Government Plans €6 Billion Adjustment in 2011

Ireland to Take 2-Year ‘Interest Holiday’ On Bank Bailout Method

By Dara Doyle
Nov. 4 (Bloomberg) — Ireland’s government will not pay
interest in 2011 or 2012 on promissory notes it is issuing to
partly recapitalize three lenders.
The measure will help keep the general government deficit
below the 10 percent level next year, according to a Finance
Ministry spokesman.
“The Irish authorities have confirmed with Eurostat that,
as a result, no interest will be recorded on the promissory
notes in those years, on either a cash or accrual basis,” the
Finance Ministry said in a technical note published today.
The interest would have been payable to the banks being
recapitalized.

Note that they have assumed 4.7% interest rate in future years to estimate the interest payments on the notes. Over 200bp below current headline levels.

@Bond Eoin Bond
Sounds like a sop so that the Irish people can accept this criminality from our Goverment.
People need to accept that their Goverment is acting as a agent for a absentee landlord and nothing more.
Patriotic capitalists should start putting their capital on strike,workers should refuse to work for these cretins and debt serfs need to default even if solvent.
Boycott the bastards.

On the basis of the prom note chaos, this is really worth 7.5bn. Has to be seen as impressive, hopefully the markets think so too.

@Karl

“In any case, the bottom line is that this €6 billion of adjustment will have more effect on the GGD than the €7 billion that I have been recommending because that €7 billion figure included €1.5 bilion for the promissory note interest.”

I am not sure I understand this statement. 6bn is less than 7bn. Okay you may have come up with 7bn because you thought there was 1.5bn pni. BTW do you mean GDP and not GGD? Again 6bn adjustment will reduce GGD by 6bn and 7bn will reduce it by 7bn. What seems to be happening is that GGD will now be optically less than we might have expected a week ago as the pni interest won’t be included.

This is not a trolling query – I am genuinely trying to understand your point.

I think it will all come down to where the adjustments are aimed. There seems to be little chance of Irish politicians – frankly, of current or alternative governments – targetting the real cost centres in the economy.

It looks like the Croke Park Agreement is off-limits for net vote reasons, as well as self-interest reasons (linking etc), so it is the most vulnerable both economically and socially who are going to get stamped on.

Political and social division looks like it is Irelands future.

Brian Cowen waffling on about a fiscal deficit when he presided over a much larger monetory deficit while Finance minister.
The Goverment need not worry about a large fiscal deficit if they create a bank and give credit towards Industry and general Utilities.
This is a criminal coup by international banks – the same banks who extracted wealth from Russia during the 90s.
These are locusts that will strip this sorry nation to the very bone – please I ask responsible patriots to tell the Irish people the truth about the nature of power in this Island.

The treatment of the promissory notes seems to be a pure fiddle.

Essentially, in order to pay no interest for the next two years, the interest now is set to zero but the interest later is increased enough that the net result is the same.

Then, instead of accruing the cost in the next two years (even though it’s there) Eurostat will let us pretend it’s not there at all.

It’s a fiddle. It’s like doing one of the Greek “technical adjustments”, but hoping that doing it in public will cause less distrust.

Keith, patriots – are you for real?

Patriotism is a big part of the reason the Irish were willing to swallow all that guff about their economy in the first place and continue to tollerate the current guff about the sanctity of certain sectors now.

What is needed is a sort of anti-patriotism. Anything of economic interest that has the word Irish in it should be regarded with the same sort of respect as an equivalant that includes a descriptor like Italian, Greek, Bolivian or Nigerian.

Flags, jerseys, scoundrels. Nothing changes.

Is it now the case, can’t tell for sure from my reading, that the interest payments are NOT deferred in “cash terms” until the end of the life of the notes?

I listened to Mary Wilson Interview Cowen this evening. He sounded tetchy (not hoarse) and after a few exchanges I wondered if he was living in Ireland or another planet. The substance of his defense of the cuts was that they would reassure parties considering investing in Ireland (cue FDI). Any connection between deflation and rising unemployment seemed to go completely over his head. The reasons behind the 2-year interest holiday weren’t expanded upon – possibly Olli Rehn or Strauass-Kahn haven’t faxed them over yet. Overall it was a very poor performance given the day that is in it. If it reassures anyone outside of the front bench I would be doubtful.

On a positive regional investment note, I read that Jackie Healy-Rae’s son Michael is meeting soon with the Minister for Finance to make sure the pledges to Jackie on roads and hospitals in his area had followed through on. What will theses cost? A billion of so? Chickenfeed to this government.

The low estimate of growth (indeed with an aim of a deficit of 9.25 or 9.5, they are allowing for adverse scenarios) is to be welcomed. We can all hope, even believe that it will be higher than that, but that will put us in a position to make lower adjustments or a speedier resolution in later years (depending on the promissory notes!).

The ‘no change to disposable income’ makes me think that pension and other tax relief changes will account for the revenue raises.

As for the 4.5bn in cuts, I presume the capital budget will do a lot of lifting. I don’t see that this helps much, though, as capital spending is all debt funded (even in the good times it largely was). The current spending gap is the figure that the GGD refers to, no?

The promissory note is clever the more i think about it. Massively helps the frontloading in terms of getting the deficit figure down as a per centage of GDP next year. Doesn’t change the overall eventual real figures, and purely optical, but more bang for your buck in 2011 and 2012.

Apart from the budgetary decisions I think that the government should think beyond the standard fiscal instruments.

With EC signing off on bailout of Anglo (and the other banks) because they do not want to see systemic risk developing, they should underwrite approx €50billion of Irish debt by offering to buy €50b of Irish debt at an average EU bond rate (this could be ring-fenced). This form of non-standard monetary policy, would have the effect of stabilising the Irish sovereign bond market and bring about lower spreads and giving some hope for Irish public finances.

@Eoin
It is only clever if you think people are fooled by accounting gimmicks.

On the promissory note interest, why has no one in the general media flagged that the actual cost of the bank bailout is €10bn higher than previously flagged?

@BOD

No one is denying (except Karl I think) that the NAMA wheeze is totally at the indulgence of the ECB and what a wheeze it is, genius in my book. We are absolutely and totally dependent on ECB/EU for continued support of the wheeze. We have for sure lost our economic sovereignity and I for one say “three cheers” to that.

