Creditworthy?

Donal OMahony provides a robust defence of Irelands creditworthiness in today’s Irish Times (article here; supporting Davy Research Report here).  Dan OBrien is more worried.   While it is always worth some pause when second guessing the markets average judgement, I’m inclined to agree with OMahony: I believe Ireland can avoid default, should avoid default, and will avoid default. 

It is a pity he spoils things a bit with the straw man that many politicians and academics are advocating default.

In truth, foreign misrepresentation of the Irish story is being partly fuelled by domestic coverage. Given the clarion calls of many opposition politicians and academics for a default of Irish liabilities as a legitimate policy “solution”, the self-fuelling impression conveyed abroad is one of heightened insolvency risk.

I dont see this chorus.   Both Fine Gael and Labour were quite explicit this week that Ireland should not default.  Even if the reporting is sometimes confused, the bright line between defaulting on sovereign debt/guarantees and allowing non-guaranteed investors in failed companies to bear losses is now well accepted. 

60 replies on “Creditworthy?”

I look forward to the announcement that Davys have made massive profits – clearly the only way for irish bonds is up, and so theres a natural trade there.
Donal has a history of playing the man/men whether they be of straw or flesh.

John, your post is making the point that few are arguing for defaulting on sovereign or guaranteed debt. However, I don’t see anything in O’Mahony’s article to suggest that he is making the distinction between different types of “Irish liabilities” that you are. Perhaps I’m wrong but I read the Global Strategist as arguing against defaults on any debt.

In this sense, O’Mahony is right about the chorus and, as I understand it, your disagreement with him is that you don’t consider non-guaranteed debt to be untouchable. If you’re going to disagree with Davy’s it might be worth clarifying what it is you’re disagreeing with.

@ John McHale

…. aside from Donal O’Mahony’s punting …… [he’d make a great postman as he’d never deliver any bills (-;]…

… you might respond to Dan O’Brien recent IT piece who noted the paucity of commentary on this blog on labour market isssues …….. methinks you’ve done a bit of work in this area? Must be a few labour market economist around somewhere ……… all we hear from the usual suspects is ‘cut the minimum wage’, ‘cut welfare’, fire all public servants …. etc etc etc ………..

Harold Wilson used to blame the gnomes of Zürich for the travails of the pound and Donal O’Mahony effectively says bondholders are fools because they took fright from a headline in the Independent.

As John points out, his criticism of Opposition politicians is misplaced. Were the Government induced headlines from Galway positive during the week?

Wonder why he ignores the weak political leadership and the 2 -year slow motion Government response to the banking crisis?

This is why the sovereign crisis flared up in recent months and the Government responded by making a recent announcement on the Anglo Irish issue.

It’s true that solvency is not a short-term issue; Belgium and Italy with creaking political systems can manage high debt levels.

However, it would be foolish to ignore the uncertain outlook in the medium term with high unemployment and no obvious engine of growth apart from a faith-based ‘smart economy’ project.

Maybe Donal O’Mahony should call for a general election.

It’s interesting how we lap up the often misinformed but positive coverage but cry foul when it’s negative coverage.

@Karl

Point taken. I agree with him on default on sovereign debt/guarantees. However, I believe that losses should (and more tentatively) will be imposed on subodinated and senior bondholders of failed banks. You are probably right that this is not his position.

@David
Point taken also. We need to rectify that deficiency.

@All

A certain adjunct ayneen_randite ‘man of the year’ {$2,500 a pop} advocating bringing in the IMF during week in Irish Examiner …. a good few ‘self-promoters’ around on economics these days ………. will link later – rugby and the fabulous Katie Tailor await ……. [

24 months on ……..
http://krugman.blogs.nytimes.com/2010/09/17/irelandspain-update/?src=twt&twt=NytimesKrugman

“Ireland’s banks were arguably second only to Iceland’s in their irresponsibility, and the Irish government’s blanket guarantee has exposed it to huge losses. But bear in mind that when Ireland seemed, briefly, to have regained the trust of the markets, this was touted as proof that austerity will be rewarded. Funny about that”

Extract from Davy report:

“The government’s proposed ‘Funding’ and ‘Asset Recovery’ bank split has yet to be approved by the European Commission, with widespread speculation around the rights/fate of the debt holders”

@Karl

I do not read into the Davy report that they are particularly wedded to Anglo’s bondholders.

The whole thrust of the report and of DOM’s article is that the sovereign will not be forced to default despite the chorus of media, politicians and academics pushing in that direction.

Your veiled suggestion that their argument is conflicted by their desire to protect their bondholder clients is possibly in breach of your ownn code.

With respect to Dr. Gurdgiev’s post, I think Irish bond yields reflect some trust that the Goverment will live up to its promises on tackling the fiscal balance rather more quickly than fiscal balance problems have been tackled in the past by comparable countries. They may also factor in a significant chance that others will provide a backstop in extremis.

