.

@loan the arranger

Well that’s just one upside of IMF time – throwing rubbish like the Croke Park agreement in the bin. Perhaps it would force real reform. FAS could go first.

@ DE

on the basis that none of the assets of NAMA were envisioned being sold within 5 years (the scope of S&P’s analysis), the gave ZERO as the proceeds of NAMA within their window of analysis. But obviously they included all the liabilities. So they said the total cost of the bank support/bailouts would be €90bn, without acknowledging that their would be a rather large asset value on the other side of the balance sheet. Its no differnt to saying a wind down of Anglo would cost 70bn (ie the total amount to be paid out, ignoring the assets left over).

@ DE

and i wasnt suggesting you werent giving figures/reasons, quite the opposite – you’re willing to stick up for your figures, they dont seem to be.

@ Sarah
Don’t get too carried away with the IMF and its record of reform
It follows procyclical contractionary policies in most instances and tends to make things a helluvalot worse
Bottom line – don’t do a Diarmuid McMurrow on it – can’t rely on foreigners to sort out the problems


Sigh. I wouldn’t if I thought our own lot would.

Perhaps an election would help.

Any other ideas?

You’re not responsible for the figures today. We all know that.
People just got carried away. We have no heavy hitting indigenous industry so we thought we hit gold with light-touch finance. And then we thought we hit it a second time with low interest credit from the Euro stuff.
We shouldn’t do some much of this self-flagellation stuff.
All nations make their mistakes. Ask the Germans!!!

@Bond, Eoin Bond
Leave BL alone.
Hold onto your hat (and I suspect you wear a bowler one) but, wait for it, BL did not borrow billions to invest in shopping centers in fields in areas that would be better flooded and used as reservoirs (no he didn’t – honest)

@ Sarah
Know what you mean
Really think that we’ve learnt a really great lesson as a country. Politics isn’t all about pulling a fast one on your colonial masters. Now we know if you mess it up we’re all messed up.
Might take another 12 months but the election will come.
FF will still get their 25% but Greens will be gone forever (thank God). Then time for a more mature right left divide I hope. But I really think that this is a lesson that we will not forget (well maybe for 15 years)

“and i wasnt suggesting you werent giving figures/reasons, quite the opposite – you’re willing to stick up for your figures, they dont seem to be”

What do you think the recap for Anglo will be?

Once things really fall apart the interpretation changes. The nice story about Ireland being tough, “doing what is needed”, is about to change: all the people who gave us hope and bought our bonds have lost large amounts of money. They will not repeat that mistake. Our international reputation will switch fast – no longer the roll model, instead we will now be treated like Greece, Iceland, maybe a bit better than Argentina. We deserve it: why would we ever bail out banks that we all know are bankrupt? The ugly corruption in our nation will soon become international consensus.

The situation is not so complicated. No regrets and no surprises. Irelend will go further than anyone to protect creditors de facto. Only if the market demands,and after that only insofar as is absolutely required by the market, will Ireland default. This is a great opportunity to buy bonds because the market is demending that the cost of the guarantee be finalized, not that we de jure default on Sov bonds. As handsome boy modelling school commented in “the truth” there is de facto and de jure.


Thanks for that. I reciprocate in relation to your knowledge of the housing and property markets, and the accuracy of your predictions on those markets to date. Talking of which, what’s the latest from PropertyWatch on rents in 2010? Do your figures tally with the CSO and Daft that rents have been more or less flat since December? Or do they differ from these two sources and still show continuing falls during 2010.

Regarding debt. Yes, of course the matter is more complicated than just giving interest payments as a percentage of GDP. I was simply giving those, as they were published on Finfacts tonight. But, the essential point they highlight is that the panic about debt in Ireland is disproportionate to the reality. That doesn’t mean that there isn’t a serious problem. There is, as there is in many countries. But, what’s needed is cold calm sober analysis of the facts and figures, not the hysterical screeching of the type that goes on in the dumbed-down Irish media and on certain websites. Not this one, of course. Everyone is a model of calm here. The debt problem is manageable, but it is best-managed with cool heads and intelligent fact-based analysis. The essential facts, which I’ve posted on other threads recently and am not going to repeat in detail here, are:

(a) Ireland is only about mid-table in relation to public debt/GDP. The IMF published the tables last week and I posted them on one of the threads. They put Ireland 14th worst (of 23) in 2009, deteriorating to 9th worst (or 23) in 2015. This includes all the debt incurred to bail out the banks.