NAMA bonds are only acceptable to the ECB for repo, it appears. Will promissory notes follow? And Irish sovereign debt after that?

@Eoin
The ECB had planned to withdraw all exception liquidity measures by this stage, so while BOD is wrong on the timing, he is correct in the intent. The ECB would like to withdraw exceptional liquidity support. That it can’t without collapsing both banking systems and sovereigns in a number of EU states is all that is stopping it. When does it reach the point of “we have to do this regardless of the consequences”?

Everyone understands creative accounting.

Icelandic bond yields are below Irish yields for a lot of the curve now:
http://www.bonds.is/MarketOverview.aspx?catid=1631

Now, why is that?

Is it because the Icelandic approach is the exact opposite of here? They announced their losses and said we can’t pay them.
In Ireland, we don’t know our losses and won’t account for them properly, but we will pay them.

I wonder is anyone going to be brave enough to tell JTO that the budget deficit in 2010 isn’t going to be 11.9%. Not me. I’m too scared of the reprisals.

Karl,

€6bn.

Why not €20bn.

Is there a macroeconomic argument against it?

I think not.

Ok guys, lets see if I can live up to my moniker and answer Karl’s ‘waddaya think’ question in a starightforward way. I’ll rearrange the words to see if anyone can put them in order (hint: see all my previous posts that argue it won’t work, can’t work and will fail)

Game is the up.

@Karl Whelan

I wonder is anyone going to be brave enough to tell JTO that the budget deficit in 2010 isn’t going to be 11.9%. Not me. I’m too scared of the reprisals.

JTO again:

No need to tell me. I explained above why it was likely to be below 11.9%. They’d only be telling me what I allready know. However, your comment is entirely forgiven. Obviously, many Irish economists are in a state of shock following this weeks spate of bad (by which, of course, I mean good) economic news. Just to recap on the week:

Monday:

SIMI reposts new car sales in October up 94% on October 2009.

Tuesday:

Dept of Finance report tax revenue in October 5% up on October 2009 and 13% above the budget taget (profile) for October.

Wednesday:

CSO report 6,600 fall in live register in October.

Dept of Employment report redundancies in October down 40.4% on October 2009.

Thursday.

Wait for it. It doesn’t get much worse than this.

Dept of Environment report new house completions in Q3 up 5.3% on Q2, the first quarterly increase since 2007. Looks like the long decline in new house completions is at at end.

No wonder some people were calling for an election a few weeks ago.

Unfortunately for Brian Lenihan he, unlike his father, will not be able to use the expression “on mature reflection”.

It’s all on record.

And the accounting just gets more creative by the day.

http://www.bloomberg.com/video/63376088/

Karl Whelan

“I wonder is anyone going to be brave enough to tell JTO”

Not me.

I don’t read any of it.

I just stand upright and sing out loud the Optimists’ Anthem.

How about you?

On such a dreamy peaches and creamy day?

@Enda F
I’m curious about the lack of interest in the spreads blowing out on a daily basis. Is it a vista that people here (and pretty much everywhere else) find too awful to contemplate? I’m curious about why the spreads are blowing out in the face of good news, both domestically and overseas (there’s a global boom on lads, and the Fed has just gone very pro-cyclical).
Of course, markets can be daft and a few hedgies might just be ganging up on us. But could they be sniffing another Anglo-esque black hole, lurking somewhere in D4?

ash – give us the headline of the article so we can access it through google

@TOD – the level of fear people feel is higher because their balance sheet is banjaxed –

As @Greg says, why not 20?

Why not fill the hole this year?

It would save 35 bn in borrowing plus interest at, what, 6.5% minimum over the next four years?

We already know there are 11 bn in tax reliefs. There are 4 bn of Bord Snip that haven’t been implemented. Squeezing the higher paid PS must be worth something? Squeezing retired higher paid PS must be worth some more? Closing down the quangos might be worth 2-3 bn.

Universal pensions and health reform (universal health) must be worth a good few billion.

If the export sector is not harmed by what is done; if it is even encouraged in some ways, in the medium term will this not benefit the economy as a whole?

@christy
“Clearing house warning to Irish bond traders”

The gist of the article is that the repo market is closing to Irish sovereigns.

@Scarab
“Can anyone explain how Anglo manage to pay their creditors interest with circa 25bn of non-performing promissory notes on their balance sheet?”
Well, much of it will be to repay maturing senior debt and deposits that are leaving – hence it is repo’d for cash at the ECB.

@TOD
‘how much higher can it go?’

If the ECB was not intervening then my guess is we would be approaching Greek levels. That story in the FT is scary.

Maybe I can put off the mortgage interest payments for a few years also…

@Winston Smith.
“With EC signing off on bailout of Anglo (and the other banks) because they do not want to see systemic risk developing, they should underwrite approx €50billion of Irish debt by offering to buy €50b of Irish debt at an average EU bond rate (this could be ring-fenced). This form of non-standard monetary policy, would have the effect of stabilising the Irish sovereign bond market and bring about lower spreads and giving some hope for Irish public finances.”

Sounds like a good workable idea to me. Could they trust us pay it back?

Fear of JTO must be running high.

http://www.finance.gov.ie/documents/publications/reports/2010/PBO2010.pdf

Page 6:
2010
GENERAL GOVERNMENT BALANCE -50¼
% of GDP -32%

If the right decisions are taken there is a way out of this economic mess. Whether the right decisions or taken is another days work, but the bottom line is that we are a very small economy in an increasinly more consolidated global economy. Unlike the dominant Global Economies, New Irish Companies on aggregate need only a relatively minscule share of the Global market to get Ireland out of this slump.
What a difference 100,000 sustainable jobs would make to our position, we need a government who can create the environment for this to happen because it absolutely can happen. We should not live in fear of debt markets and allow our desire to please them become the priority, the priority is getting this economy to grow through international trade, if we need the stabilisation fund then so be it. We cannot submit to irrational debt markets.

Of course has we a competent government in place when the current incumbents absolute incompetence and complicity was clear for all to see ( Sept 08) would we be in this economically sorry state now? I suggest not , the erratic decisions since the confirmation of the current governments ruination of the Irish Economy have clearly compounded the problem.
Radical change to how we elect goverments in order to have uncompromised and capable people to make the important decisions is the first step to finally building a sustainable Economy for Ireland and its people.