I think few people think we will be forced to or should default on the state debt. The debts, foolishly and ill-advisedly guaranteed, of a private company —-theres another story.
Anglo  state

Yeterday was a very interesting day. It offered a test of the theory that defaultin on non guaranteed unsecured senior bank debt in failed/failing banks would lower the risk premium on our sovereign debt. FG proposed it again in their letter to Almunia. The FT advocated it. I think Barclays (on page 9) referred to it as a possibility & Buiter’s think-piece on Sovereign defaults for Citigroup may have alluded to it (not certain though). So what happened, our sovereign spread blew out to record levels for this crisis.

This appears counter intuitive but there are two plausible explanations. i) the market views that a default on senior unsecured marks a crossing of a Rubicon. No Irish bank will be able to access markets then in the near future. This creates a form of bank run whereby liquidity is withdrawn from the system. ii) the market in its infinite wisdom does not distinguish between sovereign and bank debt, so Ireland will be locked out of sovereign markets for some time.

Who knows if this is even a plausible rationalisation and if it will persist for anytime. However, markets have an uncanny ability to follow a path that inflicts pain on those holding a consensus view.

@BL

“The debts, foolishly and ill-advisedly guaranteed, of a private company —-theres another story”

Do you distinguish between legacy debts before the guarantee and debts which were incurred after the guarantee was announced and were therefore presumably incurred only because of the guarantee?

BWII ….not sure is the answer. Subbies, legacy seniors for sure for the pyre, legacy…not sure. Would love to but would require harder negotiation than I suspect the state could provide.
As for guarantees …put not thy faith in princes.

@ Brian Lucey

“I think few people think we will be forced to or should default on the state debt.”

Again, just so we’re all 100% clear, the revoaction of a state guarantee would be considered a state default by the markets and the ratings agencies, and there definitely have been people advocating that course of action. I assume Donal was including that sort of suggestion somewhere in his argument.

@ BW2

“Your veiled suggestion that their argument is conflicted by their desire to protect their bondholder clients is possibly in breach of your ownn code.”

Can you point out to me to where in my comment above there is any suggestion — veiled or otherwise — that O’Mahony’s contribution was motivated by Davy’s bondholder clients?

Yay avoiding default! All the bank bondholders get rewarded for investing in bankrupt failed businesses, and the taxpayers get to pay for it!

I hope too many investors were not listening to Davy Stockbrokers in the past, I presume they always act on the basis of extensive research. Maybe they can offer some advice to Mr. Lenihan.

2007: Anglo 5% placing February 2007 “Placing a massive vote of confidence; raising our estimates and target price to €16.50” September that year “raising our target to €17.60”. Share price €12.95

November 2007: “target price reduced to €13.50” share price €11.66
January 2008: “2008 will ultimately prove a fruitful year for investors in Irish financials. May 2008 ” outcome suggests model is proving very resilient”.

October 2008: Anglo shares fall below €3. November 2008…. below €1 December 2008 below .50c January 2009 Anglo Nationalised.

Long time back. Posh English racehorse owner mused about his nags. “One feeds Fivers (those big white jobs) into the front end and bags of poo come out the rere end.” Fast-forward to to-day. Substitute credit for fivers and debt for poo.

Now credit is virtual money (electronic sort), but debt is a real (like legal) obligation. And how does one’s pay debt? Yep, from future income.

Methinks that there might be a tad of a problem with our future income. Like, it might be more than a smidgen less than we think!

So: Pay back one’s debts. Very doubtful using the Business-as-Usual model. What are the alternative options then? Defaults of some sort? Looks that way – though money inflation is good too! Or will it be a mixture of ‘Hide-the-Parcel’ and ‘Kick-the-Can’? Just watch the cash flow!

Brian P

“So the total, fundamentals-justified Irish 10 year bond yield should be around 9.30%.”-per Dr.Constantin Gurdgiev
This does give pause for thought.
It would appear that the culprit is the fundementals and not academics or politicians or indeed banks (Barclays) talking about defaults.

Politics, politics….about the only thing I have learned about the bond markets is that a bond price is as much driven by flows as it is credit fundamentals. So in the early part of the decade when massive amounts of cash were sloshing around the system, governments could sit back complacently and pont to the almighty market as proof positive that everything was A OK. In reality, the flows were the price setters, more money was flowing into bond funds than governments and corporates needed, so demand moved to other areas (mortgage backed, emerging market etc)

Today the flow is in the opposite direction and the very same people that praised market discipline five years ago are now ranting about speculators, when in reality the flow of money to bond funds has reversed and even if an individual bond investor wants to buy Irish bonds, shue doesn’t have the inflows to fund it. Very very dull, but also very true.

So what we have is politicians and their mouthpieces doing their very best to support a good faith attempt to hold up confidence and drum up demand for bonds. In doing this they are deliberately conflating sovereign and bank debt because they have to. If there is a default in the system, then that is a further loss to the bond fund that is already suffering outflows and it represents a hit to banks across Europe and they still can’t afford a write off.

The market has mechanical flow problems and it know it. It also suspects that the whole system is close to catastrophe. They key is to work out which domino falls first and that one is likely to be the first that has to refi.