(b) The core budget deficit looks almost certain to have stabilised in 2010. Davy
are predicting that it will be lower as a percentage of GDP in 2010 than in 2009. Tax revenue has improved in July and August and looks like coming in bang on target in 2010, perhaps just couple of hundred million above or below target.

(c) Ireland is moving towards balance-of-payments surplus (according to Central Bank and ESRI forecasts). This distinguishes Ireland from the other so-called PIIGS (although I never use that derogatory and semi-racist term myself). Balance-of-payments is at least as important as budget deficit in relation to a country’s solvency.

(d) From the Finfacts website I mentioned earlier, interest repayments on the public debt as a percentage of GDP are well under half what they were in 1990.

(e) On the output side: Manufacturing output so far in 2010 is almost 10pc higher than the 2009 average. And it is not down to chemicals. The output of traditional Irish-owned manufacturing industry has risen in each of the last 3 quarters, by about 2pc each quarter. Merchandise exports rose almost 20pc in value between 2009 Q4 and 2010 Q2. Services exports were almost 10pc higher in volume in 2010 Q1 than in 2009 Q1. Just for good measure, agriculture is having a boom year, after a couple of disastrous ones. Agricultural output is up, agricultural export prices are up, agricultural input prices are down. This is a very rare combination. In addition, for once the weather in recent months has been good for agriculture. As a result of all these factors, agricultural incomes are recovering rapidly. Alan Matthews posted on this here a few weeks ago. Teagasc predict agricultural incomes will increase by 30pc in 2010. I actually think it will be more, but leave that aside.

(f) On the demand side: Core retail sales (ie excluding new car sales) have stabilised. They are up slightly q-o-q in the last 2 quarters, which, of course, is not good enough and probably the most disappointing feature of the economy in recent months. But, they are still up, in contrast to the previous 2 years when they fell each quarter. More impressively, new car sales were up 125pc in August compared with a year ago. Merchandise imports have started to rise again, a good indicator of economic activity. After 2 years of continuous decline, they rose 8pc between 2010 Q1 and 2010 Q2.

(g) On the labour market side: The number of monthly redundancies has fallen continuously in 2010. The number in August was 4,400, the lowest since 2007, and down from a monthly peak of 7,500 in 2009. The number of PPSN numbers issued to foreign nationals has risen continuously in 2010. The number in August was 14pc higher than in August 2009, the first y-o-y increase since 2007.

(h) On the competitiveness side: Inflation in Ireland has been the lowest in the EU for 2 years, resulting in an almost 8pc fall in price levels in Ireland in that period against most Eurozone countries. Allied to the fall in the euro v sterling, lower price inflation in Ireland than in the UK has resulted in an almost 15pc fall since Jan 2009 in price levels in Ireland against the UK, which in turn has brought cross-border shopping down to a trickle. So, there has been a massive improvement in competitiveness. In addition, the euro is down sharply against the dollar, almost 20pc down from its peak in late 2008.

(i) On the housing side: According to CSO and Daft, residential rents have stopped falling. They were virtually flat between Dec 2009 and July 2010. The number of new house starts has stabilised in the first half of 2010 at the level hit towards the end of 2009. Admittedly, this is at a very low level, but the point is, they have stabilised, therefore the drag on GDP growth resulting from falling construction of new houses is nearing an end. Because they lag a year behind new house starts, new house completions have continued to fall in 2010, but, following the trend of new house starts, they too should stabilise early in 2011.

Putting all these together, it is clear that the panic about the economy in general, and debt in particular, is being overdone. There is a mismatch between the panic and the reality. Which doesn’t mean that there isn’t a serious problem. But, it is entirely manageable, and is considerably less in scale that in the 1980s, when there wasn’t a fraction of the internet-induced panic and dumbed-down-tabloid-media-induced-panic that there is now. Back then, of course, as well as economic problems of much greater severity than now, there was a war going on in the six northern counties, which we are mercifully spared from this time round.