@Karl Whelan

I refer you to the following from today’s Dept of Finance document:

As has been previously outlined, while this €31 billion will be added to the stock of debt, it will only add incrementally to the flow of debt from 2011 onwards as its financing will be spread equally over a period of 10-15 years. This is a onceoff
spike in the deficit. On a cash basis, there is therefore no additional borrowing required in 2010 as a result of the magnitude of the headline deficit. On an underlying basis, that is excluding the impact of the banking support measures, the General Government deficit in 2010 is now expected to be 11.9% of GDP, in line with the Budget 2010 forecast of a deficit of 11.6% of GDP.

You know perfectly well that my comment referred to the underlying deficit. As does almost everyone’s when they talk about the deficit. Including yourself when you calculated that 7bn in cuts would be needed to bring the deficit down to 10% in 2011, which would be somewhat optimistic if it was really in the region of 31% in 2010. I’m predicting that the underlying deficit will be lower than the 11.9% the Dept now forecasts, lower than the 11.6% they forecast at the last budget, and lower than the 11.5% it was in 2010. If you disagree, feel free to give your own forecast for the underlying deficit in 2010.

Karl

To hell with J.

“hoganmahew Says:

November 4th, 2010 at 9:19 pm
As @Greg says, why not 20?”

What is the macroeconomic argument against a €20bn adjustment now?

If there is one. What is it?

See why people are scared? No apologies for being wrong or misleading or imprecise. (The deficit is going to be 32% not 11.9% and certainly not lower than 11.9%.) Just more arrogance and misleading rubbish (“somewhat optimistic if … blah blah”).

6bn is about the right figure but I don’t think it makes any difference at this stage.

I think the markets have made up their mind on Ireland and that a bailout is all but inevitable.

@Eoin.
Any stories and why the CDS on Irish sub debt is exploding today?

Karl,
For what it is worth, I do not pretend to be an economist with a model of the Irish economy, the 6Bn is not enough. Given that the economy will in GNP terms fall after a bubble, the need to correct fiscal imbalance means further fall, but if targetted properly, the falls are necessary. Governments do not have much effect on an economy. They merely claim credit and try to avoid responsibility. KO’R should pop up and admit that a market does not have desires but every government does. It is a start, ten years too late and three years into the local impact of a depression that began in 1999.

All:
http://carolynbaker.net/content/view/1827/1/

A very good analysis of the K principles, apparently arrived at independently. There is no cheap land in Ireland, yet! Cash has to be the the best asset. In other countries, land that produces income and more importantly, food or useful material is a better bet as it is more secure. Theft and violence will increase.

The depression is not local. This means that spreads on the weakest investments will overshoot, as buyers perceptions correct for the depression. They will want the safest investments only. I am amzed that there is still a market, apparently. The ECB may have been intervening, but that is not a market! When no one wants to borrow, as now, those with funds to invest, the OPM brigade, will put their suckers’ savings into everything …… hence a market exists for a while.

As Eoin well knows…..

I am still awaiting the next crash as the supports for the “markets” fails to impress. I explain the delay as merely a reflection of the size of the shadow banking monster. It has more funds to burn, all based upon credit bubble, which will collapse. The longer it takes, the worse it will be…..

Given that I expect the creditors to disappear in the awaited massive crash, the more borrowing that Irlenad gets away with, the less it will have to fund by raising taxation. When the money is lost irrevocably, the suckers who funded the OPM/shadow banking monster will not throw whjat little they have left after what they have already “invested”. Things could be that bad? That would have implications for Irish borrowing. After such an incident, the EZ limits would have to be revisited! Ratios of borrowing to GNP might fall drastically, if there were a formal resolution process. GFF escape with a single bound!

But back in the real world ….

@Dreaded_Estate

Since the government announced that it intended to pursue a rigid deflationary policy several weeks ago, yields have taken off – throw a trough of bad figures into the mix as well. Much of the large amount of personal debt in Ireland is secured on our fair-weather friends bricks and mortar. I am at a loss to understand how the debt position of the banks won’t significantly dis-improve over the next few years. Property prices must decline further in this scenario. A downward spiral seems inevitable so why would a fund want to risk money with Ireland? Wouldn’t that be tantamount to throwing good money after bad? The party is over. May be a Fellini will emerge to make a film about one day.

As an aside, I was astonished (a surprise to myself at this stage) that a government that has banged on so earnestly about national interest and sovereignty would brazenly factor forced emigration into its calculations. That’s valuing graduates highly. Is there room among all those information/knowledge/smart economy reports for one on The Cynical Economy?

MH.
Irish bonds are now trading at a discount (%?). If the ECB buys these bonds now and holds them to maturity and gets repaid in full who will keep the profit. The ECB or will it be passed back to the sovereign?

Or indeed if the ECB offloads the bonds at a profit in the interim to maturity, who keeps that profit?

Let them eat cheese. Chesus!

@Tull

The new MoF will be free to raise the top rate of tax. There will be screams of protest and threats of mass emigration from the relevant lobby but in reality which country is going to want to take a couple of ten thousand monolingual incompetents who drove their own country into the ground ?

@ Brian O’D

“And last year there was much discussion about the ECB’s wish to terminate its eurozone liquidity programme”

Eh, no, they talked about changing the terms back to what they used to be (competitive tender), but that still provides a huge amount of liquidity for the banking sector. It has NEVER talked about ending its liquidity program. You’re getting very mixed up there, the ECB has always, and will always, provide a lot of liquidity for the banks.

@ Hogan

you refer to exceptional (ie full allotment), which is correct. BOD refers to liquidity provisions in general, which is very wrong. NAMA bonds will still be accepted for the next decade and more, the only question is how “cheap” the liquidity will ultimately be.

@ DE

sub debt on AIB is in the firing line for an Anglo-type (which so many of you on here somehow tried to complain about) liability management exercise now. And thats how it should be.

