Clouds Over Dublin Soon To Break Up

This is the view of Michael Vaknin of Goldman Sachs Global ECS Markets Research:

Irish bonds have substantially underperformed the rest of EMU periphery.
A heavy pipeline of Irish bank debt rolling off soon brings back memories of the Greek turmoil.
But we believe risks are overpriced, as several backstops are in place:
The banks can increase funding through the ECB liquidity programs.
And the ECB could intervene again in ‘dysfunctional’ sovereign markets.
More fundamentally, we argue that Ireland’s issue is liquidity, not solvency…
…Hence if the EFSF is activated, spreads would likely fall significantly.
Watch for signs of ECB intervention and banks’ reduced issuance to cement the case for ‘long’ Ireland.

46 replies on “Clouds Over Dublin Soon To Break Up”

“Ireland’s issue is liquidity, not solvency” ..

that’s unfortunate phrasing given that it was that belief about banks in September 2008 that has us where we are now.


Do I detect signs that the Aesthetic Turn in Irish Economics is kicking in? Neat thread title: ‘spose we might term this as the germ of its Impressionist Wing? (-;

GS are good on the ‘long stuff’ – looks like some lessons from Shennandoah might finally be settling in.

I disagree on EFSF … had we painted out one of the two elephants [rogue dysfunctional datbank] we could by now be well on the way out of all this ……. and sitting reasonably comfortably on the main one, The Sovereign – is everyone now conflating the Banking System with the Sovereign? Has political social science been rewritten over the past 24 months? Does The Minister need an Artistic Advisor?

Counter point, below, from Ryan Avent (Free Exchange on The Economis website). The last sentence is disturbing. Something needs to be done to break this psychology. If some form of fiscal signal is now demanded then the best one to give would be a tearing up of Croke Park. Liquidate the NPRF and say to the debt markets ‘see you in 18 months with a much stronger fiscal position’. If the latter works out then it works out. If it does not, then the IMF are here anyway.

“Pity Ireland. The latest figures show its GDP fell 1.2% (quarter-on-quarter) in Q2 and the numbers for Q1 were revised lower. That definitely looks like a double dip. Meanwhile, despite a couple of successful bond issues earlier in the week, the country is still paying over 6% on its ten-year debt, a good four points more than Germany. If you recall the idea of a debt trap, in which problems mount if your cost of financing is greater than GDP growth, then Ireland is in it.
But Ireland was a good boy in markets’ terms, taking swift action to cut public spending in the aftermath of its banking crisis. It has gained litrtle reward for this in economics or finance. That is hardly going to encourage other nations contemplating the austerity route.

Ireland now has the world’s fifth-highest default probability, after Venezuela, Greece, Argentina, and Pakistan. That’s not the company Ireland would prefer. Tyler Cowen quips that Ireland hasn’t actually tried austerity yet, citing this:

The escalating cost of bailing out Anglo Irish Bank is set to balloon the deficit to at least 25 per cent of GDP this year, cancelling out the benefits of previous austerity budgets.

But therein lies the problem (part of it, anyway). The banks were heavily exposed to the domestic economy, which imploded. New austerity worsens domestic economic conditions, which increase bank losses, which increase the government’s bail-out tab.

There are only two ways out of this trap. One is massive fiscal support from outside the country. The other is an exit from the euro zone, a big devaluation, and an export-based recovery. We’ll see which occurs.”

You are a busy boy today. I totally agree with you that the most positive signal Dublin could now send out would be to tear up the Croke Park agreement. It is totally at odds with what the Irish economy requires at this critical juncture. For Ireland there is no silver bullet solution – every conceivable avenue out of this mess is very painful. It is a question of trying to identify the least painful. Liquidating the NPRF and staying away from the markets for 18 months sounds great in theory, but is there a danger that it would just let Government off the hook and delay the obvious structural rebuilding of Ireland’s public finances that in my view is required.


If you asked me to chose between the Vampire Squid and the Economist, I would go for the Squid every time. He is invariably right while the Economist and its adherants are usually wrong. I remember when the forecast the doom for the oil market at $8 and the end of the credit crunch the month before Lehmans.


‘Ireland now has the world’s fifth-highest default probability, after Venezuela, Greece, Argentina, and Pakistan. That’s not the company Ireland would prefer.’