Eoin mentioned ‘bad PR’ above. I think he was referring to the government and in relation to banking problems. If so, that is the understatement of the century. But, it applies also to their performance in highlighting the facts about the overall economy. They have been completely negligent in highlighting positive developments in the overall economy. They need to get off their backsides and do something to counter the negativity. I would suggest that, in relation to banking problems, they implement asap all the excellent points made by Eoin above, and, in relation to the overall economy, they highlight the points I’ve just made.


“Any other ideas’ ? I for one would sack every journalist writing for the Irish Times and nationalise independent newsgroup then sell it off to a consortium of European intellectuals.


So I was wrong to have uprooted my family last year and moved to Australia having been unemployed for the previous 14 months with no hope of a job in sight for the best part of the rest of my working life – but hey we are not as bad as some other countries are – mid table is fine when you are protected – politician, bankers, lawyers, judges, doctors, pharmacists, a large proportion of all the public servants, various advisors to govt’s, banks and other institutions and the the other funkin hangers on in Ireland, but for the rest of us mugs we have to bear the pain…..

As the debt increases, it is inevitable that those lending will increase their price for that “privilege”.

Slashing some debt would enable that premium to decline, by the reverse token. Calling the lenders “the market” confuses the point. There is no market as a single player, merely many with much capital seeking the highest, safest return.

Improving our profile by getting rid of those reckless (SP, by the way!) enough to lend into a bubble is therefore practical. Those who still have capital to lend can lend it more freely. It is more likely that those who did lend to Anglo et al are in fact now bust. They will certainly be far more cautious about lending more.

The point that is still missed top a degree, by all commentators, is that there are many private unregulated methods of creating money/debt. It is all based upon a “fractional reserve” Once trust is lost, and that happens only when a player goes to the wall, like GS deciding that Lehman or us was a no-brainer, then and only then, is there a massive shakeout!

Lending then stops. Dead. Until the mess is sorted out and those too big to fail, become bigger as happened after Lehman. Hopefully the process is infinite, but we all know it is not!

Eventually, the money machine, international version, breaks down. Think of the last banks standing having taken on all the dross that is worthless, US mortgages, Irish bonds(!) Icelandic whatevers. They too fall.

To avoid that, there will be more IMF and more to the point, BIS meetings. Accounting rules will have to again be adjusted. No real capital will exist as the time passes and derivatives unwind. Eventually, as has been demonstrated by Anglo, all debts “must” be paid. This is not an Irish problem as such, just that Ireland is my pension paymaster. Ireland will be worse off than it need be when all this goes down.

JTO and Eoin will say that the economy will have improved by then. I hope so. I think it will have further deteriorated. In the middle of this paragraph I wish to bury the bad news that as business managers realize just how bad things are going to get, they will divert vat and paye payments to their own ends and move abroad. We presently expect them to lay off all employees and not pay their private pensions. Instead we expect them to pay off all tax debts. They will not do this. The phoenix phenomenon will start up again, and they will defraud the revenue as fast as they can. They will put it abroad and follow it when they must. They are very significant tax collectors. JTO and Eoin will say the growth will enable Ireland to pay off the interest and principal, but they are basing it merely on hope!

As the international money machine is broken, Ireland can borrow as much as it wishes. At whatever premium. The time to negotiate is when the system fails internationally. The most important assets are our people, at least those who are not corrupt. Keeping them going will be beyond the politicians.

The advice given to those who must live through the KaliYuga is to not follow the moral rules of the Golden Age. Our crowd are so stupid and venal they must be replaced by those who possess genuine cunning and know what is going to happen and have plans ready for the shocking events.

Well done! Hope you are doing well.

Numbers migrating to Australia are to drop, possibly steeply, soon as both parties seeking power in the last election here realize that too many new bodies is a vote loser.

Decisions should be made soon, people!


I hope you did not buy a house in OZ-biggest bubble in world now that Ireland has burst.

Is it all not getting a bit overwrought? I’m inclined to go with Eoin’s assessment that, having played the PR game very well earlier in the year, the Government dropped the ball – or had it taken away from them. It seems the NTMA won’t have to go into the market with long-dated stuff until well into the new year and there will be only some rolling over of short-dated paper in the interim – some due next week? I don’t think the institutional EU will stand by and let Ireland be shut out of this market. And even if it is, the necessary back-up will be provided.