Clearing house warning to Irish bond traders

http://www.ft.com/cms/s/0/3af7e838-e847-11df-8995-00144feab49a.html#axzz14Oqrwl2M

Things fall apart

http://www.ft.com/cms/s/0/948d213e-e83c-11df-8995-00144feab49a.html#axzz14OrLoGCa

And while this is going on FF won’t reveal details of the €6bn until the end of the month because it will ruin their chances of a win in the Donegal by-election. And Michael Healy Rae is demanding a bypass for Tralee and money for a hospital in Neidín in return for his support for the budget vote which to government will lose without his vote. It’s insane.

adoy says,

Did anyone hear Dempsey on Newstalk this morning, deplorable and this is one of the people leading??????? this country. Really terrible.

Is Minister Smiths distribution of “free” cheese Ireland’s “Let them eat cake” moment. Boy we have come a long way!!!!!!!!!!!!

@seafoid
“And Michael Healy Rae is demanding a bypass for Tralee and money for a hospital in Neidín in return for his support for the budget vote which to government will lose without his vote. It’s insane.”
One wonders if the opposition wouldn’t be well advised to remove the dependency of the government on these chancers (Healy-Rae and Lowry), at least for the budget. How much would it save the country to have two sick notes on budget day? I’m sure Dr. O’Reilly could accommodate, even if Dr. McDaid no longer can…

Okay:

1) €3.1bn a year will be borrowed for around 15 years (€1.3bn will be paid of the principal and €1.8bn will be paid in promissory note interest – bizarre situation that we are payinf more in interest than in actual principal but whatever)

2) Despite the fact we don’t have to pay interest of €1.8bn in each of 2011 and 2012 we are still going to borrow the full €3.1bn in each year.

Lenihan specifically said in Dail debates that the interest on Promissory notes wouldn’t actually be paid until 2025.

That seems to have changed. Now it looks like it will be on the deficit AND be paid in cash terms.

While the intent of the cuts seems sensible the lack of clarity is still disturbing, particularly when combined with the promissory notes trickery.

Apart from the fact that the changes will be sprung as a last minute surprise, now we have to read the budget with double care to make sure that the cuts are actual cuts and not just tricksy cuts where money is not paid in 2011 and 2012 but comes due later.

On this basis we could nominally cut pay for public servants in 2011 and 2012, but promise to refund the pay cut in 2015 and beyond. After all, the public sector pension deficit is similarly “funded”.

If I had enough money to be a bond investor I’d be doubting between the Irish government’s headline intention and the behind-the-back accounting subterfuge. I hope the markets go with headline intention and I hope they’re right.

Genuine question for those who think frontloading a €6bn + adjustment is a good economic idea rather than a straight forward accounting practice:

Why did the yield on Irish bonds increase today?

I don’t understand Table 2.

Is it before or after the proposed €6 bn adjustment for 2011? If the former, can anyone hazard a guess as to the post-adjustment GDP/GNP for 2011?

The government is correct to reduce the deficit next year by €6n – Either we do it or the EU/IMF does it but less reputational damage if we do it (also helps to convince the EU that we are serious about the situation if/when we need more help at a later date)

Investment in Ireland will be impossible to sell to the investment committee of any multinational if the EU/IMF are called in. What executive will push a potentially career limiting investment (if it all goes wrong) vs. investing into the safer/lower risk UK or Germany?

It seems clear to me that nobody is interested in buying Irish gov bonds, a buyer’s strike, regardless of the yield being offered. Ireland is a tiny portion of the financial markets so there is limited reason for analysts/fund managers to take the time to understand the Irish situation fully and make an informed view about whether you think Ireland will or will not make it through the deficit reduction programme.

Why try to understand what is currently one of the most complex financial situations of all the sovereign governments globally for a market size that is less than 1% of the total debt market? Its easier to focus on other less complex sovereign debt markets. From a career perspective, why be the guy (or woman) that went long on Ireland when everyone else was shorting it? From a career longevity perspective its lower risk to be wrong with everyone else than to swim against the current

Its difficult to see what options will force the bond market to re-open to the Irish gov. Even if the budget is passed (a big if at that!!), I’m not convinced that there is the appetite out there for Irish gov paper and not at a sensible yield so the government needs to plan now for funding outside the bond market (and communicate this plan to the public).

Compounding the situation is the negative impact on national mood/morale of the daily news bulletins about Irish gov bond yields and bancruptcy. The gov needs to convince the Irish public that it has sufficient funding for the coming 1-2 years so that the Irish gov bond yields are no longer pressing issues that could cause bancruptcy within months. A sense of calm within Ireland may even begin to impact on the gov bond yields. The sense of uncertainty is killing the national mood and uncertainty is always bad for financial markets. Why will foreigners back Ireland if we don’t have confidence ourselves?

If the EU sees that Ireland is serious about tackling the deficit it will presumably be willing to help (within or outside of the emergency fund) but they will expect us to have exhausted our own cash first. The NPF currently has €18m of assets (excluding the rubbish already invested in AIB and BOI). If we assume that another €4bn is poured into AIB and €4bn is needed for the gov bonds due for redemption in Nov 2011, the NPF could fund the gov deficit next year to the tune of €10bn. Combined with the cash already funded that would have the gov fully funded until the end of 2011 (there or there abouts). This would surely go some way to stabilising the national mood/fears

By August 2011 it will be clear if the tax revenue, gov spending and gov deficit is on target/track. If we are on track the bond markets will gradually re-open and we move forward. If we are not on track we have bigger problems with our deficit than bond yields. It comes down to whether you believe the gov’s figures yesterday are realistic

The government could look at other more creative options to secure funding either from the EU, IMF or private investors. What about issuing a debt instrument that pledges as security/collateral the tax income from the Corrib gas field (I bet you the government would get planning sorted quickly then!!)? Using the gov’s shares in the ESB, Aer Lingus or Bord Gais as security/collateral for a loan? Slightly more left field but if existing debt was issued at 4%-5% and is currently trading at 7.5%, what about using the NPF to buy back some of the debt as it must be trading below par? This would reduce the total quantum of debt outstanding and would give the gov more “bang for its buck” than spending the NPF on the deficit

@Zhou

‘Everything is poiinting towards bailout. The shape and mechanics of the bailout is a potentially critical issue.’
As you pointed out Ivan is saying the game is up and as a bookie he knows how to calculate the odds. Its highly likely that the terms of a bailout are being put in place right now. The reports that the specifics are being delayed until after the bye-election would tend to indicate that the urgency of convincing markets is no longer a priority. An ominous sign today is the state of the banking sector shares-
all at critical levels.
@Alan
I think I recall that the NPRF are precluded from buying Government debt.