Just who is this cut_an-pastin_prescriptive fella? And where does he get the idiotic idea that Irish citizens such as I do not prefer the company of Venezuelans, Greeks, Argentinians and Pakistanis? … and I’m speaking from direct empirical and some magical aesthetic experiences.

Only half right: the squid gets it as wrong as the Economist. And when it does get it right it doesn’t share it’s conclusions with the likes of you & me. What do you think of the substantive sugestions for high-impact policies/gestures (tear up Croke park/liquidate NPRF)?

Are you having one of those ‘magical aesthetic experiences’ right now by any chance? Could I have some too?

The Croke Park deal will die soon.

Skilled and alert politicians will share out the pain. There is lots to go around and still to come. Talking of growth will actually make this all the more difficult.

GS is not to be trusted even if it is correct. It has a massive derivatives book and playing both sides is sometimes possible with derivatives if the timing is carefully planned.

Jim Power

Yes. What ios your opinion of Steve Keens explanation of what is happening and how far down we therefore must go?

@simpleton: Isn’t living through these times enough of a magical aesthetic experience’? It has the same unpleasant side-effect of making one want to puke one’s guts out!

Probably a valid analysis from GS but the reasons for the discount currently demanded for Irish debt are (1) the lack of clarity on the state’s exposure to its banks coupled with (2) uncertaintly of the current government’a ability to control public expenditure. Bizarrely, whatever the state’s exposure is, it already exists but can only be initially quantified once all NAMA transfers have taken place, and finally quantified once the subject loans are sold, amortized, written off or whatever their ultimate fate may be and the state’s stakes in the various banks are sold.

The long drawn out process of loan transfers to NAMA is seriouly prejudical to the economic interests of the state. It needs to be concluded with haste and all loan documentation flaws, to the extent that they can be remidied, can be dealt with post their transfer.

The process is about to get even more confusing once the banks (AIB) start indicating that the % write down on the next NAMA tranche will be higher than the traches to follow. Who knows? More confusion.

The longer the stagnation in credit supply to the “real” economy the greater the ultimate damage that will be done. Speed up the process.

Two points.

1. Who can take GS seriously anymore. Remember these were the guys dishing out mortages all dressed up, mean while they were going short through CFD,s on the whole house coming down.

2. Would everyone just back off on the Croke Park Deal. Who runs our hospitals, schools, and keeps the lights on. Remember public service has taken a 15% hit already. Believe me I am feeling it. Bring in property tax and get it over with. Bring in water charges and lets all start acting like adults.

“when it does get it right it doesn’t share it’s conclusions with the likes of you & me”
hits the nail on the head – what GS tells us is what suits GS. What they advise will benefit themselves. “Default would lead to crisis says Suds”. In case you had worries about the effeects of default – the fact that GS is worried about it must be a good indication in it’s favour.

Also why on earth are these duplicitous b**ds being reatained by NTMA. Maybe it is psychiatrist who should be helping us solve our problems. We are living in some kind of Jimmy Jones colony waiting in line for the kool-aid.

By all means lets tear up the Croke Park deal. Its a sordid little backroom deal concluded by corrupt insiders which prioritises public servants over those whom they purport to serve.

As regards selling the NPRF, equities carry an earnings yield of 9% which still beats the 6% offered by the 10 year. What we should really do is issue an amount of bills at 2% and buy back 10 years but we won’t will we?


last time I looked the Squid was worth more than the Economist, which correct me if I am wrong is on the verge of bankruptcy.


The Clouds over Ireland Have Broken UP – Lovely Blue Ridge Clouds, somewhere over the IFSC.

Fresh air – just breathe it in – before the austerity_cubed crowd decide to put VAT on it (-; It’s still a public good – good stuff too (-;

Goldman make more pronouncements than I do. I do it so I’m always right. It is much harder for me to have the split personality to cover both sides. With multiple analysts facing different ways, it is easier for Goldman. You’ll always find some Goldman analysis somewhere that both supports and directly contradicts any position you like to take.