The last time I saw so much talk about international observers not understanding Ireland’s position was when the Irish banks’share prices were were diving in early 2008 (quite rightly as it strangely turns out, though I remember any number of spokesmen (sorry I meant ‘Chief Economists’) for Irish financial institutions going on air explaining how these people did not understand the unique Irish success story).

What a Davy’s employee is writing inthe Irish Times today is less important a question than the larger question of why the Irish Times is accepting articles from such sources at all. The journalists’ motto ( and the academic economists’) motto should be something like the legal motto ‘Let justice be done, though the heavens fall’). Academic economists and journalists have only one duty, that is to the truth.

Sovereign default is not an issue until it is about to happen. It rarely (ever?) happens by ‘choice’ – there is rarely ruthless default by governments (in the modern period anyway). Mostly what happens is that an unsustainable situation becomes obvious, the bond markets take fright and it becomes a case of default now or later.

I have never heard of a case where a country was ‘talked’ into default (or a recession or indeed an economic recovery). The idea that the Indo (or any other publication (whatever the media) does anything other than reflect what is already happening is risible. We are far from the age where the Thunderer spake and actions followed.

The secondary yields of Irish bonds matter little except in how they influence primary issue costs. Look at Spain; there’s a disconnect going on. Given the profile of Irish debt buying (85% international), the amount of free assets the banks have for ECB repo, there’s scope for the local banks to buy more.

The question, though, is whether the rate of debt growth has outpaced the likely ability of the economy to grow to repay it. In a sense, it is bad for us if the european economy does recover – it will lead to higher interest rates. Presuming our spread remains the same and interest rates rise, if the deficit has not been tackled (and tackled to surplus) we need growth at a clip that is being forecast by only the most bullish and we need GNP growth, not just GDP growth. In my view, this risk is what is driving the secondary markets – it is the deficit, not the banks. I expect most bond market buyers had factored in a 50 bn+ cost of the banks by early 2009 (based on 14% of bank assets and/or 30% of GDP – the average cost of a banking crisis as a result of a property bubble).

Unfortunately, the eurozone is our largest trading partner…

@Eoin has given us some info that there was heavy selling going on, with the ECB doing sporadic buying. Why they bought on thursday (keeping the yield on the ten year below 6%), but not on friday is something of a mystery. I have my own paranoid suspicions, but does anyone have anything concrete?

@hoganmahew – I can’t quite get my head around the “secondary yields of Irish bonds matter little except in how they influence primary issue costs” part of your post.

Leaving aside (as if we could) the higher cost of additional borrowing over the next 3/4 years, there is over 30% of existing bond issuance to be refinanced between Nov 2011 and Jan 2014. (See http://www.ntma.ie/GovernmentBonds/Daily_Bonds_Outstanding.pdf)

That means secondary yields matter rather a lot.

ECB-wise, there has been a plethora of guesses about the composition of the their c.€61bn purchases. Figures of over €18bn have been mentioned as being the amount of Irish debt bought.

The ECB don’t give a breakdown, and neither confirm nor deny any reported estimates made by commentators – of which there have been quite a few.

The €18bn number doesn’t really stack up though, no more than its proponents, I can’t back that up. If, however, one looks at the reportage of intervention, one can see that there have been numerous (usually via Bloomberg) reports through August/September of ECB buying of Greece/Portugal/Ireland which, when checked against the ECB’s published numbers (they come out each Monday afternoon), never stack up.

The €18bn number, to be true, would mean that ECB intervention was confined solely to Greece, Portugal and Ireland, and pro-rated according to market sizes. However, the main intervention sizewise was back in May and, at the time, was reported to be directed mainly at Greece, Spain and Portugal, with possibly some Italian debt also being bought.

If one looks at the relative sizes of the bond markets in these countries, Italy is 23% of eurosovereign issuance, Spain 9%, Greece 4%, with Portugal and Ireland 2% each.

Back when the main intervention occurred in May/June I’d have thought that the EU/ECB were a bit more worried about Spain and Greece, due to the greater size (and importance) of Spain and the greater suspected imminence of default in Greece, and would have concentrated the bulk of their buying there. Greece, in particular, would have seen a significant number of passive-type holders forces to disinvest after it lost its A-rating, and was dropped from the main bond indices. The ECB would have been one of the few potential bidders around for the size of selling entailed.

I suspect that the actual number for Ireland can only be a fraction of the €18bn and, at the risk of being made a liar of by next Monday’s data, I think the ECB were in little evidence this past week, let alone month. Why not? Your guess is as good as mine, or may even be better.

@ Tim O’Halloran

Academic economists and journalists have only one duty, that is to the truth.

This never counted for these particular ‘spokesmen’ you mentioned. They are in the business of hiding debts, hence I guess they are also paid significantly more than economists academic functions. I could be wrong though…

Excellent discussion thanks.

@ Hogan mayhew
‘The question, though, is whether the rate of debt growth has outpaced the likely ability of the economy to grow to repay it. In a sense, it is bad for us if the european economy does recover – it will lead to higher interest rates. Presuming our spread remains the same and interest rates rise, if the deficit has not been tackled (and tackled to surplus) we need growth at a clip that is being forecast by only the most bullish and we need GNP growth, not just GDP growth’

@ Michael Hennigan
‘However, it would be foolish to ignore the uncertain outlook in the medium term with high unemployment and no obvious engine of growth apart from a faith-based ’smart economy’ project.