@simpleton

I didn’t argue in favour of the guarantee from the start. I did say that it was credible to say that Anglo was systemic. I think it is now clear that Anglo was systemic at the time of the guarantee and I find it incredible that even now you think it wasn’t systemic given the amount of credit it was party to.

I argued in favour of NAMA and against immediate nationalisation of the banks. I expected NAMA to be more dynamic in dealing with borrowers and getting the market moving again. However, I don’t think we would have found out the truth about the banks without NAMA. Whether knowing the truth is a good or bad thing in this instance is open to debate.

I still think Minister Lenihan has done a great job although it is certainly not flawless. Professor Honohan has explained why the guarantee was too wide and it is very regrettable that there are still no draft legislation for a personal insolvency before the Dail. With that said, nationalisation of a number of institutions at the beginning could have had the same result as the guarantee. Also, while we still need a resolution scheme it is uncertain whether enacting same would have been of any benefit while the guarantee is still in place.

I think Minister Lenihan is correct to front-load cuts now and that it will stand to us no matter what the outcome.

Apart from the mistakes that caused the crash, much (but not all) of the recent pressure on Ireland has arisen from external factors over which we have no control (Currency wars, lack of aggressive ECB QE, Greece, Portugal, Tea Party). Our problems also arise in a wider context and have a wider resonance than people think (EU, EMU, ECU, Hungary, USA/EU -v- BRIC, Renminbi).

I wonder if perhaps we shouldn’t have gone for the Japanification solution with banks not recognising losses and deleveraging being stretched out over more than a decade. Krugman has said many times that bad as Japan’s lost decade looks it may have been the best solution possible.

I have no regrets as to positions I have taken, and if I were Eoin I would have no regrets either.

http://www.herald.ie/national-news/10-things-that-you-need-to-know-about-the-budget-2409062.html

@Ash
If €6 billion is a lot, remember that the deficit last year was ~€20 billion and it’s still a lot more than €6billion this year, and next year.

@zhou
On the comparison with Japan, at least if we take the hit quickly we may be able to rebuild on a solid base. It’s possible that Japan is still sinking under the debts.

@Hugh Sheehy

All of which, I guess explains why Ireland is more than 500 over Bunds. The overall adjustment probably isn’t achievable without serious growth. Unless they tackle the inhibitors to growth, ie zombie banks, and properly, it’s hello to the EFSF and then the same austerity anyway, and the same likely failure.

Looks like the Eurocrats are painting themselves into a corner

… and I think the bailout is already lined up and waiting to go.

Why did they postpone details of the 4 year plan (sorry, I have been away)? Was it because they don’t want it out before the Donegal by-election?

@Joseph

In the Irish Times today it was speculated that they are not going to release details of the 4 year plan which will be bleedin’ bruwtal in order to keep FF backbenchers on side. The idea is to scare them into voting for the budget or otherwise face a Christmas election. Which will decimate FF. How they are going to recover from this I don’t know. It looks like the end of the Nazis with Lenihan as the ranting Mr H.

The other theory is that it doesn’t matter when the details are made available and that the game is up and that Ireland will be going into the arms of a bailout in the very near future.

Or else maybe the Euro masters have let bond spreads widen far enough and is now going to get the finger out and save the day for mise Eire.

Considering the close attention Olli Rehn is paying to Ireland couldn’t he be renamed the Governor General?

Lads, let’s not panic…
Instead, let’s reduce the (real) National Debt and save our two main banks at the same time:
Unwind NAMA, hand back–what is it.?.€20 bn of losses to the not yet nationalised banks and reduce the ND by the residual value of their property which, in principle, has to be repaid to them some day. So, that saves the ND by c. 20 bn.
Then save these banks and rebuild confidence in the process- by exploring other options–there are too many to deal with here–including one little rule change..Move to amortized accounting for impaired assets of banks–which will spread losses over the remaining years to maturity of the loans in question- and which the International Accounting Standards Board has been recommending for the last year, in response to a requuest to come up with something by the G20 in 2008, and which the EU leaders themselves can’t agree upon although most of them see the advantage (and greater fairness) in this better, more real accounting method.
Between NAMA mismanagement and the application of unfair accounting methods of recognising losses, our main banks have been improperly crucified (while banks in those countries where we borrow have been sheilded from recognition of their equal or greater losses !) So, lets stop this economic suicidal programme of NAMA- which foreigners don’t believe we can perform anyway – and start earning back some credibility

Simpleton,

You could have argued for a different path until you were blue in the face. The fact were/are that you were not allowed impose losses further up the lliability structure of the banks by the ECB/EU. Three years into the crisis, senior debt in the Eurozone has not been touched. Neither has it been touched in the UK. The losses would inevitably flow back to the sovereign. But that is the price we paid by electing people who to spancil any ovversight regime.

Now that the Germans have copped on that there might be a bit of a problem in the Sovereign Debt markets, the rules may be changing. However, it is noticable that M Trichet does not agree with H Schauble…perhaps because he is wearing quite a lot of peripheral sovereign debt.

@Tulll
Those like Zhou who argue that the policies we followed were optimal, correct and just about perfect deserve to be called out in their support for them.
The parameters set by Brussels were wide to satrt with and have narrowed only with each wrong policy choice over the past two years. It is only now that we have zero degrees of freedom. We didn’t have many such degrees two years ago, but we did have some: it started with the Guarantee itself. That it pissed off the Brussels folk – mostly because it was so obviously stupid – started their deep dive into our domestic policy-making.
It has become politically correct to avoid criticsisng the Minister for Finance because of his tragic illness. But he has been abject through this crisis, with one wrong deciison taken at each hurdle he has tried to jump. On prime Time last night, he was asked why he had changed the number from 7.5bn to 15bn in the space of three very short weeks. The assembled might of the best minds in the civil service must have been preparing him for that very obvious question. The best answer the best minds of the public sector could come up with? “The data changed”.

Echoing that famous question put to the minister by Vincent Brown, the interviewer last night asked ” you don’t know what you are doing do you?”

Answer: “I don’t accept that”. Indeed.