There seems to be one big problem and one big risk. By playing to the audience at home pretending it retains sovereignty in these matters, the Government has annoyed the markets now that this bluff has been called and the extent to which the EU is calling the shots has been revealed. The risk follows on from this. Since the institutional EU is revealed clearly as calling the shots (even though it always has – it has just indulged governments in the PIGS playing at pretend sovereigns) in its usual cumbersome, clumsy and drawn-out manner, the markets may use Ireland to force the institutional EU to reveal clearly how far it will go to shore up the PIGS and the Eurozone.

As discussed previously for the first 6 months we had being showing flat rents. However, there has been a noticeable drop in the last few weeks.
The average rent for all properties has dropped to €764 down 2.8% in the last month and about 5% since the start of the year. The average rent is updated weekly and can be seen on the front page.

@ Paul Hunt

Irish tbill auction tomorrow, €600mn in issuance, so that’ll be a good barometer of how the market really feels. Like you said, IF there is to be an eventual restructure or default, its some way off yet, in years not months. EU/ECB will not let any sovereign (particularly the smaller ones like us, Greece and Portugal) default until the crisis is well and truely over.

Now I see why they were so spooked yesterday.

INBS has joined the NTMA as an issuer of government bonds. I assume other ‘covered institutions’ will follow presently.


“IRISH NATIONWIDE: IRISH NATIONWIDE has issued €4 billion of Government-guaranteed bonds effectively to itself. It can use the bonds to draw €4 billion in funding from the European Central to help tide it over a key refinancing period later this month.”

Thats of course assuming that there isnt the shadow of Rich Uncle Jean-Claude over the tbills. Plus, while its nice to get tbills away, i have a vague memory of funding short while spending long being a small problem. Lets both agree that we dont want to do the sovereign equivalent of living on the overdraft.

@ Nollaig

Well said.

The current issue being discussed is just another symptom of the failed governance system and the popular tolerance of it.

Slow-motion government: Main operating rule: only respond to a pressing issue when it has mutated into a crisis…sorry…a dire crisis.

So this is the official or fairytale version of the Irish:

The Irish Mind. An abundant supply of that rare commodity you’ll need to bring your business to peak performance. The Irish. Creative. Imaginative. And flexible. Agile minds with a unique capacity to initiate and innovate without being directed. Always thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Working together to find new ways of getting things done. Better and faster.

This flexible attitude pervades the ecosystem. Nowhere else will you find such close, frequently informal, links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. In Ireland, everything works together . © IDA Ireland

Mind the gap

Can we handle the truth?

JtO – fair play to you for fighting the good fight. Admittedly, there has been some stabilisation and even some improvement in economic metrics of late, but the drag factor exerted by the banks and our general indebtedness is far greater.

I would like to address some of the points you made above.

For sure public current debt to GDP/GNP does not look too bad relative to peers; but private debt is the elephant in the room. Mortgage debt alone is above 115% of GNP. According to 2Pack on the propertypin total public + private debt will equal somewhere between 225% and 250% of GDP by the end of 2011 vs the 1987 figure of 150%.

The deficit has stabilised. Perhaps it has, but it is still a substantial and it is still a deficit. At least two more deeply unpleasant budgets await us. What will further fiscal contraction do to the economy I wonder?

Your point in interest payment is a fair one but what we are paying relative to the Germans is reflective of genuine concerns about our taxpayers to repay all of the public and private debt we owe.

The decline in the number of announced redundancies is hardly a turnaround.

Competitiveness – I fully agree with you here! I would even go further and say that the housing bust is supporting this process through lower rents and lower absolute house prices. Compared to where I live in London, parts of Dublin are beginning to look like good value.

We over-built for at least five years so don’t count on housing starts (or indeed private sector construction) to add to economic growth in a material way for a number of years. Ironically, the overbuilding may create maintenance work for the sector (how long does can a property remain empty before it needs to be torn down?) but we need another way to soak up the umemployed.

The WSJ article may seem like old news here at irisheconomy.ie, but the clear and stark description of the massive understatement of bank’s sovereign bond risk could be the source of rattled markets yesterday. That stress test and its poor design is coming back to haunt the EU regulators.