@the loan arranger
‘ i) the market views that a default on senior unsecured marks a crossing of a Rubicon. No Irish bank will be able to access markets then in the near future. This creates a form of bank run whereby liquidity is withdrawn from the system.

or..

ii) the market in its infinite wisdom does not distinguish between sovereign and bank debt, so Ireland will be locked out of sovereign markets for some time’

@bklyn_rntr

‘Politics, politics….about the only thing I have learned about the bond markets is that a bond price is as much driven by flows as it is credit fundamentals.’……

‘The market has mechanical flow problems and it know it. It also suspects that the whole system is close to catastrophe. They key is to work out which domino falls first and that one is likely to be the first that has to refi’

It follows from all of the above that the Ireland is one of the most vulnerable parts of a vulnerable system, and that Gurdgiev’s bleak assessment of our creditworthiness is probably accurate. While interlinkages of bank and sovereign credit are inescapable, it looks increasingly like our political and professional leaders are simply lost in the woods.

The policy vacuum that is Ireland, can only increase concerns of ability to repay.

Every new debt can only increase concerns about ability to repay.

So stop borrowing!

Fix the current deficit and the increasing loss of tax revenue. NOW!

More austerity ……..

Pat,
I agree. It would be a good start if the public service pay cuts were extended to retired Public servants.

Some of the rubbish written here is incredible. Ireland will not default on any senior bank debt, full stop. The EU wont allow it, it would cause a panic flight of capital from all non core euro countries and the EU would collapse in recrimination within weeks. However, they cant say that explicitly as Germany cant be upfront to its citizens and say they are going to print away the problem and they need also to force the PIGS to get their budget deficits under control (threat of economic ruin gives local politicans the necessary armory) so this game of buying time continues. Liquidity will be providedvia ECB as longbasis needed for both sovereign and banks. The US, UK, Japan have all printed the equivalent of €3 trln or more to stop a financial collapse, EU will do the same. Donal is right that Irish bonds are mispriced and the debt not out of line with other states, particularly when you look at off b/s obligations incl pensions.

First time here, B Lucey you regulary pop up criticising NAMA and the guarantee, yet all I can think of is your suggestion in April that the Anglo deposit book be sold for 20 odd bio and be used to fund the other liabilites??

@MPLT

“Some of the rubbish written here is incredible. Ireland will not default on any senior bank debt, full stop. The EU wont allow it, . . .”

The language you use is incredible. On its face, you seem to view banks as just organs of the State, and the Irish State as an organ of the EU. I would hope, however, that you really have something less dictatorial in mind: ample liquidity support from the ECB has been the quid pro quo for avoiding imposing losses on bank creditors. I doubt that the European policy making community is as single-minded about bailing out insolvent banks as you suppose. Even if you are right about the risk of capital flight, the use of explicit guarantees is an alternative. What you are recommending is a 100 percent credible implicit guarantee to cover all bank debt, including legacy debt. That is a dominated policy if capital flight is the concern.

The problem that most people miss ( Davy’s O’Mahony above but ever more so Honohan and Lenihan), when they look at “economic fundamentals”, is that even if the odds are in your favour, you end up defaulting if there are modest odds against you. A 20% risk of default over five years sends five year interest rates up by roughly 2-4%. Those higher rates must be reflected in other lending by banks (apart from times when you think the local businesses and mortgage holders will do fine despite sovereign default!), so business and mortgage credit dries up. That drives the economy into recession, and the recession makes the default more likely. To survive we need to have 5%, not 20%, default risk. We are far from that 5% due to fundamentals of large budget deficits and unknown bank bailouts. Barring decisive and very painful policy actions to stem default risk, our “modest risk” of default will rapidly trash the “economic fundamentals” that some people claim are, today, ok.

@MPLT – You miss the point that rising spreads in the periphery show the current programme is failing. If the EFSF continues to fail to calm markets, the EU/ECB/IMF will eventually move to a restructuring. This has always been the strategy according to one faction in the EU/ECB/IMF: “Give banks some time to sort out their balance sheets, then restructure sovereign debt if needed”. So far restructuring looks needed. When the faction that supports restructuring feels banks are well-positioned, and contagion costs are less than restructuring benefits, they will shift to back the hard-liners within the EU/ECB/IMF, and then restructuring will actually happen.

I wasn’t condoning EU policy, in fact in isolation the Anglo bond holders and depositors should bear the pain, they took the shilling via higher rates and the bet didnt pay off. But the wider implications for Irl and Euro probably override this. The EU made it clear when they forced the austrians to bail out the piddly little bank last year and Minister Lenihan is speaking on behalf of EU when he says there will be no default, every penny of senior debt repaid. Lehman means no bk will ever be allowed fail unless they have high degree of certainty of implications and who will bear the losses. The INBS retained ELG bond is the mechanism when collateral runs out, its unsecured money printing and shows that this will be the plan when needed. not suggesting its right or wrong, but it is what has and what will happen

Surely the point here is that things have gotten out of our Government’s control and their plans no longer appear ‘manageable’?