The other figure venerated by Zhou et al is he-who-is-beyond-criticism, Patrick Honohoan. Don’t get me started.

@Tull
Could a different strategy have produced a worse outcome than where we find ourselves now?

If we had arrived at the same place and saved ourselves 50 cents along the way it would still have been worth doing.

@simpleton
I think the flaw is in the permanent government. Our ministers and TDs are woefully inadequate to be addressing these issues. Teachers, solicitors, barristers, medical doctors. Not even an accountant amongst them, never mind someone who might understand finance and economics.

With that ‘lacuna’ in mind, the permanent government should step up to the plate. It is they who write the policy that is implemented. There is some evidence (mostly anecdotal) that the DoF wanted to nationalise Anglo. There is less that they wanted to exclude it from the guarantee. Of INBS, it seems there was contingency planning for it to fail? On the options for the guarantee, despite Merrill Lynch arguing against it, we’ve seen no evidence that an all-embracing guarantee was argued against by DoF officials.

So what are we left with? The Taoiseach and the MoF refusing to nationalise Anglo on the night, the guarantee, NAMA, the promissory notes. All DoF constructions to one degree or another. As for the Central Bank and the Regulator – mostly pork for the Taoiseach to stuff. Rewards for promotion-jobbing yes-men. Advisory committes stuffed with political appointees or lickspittles. As Simon Carswell said on the RTE documentary a while back – you get the regulatory system you want.

Which brings us back to the Bert. A man who knew what he wanted, because his pals told him so. Who had no shame in stuffing his friends in every greasy orifice the state offerred (and under him it offerred many more than it had previously). And he thinks he has a chance at the Presidency?

As you say, simpleton, not much that could have been done would have a worse long-term outcome than what has been. Yet still, they walk free…

@Zhou
I would respectfully refer you to your post above, the one in response to me. I would summarise your post, in terms of both content and tone, in the following way: ‘while the government made a few small mistakes along the way, it basically followed the right path. While I did not support everything they did, I was a supporter, not a critic. Other paths argued by critics would not have improved the outcome’.

I would add that in terms of both content and tone, this summary is an accurate reflection of most of your contributions to this blog – which have always been eloquent and moderate in tone, even in the face of provocation from the likes of yours truly.

But we are providing over a catastrophic outcome, aided and abetted by bad and fundamentally wrong key policy choices made during the past two years. I find it incredible that you seem to think that any other outcome was not possible to achieve. And that both the designers and cheerleaders of these dreadful policies are not to be admonished.

Perhaps not Stalinist but certainly Panglossian.

@simpleton

“I suspect you are either a junior barrister at the Mahon Tribunal or an Assistant Principal at the DoF.”

Wrong, he is a clerical officer in FF with a virtual office in Mount Street.

@zhou

Ivan Yates says the game is up in the Examiner:

I and many others have been saying this for a longish time and my calculator is so old it doesn’t even do floating point arithmetic. How does any company pay off a debt that is multiples out of kilter with its turnover? If it can’t trade its way back to a surplus, it doesn’t. The result is called bankruptcy in most jurisdictions. In Ireland it is called a ‘four year plan’.

Of course the Stabilization fund will be invoked. It would require an upswing of bipolar disorder magnitudes to believe that yields will drop below 5% after the New Year – about 10 weeks off. Cowen and Co. are stranded in some grotesque Candide touristed land.

@Robert Browne

What always struck me about the Irish collage environment is that students would never care to ask the simplest of questions of supposedly complex problems.
Professors and academics of science and Particularly business seem to want to embroider their conjecture with complex patterns when the cloth they work on is full of holes.
Students seem afraid and unwilling to take on these high priests as their seems a culture of deference to the new “word of God” not unlike the period before the reformation.
Being a simple soul myself I have to reduce everything to basic parameters and work to create a model while I notice in Irish academia the opposite applies.
I remember a very impressive scientific presentation on dark energy and its effects on galaxy formation to the general public a few years ago with impressive graphics and what struck me was the basic flaw in the simulation was they based their model on observed galaxies motion as if that was suffiecent and created complex models based on just the brightest galaxies while the great mass of matter is unseen and unknown.
Now this is understandable in itself as you can only gather light from such astronomical endeavours and not collect darkness.
No what struck me is that while presenting to the public this great light show he presented it as Gospel – he could not or would not say their was a basic flaw in the observations and therefore the model may be incorrect.

This man knew the flaws in the system yet to get the funds to continue he presented a magic show rather then a science show.
Now consider the field of economics, a mine field if ever there was one – with the people providing the funds the same people who stand to benefit from certain “truths that we hold self evident”.
Now these students exposed to this crap start working for financial institutions on completion of their studies and some have the ear of goverment and since the days of Yes minister there has been no independent strong civil service as after the admittingly great humour of that show all serious advice has been contracted out to private agents which are inevitably a branch of another beaucracey – the banks.

What needs to happen is a open revolt amongest economic students about the nature of the syllabus and its function because never in the field of science has a “science” got it so wrong about everything.
Maybe economists should consider career changes and become astronomers – no on second thoughts that’s a bad idea – better they become astrologers as they are more qualified in that field.

Btw – sorry for the slow reply – was nipping out to watch “The Social Network” when I asked for offending quotes. In the film, Zuckerburg’s character mentions that he is dropping into a blog discussion every do often to stir up a good debate!

@ MH.
As a private sector worker I look in awe at the pensions of the public sector. I now meet people that I went to school with who have been retired on full pension for over five years, doing far better than the vast majority of people in the organization I work for. Meanwhile I now have seven years to go to get a State pension, contingent of course on both myself and State making it to 2021.
It could be a photo finish.
No State or State body pension should be in excess of €50,000 PA.
Your figure of €60,000 as a pension cap is far too high.
Only one State pension should be paid.
All early retirement pensions should be discounted for years missed.

Keith Cunneen Says:
November 5th, 2010 at 11:11 pm

Yes, very often the emperor has no clothes. In a bubble world, there are no reality checks. Then the bubble is pricked and reality never stops.

Science in particular has been railroaded. Quite why there is such widespread desire in cosmology and astronomy to consider that invisble forces exist and that electricity is always rendered neutral is almost beyond me, but then a conspiracy theory can supply one or two answers.

I am content with competent masters and mistresses. They deserve high pensions. The corrupt and incompetent do not.