Looking again at the WSJ article there IS significant new information in it. It was noted by various commentators (here and elsewhere) soon after the stress test announcements that bank sovereign bond positions were effectively understated. What is new is that the WSJ article has ferreted out exactly the magnitude of the understatement for some sample banks. It seems an extremely large understatement which undermines the stress tests. So the “good news” from the stress test (always dubious) has just evaporated entirely.

Media (Times) reporting in their business section that the Blanket Guarantee has in effect been extended.

But debt issued before the ELG isn’t covered after September 29th?

So only a forward looking version has been extended surely.

2010 Operations

€4bn for INBS

(net of haircut in ECB repo window or gross, nobody said…someone should ask ….non?)

€??bn for Anglo … swap out €6bn of subbies too maybe ??
€??bn for AIB

Possibly (as a seemingly automatic backstop to market funding operations)

€?bn for BoI
€?bn for IL&P
€?bn for EBS

Add that lot to the €90bn odd of NTMA declared GGD and what have we got ? €115bn of government guaranteed and incurred debt in an economy with a GNP of between €130bn and €140bn…and by end 2010.

Then we must add the desperation factor, at what premium are the ‘covered’ institutions issuing these instruments.

Then one asks, if the bulk of issuance in Q3/Q4 2010 is by ‘covered’ institutions what implication will this have for the large NTMA syndications due in H1 2011.

Budget cutbacks of €3bn in December 2010 completely wiped out by INBS in one simple book keeping operation and nobody even gets to vote on it in the Dáil, what a democratic play 🙁


“EU/ECB will not let any sovereign (particularly the smaller ones like us, Greece and Portugal) default until the crisis is well and truely over.”

We’re back into chicken/egg territory here. As I see it the markets view the ‘crisis’ in terms of the short- to medium-term economic stability and viability of the PIGS – in particular their ability to service growing sovereign debt. Since they can’t achieve this entirely on their own, the question is: What is the institutional EU/IMF going to do about it? The institutional EU is leaving that question hanging by kicking the can down the road and the markets will keep pressing for a definitive answer.

And yes, as Brian Lucey points out we shouldn’t do ‘the sovereign equivalent of living on the overdraft’ (or ‘borrowing to buy ice-cream’ as I recal one of the contributors here observing this behaviour a quarter of a century ago), but it seems to be a ‘ways and means’ exercise that is consistent with the can-kicking. The hope is that some clarity on the banks and the swallowing of another does of rectal fiscitude will calm the markets and they will smile on us in the spring.

And, to an extent, I agree with JtO. The domestic economy has changed out of all recognition in the last 20 years and has a resilience to bounce back. I also expect there is huge activity in the grey and black economy. But it is being weighed down by the costs of serious inefficiencies in the state and semi-state sectors and the lack of genuine competition in the private sheltered sectors.

We need to focus on these deadweight costs before the markets force us to do so. At the very least, while the State Asset Review Group is conducting its work, the energy policies being pursued by Minister Ryan should be put on hold and subjected to a detailed cost/benefit analysis.

The discussion on this thread comes down to whether you believe the yield on 10 year Irish bonds is justified by objective economic criteria or not. I agree with JTO that it is not.

If you accept JTO’s analysis (and not everyone does) you then have to find another explanation for the yields.

Part of the explanation, in my opinion, is the media. The Irish media has been particularly negative, far more negative than the international media. However, the international media cannot ignore what is said here. In particular it cannot ignore calls for what is in effect a sovereign default by economists in reputable newspapers (The Irish Times, Irish Independent and Sunday Business Post). As Keynes pointed out investors not only respond to objective economic reality, but also to how they think such economic reality will be perceived.

A second factor, and maybe a much more important element, is the fact that there is an international financial (maybe also political) interest in destabilising the Euro. The way to attack the Euro is to speculate against what are perceived as the most vulnerable economies within the Euro zone. Unfortunately, this country has been placed in that category.

Our ability to access international finance capital has been one of the factors that has facilitated spectacular economic growth, but unfortunately it turns out that it is also our Achilles heal.

@Garry, 2Pack

Isn’t the INBS move just the next logical step from Anglo repoing promissory notes through the CB?

It is either genius or desperation.

Markets hate uncertainty and lack of information.

Time to recall Dail and show Irelands serious about tackling its banking and deficit problems.