1. Debt – the bank losses are still not accurately defined. Aib is still to play.
2. Fiscal policy- do the markets believe we can continue to savage public expenditure?
3. GDP growth- the ability of the country to manage it’s debt is wholly dependent on the economy growing, will it?

If the markets do not believe the Government can control the above they bet against it which adds to the spiral by pushing up the bond rates we have to pay.
At some point the Government will have to admit it can’t win and have to seek help. Fortunately our problem then becomes a Euro one.

@ Paul

‘When the faction that supports restructuring feels banks are well-positioned, and contagion costs are less than restructuring benefits, they will shift to back the hard-liners within the EU/ECB/IMF, and then restructuring will actually happen’

Do they mean ‘when the major Eurpoean banks manage to reach some semblance of solvency ‘ ?

@Aiman
“over 30% of existing bond issuance to be refinanced between Nov 2011 and Jan 2014.”
But this is not refinanced at the secondary market yield, it is a new primary issue that refinances the debt. As we see in Spain, it is possible to be credible in primary issuance, even if the secondary markets (relatively thinly traded compared with total outstanding) are incredible.

On the subject of the ECB buying 18bn – I suspect there is an element of churn in this – buying tbills that are of short remaining duration.

@ Aiman

completely agree about the 18bn Irish “bought by ECB” figure that Barclays came up with last week. It sounds way way too high. Spoke with a few guys about this on Thursday, and we each came up with guesstimites of more like 7-10bn. As a background for this, consider the following – Depfa Bank, the Germans bigger version of Anglo, had around 45bn in Greek govvies on their balance sheet. Depfa has been explicitly (though discreetly) guaranteed by the German state. What odds that the Bundesbank has been directly buying large chunks of these holdings via the EFSF? I’d guess around 40bn of the EFSF has been used to buy Greek bonds.

Second theory – with secondary yields on Irish debt having spiked, the cash value of the Irish govt debt has fallen off significantly – you can buy a lot of the bonds at 90 cents now. What odds the following – the EFSF buys the bonds at c.90 cents, and only asks for 90 cents back off the Irish state at maturity? 10% restructuring done straight away, ‘off-market’, with no loss to the EFSF, no panic in the market, with the loss crystalised when they bought the bonds on the secondary. Essentially an EU “buy back” of the bonds ala the banks buying back subordinatred debt? This method of restructure would be even greater for Greek debt given that it trades as low as 60 cents if you go out long enough! Just throwing it out there…

The whole debate is spurious and little more than hot air unless it is linked to the matter of future economic growth in the real economy. It is like accountants who know nothing about how to get a ball into the back of a net debating the solvency of a Premiership club without linking it to the matter of whether the performances of the manager, coaches and players on the field are more likely to lead them to the upper echelons of the Champions’ League or to the lower echelons of the Championship. I’ve been saying this for months. In yesterday’s Irish Times, Dr Garret Fitzgerald, the bete noire of some academic economists in Ireland, said exactly the same thing. I can’t give Dr Fitzgerald’s exact quote, as the link to the comments section in the Irish Times website appears to be down, but it was to the effect that people are spending far too much time focusing on the banks issue, when they should be focusing far more on the matter of growth of output in the real economy, and that the latter would take care of the former if growth occurs in the next few years. So, to paraphrase Tony Blair a long time ago, the priority for policy-makers should be growth, growth, growth, not banks, banks, bank.

The economist from Davy has laid out his stall fair and square with lots of facts and figures and sources for all of them. If people wish to dispute his facts and figures, let them do so in the same statistical detail (and with sources) that he has. Nobody so far has done that. Merely a couple expressing outrage that the Irish Times has dared to print his opinions.

Basically, the economist from Davy is saying that, even on the basis of modest 3pc annual growth between 2011 and mid-decade (far less than Ireland’s long-term average annual growth rate between 1958 and 2010, which was about 4.5pc), the debt will be entirely manageable. His figures, again on the basis of modest 3pc annual growth between 2011 and mid-decade, show that by then debt as a percentage of GDP would be just a little above the EU average, that annual interest repayments would be just a little above the EU average, and barely half what they were in Ireland in the early 1990s. Again, if people wish to dispute his figures, let them do so. But, so far none have.

Given all this, the focus should be on getting growth in the real economy going, not this obsession with banks. And this requires some intelligent analysis, sector by sector, of how the real economy is performing, with a view to determining just how realistic or unrealistic is the 3pc growth rate from 2011 on that the Davy economist says will leave Ireland’s debt problem entirely manageable. But, what we are getting in the media is mostly junk analysis. For example, McWilliams, in pursuit of his agenda that Ireland exit the Euro, claimed falsely in his Irish Independent column last Wednesday that Ireland’s exports have been stagnant for a decade. He claimed that exports from Ireland had risen by just 0.3pc between 2000 and 2009. He made a big point in his column of emphasing that it was not a misprint, that it was indeed a paltry 0.3pc, not 3pc or 30pc. It was a falsehood. The actual figure is 40pc, and that’s between 2000 and 2009, the bottom of the recession. It will be a lot higher over the decade between 2000 and 2010. Even Michael Hennigan was outraged at this blatant disregard for statistical accuracy and devoted a special section in Finfacts on Friday to demolishing McWilliam’s claim.