Fools who have suddenly woken up to reality, and decry the public service, get my goat. The options thirty years ago are different to those open now. Reality intruding again? The likelihood that their sour grapes will be heard is slim.

@Zhou,
No it’s not about I told you so. It’s an attempt to hold to account people who have advocated policies that have contributed to the catastrophe that we now face. But I forgot, we don’t do accountability do we? I think It’s in Artlicle 3 of the Constitution the one that says: Always invoke the Bart Simpson defence: ‘I wasn’t there, I didn’t see it, I couldn’t have done it, It was somebody else’s fault’.

Seeing as you asked, on these pages I gave vigorous support to Karl W’s calls for bank nationalisation. Of course, I can’t prove it, but that would have produced a much better outcome. Still not great but better. I utterly opposed NAMA in terms of the way they set it up and still do. It was and is amateurish and under-resourced.

Simpleton,

The only way nationalisation would have produced a significantly better outcome would if losses would have been imposed above the subordinated debt.
Our real rulers would not have countenanced such action in 2008 for fear that it would have caused a massive run on every European bank with exposure to the peripherals and a loan to deposit ratio above 100%-which means every Eurozone bank. So the taxpayer would have assumed the losses much quicker if you nationalised, marked down and filled the hole.

If we had actually gone solo and burned senior debt in a nationalised bank it would have been treated by markets as a default. So we would now be in our third year out of the markets if we had down the route you advocated. Sure we might have a balanced budget as you claim but there would be no nurses teachers or Gardai.

The mistake was allowing Anglo inflate like a Zepplin in the first place. There was going to be no good outocme after that. If you need evidence of the harm down by Mr Cowen on that score, go purchas a copy of the Daily Mail today.

Off topic I know.

Anglo Irish Bank …. Who knew what?

How can Independent Newspapers publish this if it is untrue?

“To demonstrate how up to its neck the Financial Regulator’s office was before the placing, at one meeting Pat Neary told a member of the bank’s board that Sean FitzPatrick was talking too much and too openly about the Quinn stake. This member was told to tell him to “shut his mouth”. It was alleged that if it got out “there could be a run on the system”. According to one source, “a member of the Central Bank board had overheard Seanie at some party spouting on about Quinn and brought it back into the Central Bank boardroom”.”

If it is true the abyss just got more abysser.

http://www.independent.ie/opinion/analysis/this-government-has-discredited-ireland-2409820.html

Was the guarantee really a solo run? My understanding is that Brussels was in the loop all the way. You would never know that know. As to alternative outcomes- well if me aunt had etc. Seeing as you mentioned the FDIC, perhaps you could post the equivalent link for the EU as we are not the 51st state.

Robert Browne

“IMF will not support schemes which were schemes in every sense of the world.”

There is one big problem with the IMF/EFSF is that it does not allow for a restructuring of debt (never mind any write off).

The EFSF is not an IMF bailout. It is designed to burden the state with all of its debt for the dubious pleasure of providing funding at a couple of points below the market.

We should not apply for support from this fund unless the EU/IMF accept that the debts of Anglo and INBS are un-payable and that both institutions should be liquidated.

Otherwise all we will have done is pay off the bondholders and allowed the ECB to copper fasten the debts of Anglo and INBS to the Irish people.

@ Brian O D

ECB provided tons of liquidity for the banks even in the boom times. It was less ”necessary” but still very useful for cheap predictable liquidity to fund themselves, and its going to be a requirement for the next few years at least. Nama bonds will always be elligible collateral, unless the ECB looks to explictetly change its collateral framework to be far more restrictive than it has ever been. There are indications they are considering this. As I said, you are mixing up exceptional liquidity programs with standard ones.

@Greg – “Otherwise all we will have done is pay off the bondholders and allowed the ECB to copper fasten the debts of Anglo and INBS to the Irish people.”

Ve haf vays of making sure zis happens!

@Michael H

The Irish Times reports that Olli Rehn, European commissioner for economic affairs, will press for measures to improve competition when he travels to Dublin to meet Minister for Finance, Brian Lenihan, on Monday.

Give Rehn a copy of the fee notes put in by tribunal lawyers, solicitors and barristers, and ask Anglo (a state owned bank) to hand over copies of their bills, and then sit back. Rehn could also run his eye over the NAMA payola for professionals.

Re Anglo. Wonder why the government is reluctant to appoint an assessor for the shares it nationalised?

The Alchemist

“Give Rehn a copy of the fee notes”

Give Rehn a copy of the Daily Mail and ask him why Irish Citizens should pay for Anglo and INBS.

I would dearly love to hear his answer.

The Alchemist

“Re Anglo. Wonder why the government is reluctant to appoint an assessor for the shares it nationalised?”

Like by-elections they made sure there was no clock.

Time for someone to take a High Court action.

@ Greg
I have no illusions about “bailouts” at 5 to 6% and I know it is debt restructuring or write off that we need. We are not flavour of the year in Deutchland over Depfa but either they give us the money or the money is not going to be there to overpay our workers and our dole queues. Beggars who don’t even run their own country anymore cannot expect to be calling the shots. Ireland, will be turned into a debt servicing machine on the edge of Europe with a stagnated, moribund economy with massive emigration of the natives. That is why we should not have had a Lisbon II. That option should have been kept in reserve. That is why I voted against the Lisbon plutocracy because no matter what we still had our veto. Look what obedience delivers.

Personally, I would not go near the markets next year and loose our economic sovereignty? I would not have those patriots ghosts on my conscience. I would not worry about the pinstriped NAMA ones like Frank Daly. Who ever is “leader” and Cowen should be gone before Christmas, needs to tell it like it is. “We are a busted flush”. A large part of the interest on our debt servicing has to do with our banks but also the debt servicing of repetitive current expenditures such as salaries that should never have been paid, pensions that should never be paid, quango’s that should never have been set up. State workers who should not have been hired, fraudulent benchmarking, not to mention Harney’s personal grotesquerie. We have been betrayed by greed and incompetence.

Just finished reading John McGuinness’s book while I was watching the Irish match “The House Always Wins” nothing we don’t know already, but he confirms that it is the unions who are the fulcrum of power this inertia will destroying the economy and it will take the unions with it, that is the ironic thing. Croke Park is just an expression of the governments realization that it is not them that run the country but the unions. Why unions get tax breaks for pushing the vested interests is beyond me. This crisis needs a Thatcher moment!