LEX in the FT:the eurozone banking sector can be divided into the living (France, Italy), the nearly dead (German landesbanken, Spanish cajas, Greece), and the actually dead (Ireland). The sector is under-capitalised, over-exposed to sovereign risk and excessively dependent on the European Central Bank for liquidity.(Sept 7)

@ Karl,

Would it not be better if certain sentences were censored / deleted rather than the entire comment? Would that not be fairer?

This site has contributors and commentators. Both need each other. This site requires both.

If however comments which have taken considerable time to type in are deleted because of one caustic sentence then the incentive to post here will be reduced.

I agree we all require to be civil when on this forum, however when blogging in public one has to be able to adopt a thicker skin, to take the rough with the smooth at times.

But I would ask you to remember that there is a symbiotic relationship between contributors and commentators, both require the other. If you are going to kill off / discourage certain commentators then you may very well end up inadvertently killing this site as well.

Just a thought.


‘The management reserves the right to refuse admission’

It is their blog, not ours. We are but creatures of the internet 🙂

looks like we are not the only sovereign suffering. a massive increase in cost of funds today reported by bloomberg-

The bonds due April 2021 were issued at an average yield of 5.973 percent. That compares with an average yield of 4.171 percent at a previous auction of the same-maturity debt on March 10. Today’s auction attracted bids for 2.6 times the amount offered, compared with a bid-to-cover ratio of 1.6 in the March sale.

Ireland currently faces two budgetary challenges:

a. bringing the ongoing public finances back into balance; and
b. plugging the hole in the banking system.

Simultaneously, Ireland faces a major economic challenge:

c. debt-deflation (a la Irving Fisher) at a time when we don’t have the monetary tools to address this and are being forced to turn off the fiscal tools which might ameliorate it. Every single one of Fisher’s debt-deflation characteristics are at loose in Ireland today.

Looking at the three problems in turn …

a. Ongoing Public Finances

The government is spending about €50b each year while it takes in about €30b in taxes. The government projects (Budget 2010 documentation published last December) that annual tax revenues will grow by about €2b each year for the next four years (i.e. by about €8bn over that entire period).

Yet tax revenues are currently running at 9% below last year’s levels. With ongoing debt-deflation in the domestic economy, I find it very hard to see where tax revenue growth will come from. (Perhaps I’m being overly pessimistic).

But suppose I’m right … that would mean that the budget adjustment of circa €20b would have to be nearly entirely financed by cuts. If one were to bridge the €20b gap overnight, here is what might be required:
i. property tax based on square footage: €1b
ii. higher tax of lower paid: €1b
iii. slash capital budget from €6b to €2b: €4b
iv. apply those McCarthy recommendations not yet implemented: maybe €2b
v. that leaves €12b to be financed through welfare cuts and public sector pay and pension cuts of the order of 30%

It is highly questionable whether this is politically possible.

b. Plugging the Hole in the Banking System

The NAMA model of LTV is highly questionable when one considers (i) that we are coming out of one of the largest financial bubbles in human history (in terms of credit growth/GNP) and (ii) the scale of physical oversupply in every property class at a time of debt-deflation, parlous economic growth and renewed emigration.

NAMA is serving a purpose in avoiding a fire-sale of Irish property assets. But it is doing that with the taxpayer taking over the equity risk in property assets which continue to fall and – in my opinion – have much further down to go. And what about Irish banks’ mortgage loans and loans to commercial companies which are dependent on the health of the domestic economy?

Constantin Gurdgiev has estimated that the entire Irish banking system rescue may cost 35% of GDP this year. I think it will cost more as the interaction of three crises (government finances, banking and EMU-induced debt-deflation) will act in a thoroughly toxic way here (in a manner which will be the inverse of the benign interaction of these factors between 1997 and 2007).

c. Debt Deflation

These are the steps which Fischer identified as comprising debt-deflation:

“Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
7. pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.”

They are all present in Ireland today but we lack access to the remedies which Fisher suggested:

“Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebted-ness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called “natural” way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation.

On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.”

We cannot avail of the remedy. We cannot reflate the price level up and we will be constrained by the EU in how much fiscal relief we can apply. We are stuck in debt-deflation.