So, for a change, let’s do some intelligent analysis of how the real economy is performing and of whether or not the 3pc growth rate from 2011 on, that the Davy economist says is required to make the debt problem entirely manageable, is realistic or unrealistic. My analysis, for what its worth, is as follows:

on the positive side:

the wealth-producing sectors have been performing very strongly since the bottom of the recession in 2009 Q4 – in particular:

by May-July, both the volume and value (turnover) of manufacturing output were up over 20pc on 2009 Q4, with growth in the majority of sectors, not just chemicals

overall services exports have been growing strongly, up by 10pc in volume tems in 2010 Q1 over 2009 Q1, and with lots of indications that this is accelerating, although data isn’t so up-to-date for them as for manufacturing – contained within this sector, tourism started 2010 very badly, due to the arctic winter and the ash cloud in April and May, but seems to have picked up strongly over the summer

agriculture is having a boom year, with output up due to (for once) favourable weather and, more importantly, output/export prices up and price of inputs down

So, the 3 main wealth-producing sectors all appear to be in rapid growth in 2010.

on the negative side;

little of this growth in the wealth-producing sectors and exports has found its way into increased consumer spending, so overall growth in the economy in 2010 will be nowhere near as high (it may even be quite low) as the spectacular growth in output by the wealth-producing/export sectors would warrant – in particular:

core retail sales have grown only very modestly in 2010, although new car sales in recent months have been running at twice their 2009 levels

The slow growth in core retail sales in 2010, at a time when the wealth-producing sectors are roaring ahead, is the most disappointing feature of the economy currently, and the feature that should be receiving most attention from policy-makers. It also important because most tax revenue comes from consumer spending and, indeed, most employment comes from consumer spending. In Ireland, the wealth-producing sectors are taxed very lightly. This is a good thing, I’m not against it. But, it does mean that neither tax revenues nor employment will increase much until some of the growth now going on in the wealth-producing sectors finds its way into increased consumer spending. I’d say that there are two reasons why this hasn’t happened to any great extent in 2010. First, although manufacturing output and output in the other wealth-producing sectors has been growing strongly since 2009 Q4, wages in those sectors have not. In fact, they’ve been cut. Second, the 24/7 deluge of hysterical comment about debt/default in the media, allied to total non-reporting (indeed false reporting as with McWilliams’ claim above) of the very good performance in 2010 of the wealth-producing sectors, is keeping consumer confidence abysmally low, which in turns mean people simply not spending as they might. Both these areas should be focused on by policy-makers in the next stage of recovery, with a view to ensuring that the strong increase in output currently occuring in the wealth-producing sectors of manufacturing, services exports and agriculture, spills over into increased consumer confidence and increased consumer spending.

Regarding the Davy economist’s comments on the behaviour of opposition politicians and academics. I think he is being unfair to Fine Gael and to academics like Karl Whelan, although he may not have had them in mind. They may indeed be genuinely opposed to the government’s stategy without in any way wanting to see the economy crash. It is perfectly legitimate to oppose the government’s strategy and I certainly woud never say that doing so in any way means wishing ill for the economy. However, we are fooling ourselves if we think there are not some people around who do want the economy to crash, as a mechanism for cleansing the Irish people of their sins, mainly the sins of not having voted in recent decades for the agendas and parties that they support. It is hardly controversial to say that. Those that do don’t hide the fact that they do and are happy to post on here that this is what they want.

Anyway, far more important things to worry about this afternoon than trivia like the economy. But, talking of the latter, those who have been out in the streets will have noticed a huge surge in the number of foreign tourists to Dublin this morning, mainly from Her Majesty’s counties of Tir Eoghain and An Dun. Maybe some Dublin 4 economist will one day calculate how much revenue GAA fans from these foreign parts bring to Dublin when teams from there are in both the minor and senior All-Ireland finals, as today.

@JohntheO
“The slow growth in core retail sales in 2010, at a time when the wealth-producing sectors are roaring ahead, is the most disappointing feature of the economy currently, and the feature that should be receiving most attention from policy-makers.”
This and the paragraph that follows it (before the strawman of “talking confidence”) is key, IMO. Employment levels are not increasing with output – the gap between GDP and GNP is widening. Until we get growth in GNP, we will are not seeing an economic recovery. Far from missing the wood for the trees, I think international markets have woken up to this fact. This is the cause for concern – GDP growth does not translate into an improvement in public finances except in a single metric debt:GDP. This is an optics measure that does not address the issue of whether the debt burden is growing faster and to a higher level (as a result of the bailout costs and the already baked-in deficit) than the economy can grow to service.

@Eoin

Depfa was bought by Hypo Real Estate, which is now 100% nationalized.