Oh, an aside, the Fintan O’Toole tenner a head into Liberty Hall to discuss the woes of the Irish economy came to an abrupt end the other night when some union honcho crept up to the stage to tell him the event was running over the time allocated.

Eoin

“there were complaints about the govt destroying the property rights of subdebt holders on that thread. Check it out, somewhat surreal.”

Of course not at all surreal.

What is surreal is that the property rights of the Citizen are being destroyed to bail out Anglo & INBS.

What is surreal is that our Government are about to waste another €2bn of the public purse in what must be one of the greatest rights issue disasters in the history of finance.

Unless of course you know of a bigger one.

@Eoin
Ah gotcha, don’t worry, I’m being a bit dense this evening. Too much dinner, not enough drink I suspect.

What really winds me up is the fact that if the IMF / EC came in here they could sort out our budgetary problems in the time frame required and in a way that would not wreck our society or economy; quite the contrary they’d probably help a lot.
Think of it, property tax in, which means we’d be like every one else in Europe, oh the harshness of it all (say 3bn).
Dole payments down to around UK levels (easily a couple of bn could be saved there),
reduced tax breaks – 11.4 billion of tax breaks would all be on the table for review (at least 5bn).
Public sector pay – where do I start (10% reduction would be another 2bn saved).

Bottom line is, these things could be done !! We’re losing our sovereignty not because of the (admittedly very large) mistakes of the past. We’re losing our sovereignty because of the weakness and lack of leadership of the present.

@ Eoin
” Nama bonds will always be elligible collateral,”…

Maybe our government should issue another €20 bn of bonds, at 1.5%, or even 4%, to the Irish banks and let them shove them into the ECB?
What do you think is the limit of ECB tolerance for Irish State guaranteed bonds
In fact, if the ECB has such an appetite for NAMA bonds, then NAMA should reduce the haircut to 25%, as originally envisaged, and issue the banks c. double the present amount of bonds and let the banks fund an infrastructure developmemnt programme to stimulate the economy (as well as saving themselves from nationalisation, leading to foreign ownership…)

Greg
This is an internal currency idea that has merit as I discussed already. Construction projects and new taxes would help too!

@Greg, Pat

I think the introduction of some form of local/internal/complementary currency could be very useful, given the Frankfurt-supplied straight-jacket currently in place. My question for the panel is whether schemes such as the C3 scheme to increase credit for SMEs, as used in Uruguay, would work here.

Separate from alternative currencies, the whole concept of pay-for-performance is totally missing from the current public sector/semi states. It is not that hard to link pay with quantifiable performance targets. For example Batt O’Keeffe seemed extremely proud of his jobs strategy document a few weeks ago that promised a gain of 300,000 jobs in 4 years. Fair enough, so my suggestion is that Minister O’Keefe be paid a low base (the minimum wage), then a sliding scale that pays a percentage of current salary according to net jobs created, with a target of 75k jobs per year e.g.

less than 60k jobs: minimum wage – no bonus;
60k – 70k jobs: 80% of salary;
70k – 80k jobs: 100% of salary;
80k – 90k jobs: 120% of salary;
90k – 100k jobs: 140% of salary;
greater than 100k jobs: 160% of salary

A public web page is updated monthly to let us know how things are going. I have no problem with large salaries provided there is a direct correlation with a large amount of created value. Perhaps when the Minister announced a plan such as this to the Dail he would have a less self-satisfied, arrogant and condescending approach than he did a few weeks ago.

Stock options as used in the private sector can be viewed as combining an alternative currency (company stock) with pay-for-performance characteristics. Clearly they can be subject to abuse, but when properly used can align incentives between shareholders, management and employees. I like the idea of paying higher earners significant amounts in 10yr treasuries, as it would achieve the same effect of better aligning the interests of those involved, as I understand it.

@Michael H

I become nauseous when the Great Reformers begin rubbing their hands about the ‘enormous’ reforms coming done the line from Croke Park. Official track record on reform is nonexistent. Golden opportunities have been wasted.

For example, when the Farm Single Payments system was introduced a few years ago, farmers were promised an end to forms and complete simplicity in all dealings with the ‘department’ on aid.

Instead the same monotonous area aid forms are sent out year after year, sometimes with a little irrelevant tweaking of column headings. Details such as email and mobile phone numbers are requested, even though the chances of anyone in the armies of sheep-clerks using either mode to communicate or seek clarification in case of an error on a form is unheard of.

The Single Payments ‘reform’ has never been implemented as a reform. The same herds of drones still occupy the same positions in the dronocracy. No reduction in numbers. No reduction in bureaucracy. No reduction in inefficiency. And above all else, no improvement in service. Of course Croke Park won’t deliver anything. That’s why all the vested interests signed up to it.

Re Anglo and the ‘virtual’ assessor. It seems Revenue will allow a set off of Anglo share losses post nationalization against a capital gain (unlikely event) but subject to the usual magic and case by case, etc. Of course there is a window on two years on set offs. Moreover, if the assessor decides Anglo shares are immensely valuable, Revenue will look for a refund.

@Eoin
“once they let us do it they can’t undo the situation, there is no ‘temporary’ ruling in place on them (Karl is even more vehement on this i believe).”
Well, since ratings are ephemeral, there may be a temporary element.

Having to competitively bid would be bad. In the first place, there is more Irish paper than almost anyone else, it has funding cliffs too. Still, the emergency lending facility will always, I presume, be open and it just raises the rate charged to 1.75% (though this *could* go back to 2%).

@Eoin
Yeah. Some day this war’s gonna end…

That wouldn’t be damn right for the guys in the boat, though.

There is also the duration to consider. *If* competitive allotments are at a shorter duration, that would be not nice.

The payment holiday on the pro notes is intriguing. Was it negotiated to reduce the size of the adjustment in the budget so avoiding the need to cut OAP and public sector pay. If so it is phony book keeping and just kicks the can down the road to the next govt. Does it constitute a default and willit cause our spreads to explode next week? Will the CB be still happy to accept the pro notes if they are not coupon bearing.

It looks like a death rattle from a dying govt