Bottom Line

We make an intellectual error in examining each problem in isolation from the others. They are interdependent and they are interacting in a toxic manner.

I cannot see how it could be politically possible for an Irish government to fix both our public finance problem and our banking system under the current conditions of debt-deflation.

Something must give.

As of closing last night, the spread between Irish and German 10-year govenrment bonds implied a market expectation of a 28% loss on Irish bonds.

It is unlikely that there will be a total loss to Irish bond-holders. So the expecation of a 28% loss is unlikely to represent an expectation that there is a 100% probability of a 28% loss. It more likely that current bond prices represent a 50% expectation of a 56% loss. That is how serious things are.

The market believes that something must give. Normally when the market believes that, something does give.

@Cormac Lucey

Your calculation over-states the problem by a factor of almost 2.

(a) ESRI forecast the exchequer deficit in 2010 at 17.6 billion, not 20 billion. Of course, if you add in all the bank stuff, its 31.3 billion, which is the general government deficit. However, regardless of whether one thinks that should be included or not, its a one-off and drops out of the calculations in later years. ESRI put the general government deficit next year at 16.5 billion. So, the starting-point is not 20 billion, but around 17 billion.

Of course, ESRI might be wrong. Their forecast depends on tax revenue coming in on target. So far in 2010, it more or less is on target.

(b) There is no requirement whatever to eliminate the budget deficit completely. Most countries have never come within a sniff of having a budget suplus. Most countries run budget deficits each and every year, and always have done. The question is: what size of deficit? Under the Stability Pact, the only requirement is to get the deficit down to 3pc of GDP, which equates to about 5 billion. All but a handful of countries are way above 3pc at present.

So, the gap that has to be closed is about 12 billion (from around 17 billion to around 5 billion), not 20 billion.

How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ? It does seem as though the economic model imposed during the recession is strangling the economy leading to a fall in tax take which is widening the deficit.

David Buik of London has said that the better German, nonLandes, banks need immediate new capital of 105,000,000,000 euro.

He quotes Pimco as saying Greece is insolvent and the PIIS as close behind. Also the european banks stress tests were applied to only some of the libilities and that other liabilities seem to have been hidden. No details.


ABC TV in Oz.

@ Seafoid

“How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?”

Cos we’re expecting less than last years (but we’re spending less as well).


How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?

JTO again:

Seafod, it is because the government’s target is for a 6pc fall in 2010 as a whole (ie in year to December). And, as Eoin says, they also have a target to cut spending by that amount roughly as well. So, if tax and spending both hit target, the deficit should be down a fraction in 2010.

If the year ends with tax receipts more than 6pc down on 2009, then they are below target. If the year ends with tax receipts less than 6pc down on 2009, then they are above target. At the start of the year, they were 17pc down on 2009. Now in the first 8 months to August, its 9pc. So, its closing in on the target of 6pc by December. Touch and go whether it makes it. Dept of Finance estimate they are 0.7pc behind target in August, but it was 1.6pc behind in June. All we can say at this stage is that they will be very close to the government target of a 6pc fall. Possibly a little below, possibly a little above. But, only about a couple of hundred million either way. The point I made about the medium-term requirement being to cut the deficit by about 12 billion rather than the 20 billion Cormac Lucey said is much more important.

@ Seafoid

“How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?”

Answer: because the government has set low-ball tax revenue targets for the full year that feature tax revenues picking up in the latter half of this year.

At the last budget, Brian Lenihan projected that GNP would drop 3% this year but that tax revenues would drop 6%. In addition to putting in a lowball estimate of tax receipts, Lenihan backended his schedule of expected tax receipts. That is to say the pattern of expected tax receipts in 2010 is skewed more towards the end of the year than the pattern of actual tax receipts in 2009.

It is in this way, despite tax revenues being down 9% YTD compared to 2009, that the government can assert that tax revenues are “broadly on target”.

As a simple person, I focus on the facts that I can easily comprehend:
a. the government forecast that GNP growth would be -3% for the year.
b. the government forecast that tax revenue growth would be -6% for the year.
c. tax revenue growth to the end of July was -9%.

For me, fact c. is the salient fact. How the Department of Finance schedules their tax targets within the year is of no interest to me unless there is a technical reason (change of tax rates/payment deadlines) to justify it.