I am glad you mention them as they are a good example to understand what Dublin really was about in the context of this global heist.

The SEC is investigating Depfa on their CDO business they conducted from Dublin.

Five school districts in Wisconsin in the US borrowed $165 million (€135 million) from Depfa in 2006 to buy collateralised debt obligations (CDOs) to fund future health benefits for retiring teachers.

Dublin was the european Hub for fraud and rip off. The NYT branded us “The wild West” of european finance, after the global reinsurance scam was traced to Dublin. Cologne re had performed re insurance contracts to artificially boost AIG’s reserved for 0,5 bln.

I would like to stress, this is five years ago!

In my Opinion, there are deeper reasons why this government does not want the Anglo secrets to become public knowledge, there are good reasons for them to keep this behind closed doors, and just present the Bill to us as “There is no other way!”

Any politician in charge in ireland at this time, working for DoF, can not claim at all they would not have known about all this. They BUILD this european hub of Fraud and welcomed Companies like Maples & Calder to open offices in Dublin in 2006!

The politicians in charge were complicit! Whether in Germany, or in Ireland or anywhere else, this much is 100% certain.

One has to have a close look at the functions these politicians and banksters were holding, jumping from positions as Board member in Bank XYZ to BaFin executive, to Department of Finanance etc.

This is how the system worked, and still works, and no one hits the brakes….

@hoganmahew – the price of secondary market bonds dictates the price of new bonds issued in the primary, as close as makes no difference. There is no premium for newness.

I don’t understand to what Spanish experience you refer. Issuance there has been priced tight to the prevailing secondary levels. Where else do you think it might be priced?

@ hoganmahew

“Until we get growth in GNP, we will are not seeing an economic recovery. Far from missing the wood for the trees, I think international markets have woken up to this fact.”

And with another 3b+ of cuts/taxes its unlikely we will see any meaningful GNP growth next year. As you say maybe the markets have woken up to this. Perhaps the announcement of possible additional cuts was the reason the markets took fright.
One issue that perplexes me, some commentators have suggested (Jeffries, I think) is if there are no (international) buyers for Irish Bonds, then how come the ECB and our bigger banks did not intervene aggressively on Friday. Unless there was massive selling surely our own banks could have contained the situation- if only out of self interest.

@Aiman
Yeah, perhaps so. My impression, though, is that once debt costs approach ‘ridiculous’ levels, a disconnect emerges (between primary and secondary – there is reasonably solid buying at the primary level, with buyers lined up before auctions; only the Germans risk fails) and perhaps the opportunity that Eoin alludes to is at play.

@podubhlain
“And with another 3b+ of cuts/taxes its unlikely we will see any meaningful GNP growth next year. As you say maybe the markets have woken up to this. Perhaps the announcement of possible additional cuts was the reason the markets took fright.”
I disagree. Borrowing is not growth. While, given the profile of lenders if we are to believe the assertion that 85% are overseas, it does increase ‘money’ in the economy, it comes at a cost of paying back with interest in the future. The buy now, pay later economy just doesn’t stack up in long-term growth prospects once you hit a certain level of debt.

@JTO

Surely falling house prices are also affecting consumer spending – not just negative sentiment causing low levels of consumer confidence.

There has been a real and substantial destruction of wealth amoung the property owning classes in Ireland. In response they are spending less and saving more – trying to rebuild their devastated balance sheets. This is not about confidence or animal spirits – it’s the real deal baby.

Unemployment levels have also substantially increased and consumption levels are clearly linked to this.

@ hoganmahew

“I disagree. Borrowing is not growth.”
I don’t think I advocated more borrowing. Cutbacks are not growth either.

Further cutbacks in the budget are inevitable and will be deeper, the longer they are postponed.
FACT

The sooner they are made, the sooner we will have a sustainable, sound economy. To influence the eventual shape of that economy, the taxes imposed must be on land, in all its shapes and forms. Bad news for those still hurting from their delusion that land is better than money! The cutbacks can come in the areas attached to lauding land too. Agriculture, buying sites for foreign investment, “armed forces” occupy land. Education over the net. All have an impact on land as they have grown to incorporate land as part of the great subsidy to the middle classes. LAND is not a religious icon! It has a use and Ireland has more of it, thanks to our neighbour’s policies, per capita than most in Europe. The public servants affected can be allowed trasnfers to more useful areas.

Please remember that this is not a recession and that Japan style depression will affect our markets for a similar length of time, two decades and counting. This debate will, sadly be relevant for years to come!!!!!!!!

Until the reforms are made, Ireland will lose competitiveness on many fronts even as wages fall. Until then, any investor, with a choice of putting money into $Au or Irish bonds will have an easy choice! Equities are out of the question, we all agree?

http://www.guardian.co.uk%2Fmedia%2Fgreenslade%2F2010%2Fsep%2F20%2Fdownturn-ireland

The MSM start to die. Why? They helped fund the bubble and steal from everyone who believed their irresponsible BS. The rest will follow ……

The idea that some news is only worth a euro and a lot of lies disguised as news, may need revision. The supports of a free credit economy are slowly dissoling as the rot has progressed too far.