Interesting that Peter Sutherland is on RTE advocating more pay cuts.
BTW – I’m not against pay cuts and I am against the Croke Park agreement but….
The economy is dying because disposable equity is being siphoned off to pay sovereign and personal debt.
That’s the real issue here. When you add up the sovereign and personal debt we are up to our eyes in the stuff.
Now Peter is speaking for those to whom we owe debt. Goldman are playing their games too (God knows what they are this time…)
So pay is important but cannot be separated from the key issues of debt and growth. Anybody who focuses solely on pay has an interest in Ireland repaying its debts but no interest in it functioning as a proper country.

As long as Ireland still wants to borrow €20+ billion a year it needs to keep repaying, and promising to repay, its debts. If Ireland hints that it might welsh on its borrowings then it wouldn’t be able to borrow any more and huge pay cuts (up to 100%) would be certain.

If Ireland magically didn’t need to borrow any money now or for years to come then it might get away with not repaying. Of course, the only way anyone can currently suggest not to need to borrow any more money is to implement huge pay cuts.

If Ireland continues to borrow then the borrowing will eventually overwhelm the economy and the resulting crisis will result in huge pay cuts that last a very long time.

If Ireland wants to pay back its current borrowing then it’ll probably need pretty big pay cuts.

It’s like a game of tic-tac-toe. You always get the same outcome.

Unless stonking growth arrives like a deus ex machina then we always end up with “pay cuts” as the next six places on the Irish Monopoly board.

@hugh, that’s a bit simplistic.

there is pay, there is infrastructural investment, there is social welfare, there is health and education, and so on…and lets not forget tax rates and tax breaks.

the structural deficit is of such a size that pay cuts will not do it. You simply can’t do enough there without becoming somalia.

so lets have a little realism from you Jim and the others – what painful bit of the mix are you personally expecting to take on? Expecting others to do all the heavy lifting is just plain childish…

All of those things are there but my simplistic analysis suggests that if we had to reduce the spending gap by €20 billion per year then it would certainly include pay cuts.

It would include other things too but being simplistic I didn’t want to try to list them all on a blog comment.

Finally, I’m already doing a lot of heavy lifting. Thanks for your charitable assumption that I’m not.

“Goldman make more pronouncements than I do. I do it so I’m always right. It is much harder for me to have the split personality to cover both sides. With multiple analysts facing different ways, it is easier for Goldman. You’ll always find some Goldman analysis somewhere that both supports and directly contradicts any position you like to take”

Yep, Sutherland’s nose is in the Irish Financial Crisis trough alright.

When you see parasites like GS and their cheerleaders waffling, they only do so cause their commission is in danger of being pulled.
Mafia in pinstripes.

“As regards selling the NPRF, equities carry an earnings yield of 9% which still beats the 6% offered by the 10 year.”

I read somewhere(here) that the yield since inception at the NPRF was 2.3%.
Maybe I am wrong.

does anybody know where to find the croke park agreement, is it a document publicly available or just an understanding, a piece of paper or something? agreed that it must go, the public sector has to start becoming the solution to this problem, if ireland had efficient government who knows what we could achieve, we have seen examples of good governance over the years, but they seem more like the exception than the rule. If we can make it the rule to do things efficiently, get the incentives right for managers to create the outputs we want.

Well, we could descend into finance theory – they are called dividend discount models, not earnings discount models. But let’s resist. Instead, let’s not be slaves to academic scribblers but be pragmatic. What would be the impact of the announcement that (a) the deficit next year will be 17bn and (b) will be funded by sales of all NPRF assets? Is this not the logical conclusion of the can-kicking policy so beloved of your good self and Eoin?

surely all the arguments against defaulting on anglo debt apply to defaulting on an agreement with the public sector unions . how do you expect to operate an economy with no wage agreements? why would any union sign up after you reneg , and dont you think all this chat about tearing up aggreements is sending the wrong signal to the labour markets?

Nope, one is a legally binding agreement, the other is a back-of-fag-packet sort of thing with no legal standing whatsoever.
Your suggestion seems to imply that there is a public sector labour market. That word market usualy implies prices moving around in response to supply and demand changes. Which bit of the public sector behaves like that?

Simpleton, I would think your proposal would cause the immediate collapse of the irish bond prices. It wd be viewed as rifling our savings to finance a continued consumption binge. Now if you targetted a deficit of 10bn I might agree with you as long as you gave specific commitments. Bottom line, I have no objections to what you propose as long as the current deficit is eliminated.