@ John the Optimist

The government’s budgetary adjustment programme is predicated on annual tax revenues increasing, as a result of economic growth, from €31.1b (2010) to €39.5b (2014).

But where are the signs of that economic growth?

Unemployment has already reached 13.8% in July even though the government predicted it only to reach a rate of 13.2% by year-end. Core retail sales fell in July, the third such fall in the last four months. The seasonally-adjusted volume of retail sales was lower in July than in January. Mortgage arrears continue to increase.

And where is the economic growth to generate these revenue increases going to come from if the domestic economy is trapped in debt-deflation?
The export sector can help but it comprises a relatively small proportion of overall economic activity. Even if it were to do very well (very likely given domestic cost deflation), that would not compensate for a domestic economy that was doing very badly.

@Cormac Lucey

I don’t understand your point about the fall in tax revenue. Are you saying that, because it was down 9pc in the first 8 months (to August, not July) of 2010, the government target of being down 6pc in the full year (to December) 2010 is unattainable? But, this ignores the fact that the fall over the corresponding period of 2009 has been getting progressively less as the year has gone on. The y-o-y fall in the first 3 months of 2010 was 15pc. Now, it is 9pc in the first 8 months. A continuation of that trend will see the target of a 6pc fall in the year as a whole being hit. It may come out a fraction below or a fraction above 6pc, but few economists now doubt that it will be very close to the 6pc the government targetted. As spending has also been cut, this will be sufficient to stabilise or even reduce the deficit slightly.

Regarding the contrast between the buoyant export economy and the flat domestic economy, what you say is correct for 2010. Manufacturing output and exports have risen sharply. As employment in these sectors is still down on 2009, productivity in both of them has skyrocketed. I calculate that productivity in manufacturing industry is up close to 15pc in the first half of 2010. Despite that, employees’ wages in manufacturing industry have been cut. As a result, there has been a huge drop in unit wage costs in the manufacturing and export sectors of the economy, at a time when these costs have risen in most competitor contries.

This has its advantages and disadvantages. The advantage is that Ireland’s manufacturing and export base is becoming very competitive again. It never was uncompetitive, but in 2007 it was less competitive than it was in 1998. Now, it is fast approaching its 1998 level of competitiveness again. So, as you say in your post, that sector is likely to do very well in coming years. The disadvantage is that little of the growth in manufacturing and exports will work its way into consumer spending in 2010. GDP growth will be greater than GNP growth and the profits of MNCs (I work for one myself, so I am not anti-MNCs) will increase sharply. That much I agree with you on for 2010. However, the key point is that there is no reason why this should be repeated year after year. The sharp increase in competitiveness in these sectors only needs to be a one-off. There is no need for unit wage costs in these sectors to be reduced by 15pc every year, especially as they normally rise in other countries every year. Once these sectors are at a competitive level, which they clearly now are, wages can be increased in line with productivity growth as they historically have been, which will then feed into consumer spening. The scenario of the manufacturing and export sectors growing strongly, but with none of that growth working its way into the domestic economy, is implausible over the medium- and long-terms, although it is plausible over the short-term as the one-off massive increase in competitiveness occurs.

@ John the Optimist

I just think that it’s a lowball target to predict GNP to fall 3% for the full year and tax revenues to then fall by 6%.

I too have worked in the MNC sector, in finance. And I know to prepare a budget to achieve political objectives. If, as BL asserted when he was presenting the last budget, we had “turned the corner”, one would expect tax revenues to rise or at least to stabilise.

What I resent is the attempt by BL to verbalise something (recovery) that his figures deny. Instead we got a lowball tax revenue estimate, whose non-attainment can’t be recognised until year-end as the scheduling of expected receipts is back-ended.

Time will tell whether the full year tax targets are met. I contend that the evidence suggests that they will not be met.

The y-o-y fall in tax revenue to July was 8%. The y-o-y fall to August (as you corectly point out) was 9%. Unemployment is ahead of target. Core retail sales have fallen in three of the last four months. The ISEQ index is down 20% since April. Despite the recent rise in sterling against the Euro (and reports that the volume cross-border shopping has abated) VAT receipts are down by 7%.

Even if our tax revenue targets were met, should we cheer when tax revenues fall 6% given the scale of our problems?

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