Do not lend to newspapers or buy their shares! Hot tip!

On the 18th the Irish Times has the mystic Meg of Irish politics making a confident economic prediction that borrowing costs would fall: “BANKING CRISIS: MINISTER for Communications Eamon Ryan has predicted “clarity” and “certainty within a matter of weeks” on the crisis involving Anglo Irish Bank and AIB. He also expressed confidence the cost of borrowing would be reduced in bond markets and that Ireland “will be in a much better position in international markets”.

This morning (20th) the Irish Times reports: “Bond yields rose again today ahead of tomorrow’s scheduled auction by the National Treasury Management Agency (NTMA). Yields on 10-year Government bonds moved as high as 6.384 per cent before falling back a little to 6.379 per cent by 1.05pm.The spread between Irish bonds and German bunds was 391 basis points.”

Several times over the past few weeks I (and others) asked the question: what rate would be too great once bind yields hit 5.5%. Now that yields are creeping towards 6.5% I ask the same question.

The government and now Patrick Honohan has signaled (the government as usual in as weaselly as manner as possible) that more than €3bn in cuts will be required, possibly €4 bn possibly more. Here’s a question for the economists. Will even €4bn be enough if yields on 10 year bonds remain above 6%? I am only a simply minded creature but when I do the sums it seems nearly impossible to cover the bank debts and the budget deficit with rates creeping upwards by the week.

Is it time for Lenihan and Cowen (if he is over his hoarseness) to prepare the country and especially the taxpayer of the intervention of the ECB/IMF via the stability fund?

Thx for arresting discussion. A few points pop out. No charts on the guesstimates of debt reparation as a proportion of tax yields against given parameters, such as no deterioration in unemployment, say over the years 2012-14. One figure I got elsewhere approached 37-40%. Wow!

@Paul mentioned the possibility of restructuring of sovereign debt: “This has always been the strategy according to one faction in the EU/ECB/IMF: “Give banks some time to sort out their balance sheets, then restructure sovereign debt if needed” If we had a decent government, they would be demanding a resolution of our crisis along these lines.

EFSF http://bit.ly/9RcfL3 Eoin Bond’s theory advocating the purchase of Irish bonds at 90% value and reselling them to Ireland Inc at a lower maturity cost. How come our government is not pursuing active intervention to access EFSF aid to relieve our debt burden along similar lines

I would like to quote JohnTheOptimist in full as he is I belive making an error of judgement of gargantuan, Greenspan proportions that can create and I believe is already creating massive damage to our economy:

“Basically, the economist from Davy is saying that, even on the basis of modest 3pc annual growth between 2011 and mid-decade (far less than Ireland’s long-term average annual growth rate between 1958 and 2010, which was about 4.5pc), the debt will be entirely manageable. His figures, again on the basis of modest 3pc annual growth between 2011 and mid-decade, show that by then debt as a percentage of GDP would be just a little above the EU average, that annual interest repayments would be just a little above the EU average, and barely half what they were in Ireland in the early 1990s. Again, if people wish to dispute his figures, let them do so. But, so far none have.”

Next ten years we will do well to keep our heads above water. Declining GNP punished by debt reparations of savage proportions fed by an economy that to survive will have to readjust downwards, rather than upwards. Before growth becomes an issue we need to sink a lot more than we have even begun to do! Talk of growth is nonsense! Never mind a good season for agriculture, we are being forcibly downsized!

Sorry if post is too long:(

Here’s an interesting piece in relation to the likelihood of sovereign default around the peripheral eurozone:

“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”

Others would launch come to the rescue. The “No-Bail” clause in the Maastricht Treaty would be ignored. The EU would instead use the “exceptional occurences beyond its control” clause (Article 100.2) to do whatever it wanted.

There would be a price. “The country in question could be partly warded and have to fuilfil strict controls”.
Quite. This is another long-held fear of eurosceptics: that EMU would lead to vassal states.”

“Mr Stein’s piece is a study of break-down mechanics. What would actually happen? The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.
Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.””

If we had a decent government they would already be negotiating with EC on the following:

““exceptional occurences beyond its control” clause (Article 100.2) to do whatever it wanted.”

In summary of the above points, our government for some unfathomably dark reason refuses to contemplate dealing with our banks especially Anglo, along the sensible lines.

These ignored and denigrated paths for restructuring, renegotiation, intelligent intervention indicate our biggest problem on Ireland Inc is a crisis of leadership, that is hell bent to support malpractice, corruption of the banking sector, while sending the bill for this to the taxpayer.

@Paul Quigley

I think they care about whether the major european banks will be able to keep access to private funding markets despite an Irish default. That could come about as those banks recapitalize more over coming months.

An alternative, and much worse situation where they would need to act, would be to see Spain start into troubles again. That will force actions too, and reopen the question of whether the euro zone can hold together.

Either way, I suspect we will be cut loose because the pragmatic faction that currently supports us bailing out our banks will change its views if we don’t grow fast enough to ensure solvency soon.

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