@David O’Donnell:
“[…] and I’m speaking from direct empirical and some magical aesthetic experiences.”


I’d been wondering what those clouds were.


Any assessment given by Goldman needs to be taken with a huge dose of salt. It has mastered the art of running with the hares and hunting with the hounds. GS has been engaged by the Irish Govt to advise on matters concerning the split and wind-down of Anglo-Irish and it is entirely possible that it has been suggested to them that they might profer a supportive “independent” view like this one to try to allay fears and help talk up the Govt’s case. GS has clients with interests in Quinn’s, on one hand, while playing an active part in the desicion-making process on Anglo’s acquisition of Quinns, on the other hand. How are these conflicts of interest tolerated? In all of these dealings what is needed is transparency and it is non-existent.

Austrlia is grateful for the fully trained nurses, radiographers, physiotherapitsts, dentists doctors and teachers trained in Ireland at great cost to the taxpayer! Or do these not count as being in the public service?

Public service qualifications are set: BY THE MARKET!

Your attitude is parochial and even insular. You must be a highly placed policy maker in the Irish Government?


Agreements are always related to credibility. Whom do you think will enforce the one? The other will be enforced at the ballot box, or at the tumbrils!

You seem to have mislaid your usual commen sense?

As the situation deteriorates, so that even JTO sees the sense of taxes, then the Croke Park agreement will be amended again and again as they deteriorate even further. This will go on for years until we write about the decades old recession. This is a depression.

The absence of the opportunity to debate this very point is a victory for the shills who have cowed the independent academics. Spin is like bad advertizing: expensive but always effective even when nasty!

Speaking of clouds, I understand that the chances of a “year without a summer” are increasing.

This will have immediate and profound effects upon the Northern hemisphere. If it recurs next year, then the probability of a solar minimum with cooler temperatures for decades, becomes worthy of more debate. By then it may be too late.

Ants and grasshoppers. The locusts have had their day? The sooner a basic and even pessimistic view of the economy is more widely adopted, then the better armed those who adopt it will be to face the coming storm.

Some little nuggets we would have been well advised to remember:
‘Proverbs 22:7 warns that “The poor are ruled by the rich, and those who borrow are slaves to the moneylenders,”
“Don’t guarantee to pay someone else’s debt,” says Proverbs 22:26-27, “If you don’t have the money, you could lose your bed”
“If any of your people become poor and unable to support themselves, you must help them… Don’t take advantage of them by charging any kind of interest or selling them food for profit.” (Leviticus 25:35-37 CEV)’
It’s good to google debt and history. It’s been a big issue!! Consensus seems to be that debt can useful but only if given for what is necessary and what might bring growth. Certainly not for day to day living and big restrictions when it comes to housing

Isn’t the NPRF supposed to fund future pension commitments? How would selling it off be any different to what Robert Maxwell did to the Mirror pension scheme when one of his business deals went astray ?

How much has been paid into the NRPF to date ?

I was also wondering if there is any detail on which debtors are responsible for the 23bn of losses in Anglo to date. Sean Quinn’s loans were written off but who else’s were?

@Pat Donnelly

the global temperature is like bond rates. If you don’t manage your spending/emissions the thing goes infinite. With finance you can default or inflate but there is no default option for planet earth. In the UK they are talking about reducing emissions by 80% STARTING in 2050. Imagine the response to the Chancellor saying he’d cut the government budget by 80% starting in 2050.

All this talk of tearing up the Croke park agreement is interesting. Has anyone sat down to really think through what the consequences (to the economy) of that might be? ‘What if?’ a couple of scenarios?

My own view (based on talking to them) is that individual members of unions don’t have the stomach for a fight in the current circumstances and the gov could get away with doing it. It’s easy to tread harder on the downtrodden when the going is tough. Sad but true.

I think we are being softened up anyway for abandonment of that agreement.
Do you ever get the sense that the ship is sinking, the life boats have been allocated and the rest of us are just kind of picking people to throw into the sea to make it sink that bit slower.

People, I still detect no real appreciation of a depression in this blog!

David Burke
Asking the Irish voter to be mature is possibly a waste of time when politicians deliberately undermine appreciation of just how bad things are. Lenders might in fact be more impressed with a government that brings that home to them!

Let there be no more borrowing, whatever it takes!

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