Default Inevitability?

With the 10-year yields heading towards 8 percent and the 5-year CDS cost surpassing Argentinas, Ireland has very definitely lost the confidence of potential lenders.   Morgan Kellys Irish Times article offers an explanation: the combination of the cost of bailing out the banking system and the dismal underlying rate of nominal GDP growth makes it impossible to avoid a default. 

While the situation is clearly critical, I do not agree with Morgans starkly pessimistic conclusion of default inevitability.   Given how influential his analysis is, however, I think it is useful to recap the argument using the IMFs fiscal-space model as an organising framework (see here).   The model shows that default results when a countrys debt to GDP ratio passes a critical point.   This critical point depends on gap between the nominal interest rate and the nominal growth rate and also the economic and political capacity for generating a primary surplus (a countrys fiscal space is then the gap between the debt to GDP ratio and the critical point).   It is easy to see how continued creditworthiness might be beyond a countrys capacity when facing the combination of a very high bank bailout cost and a very low underlying nominal growth rate.

Morgan argues that this is the case for Ireland.   But I do not see things as being as dire as he makes out.   Even taking his high €70 billion estimated cost of the bank bailout, a large gap between the nominal interest rate and the nominal growth rate of 4 percentage points means that the bailout cost would add €2.8 billion to the required primary balance (just under 2 percent of GDP).   This could well push a country over the edge, but it hardly seems decisive.   Moreover, Morgan argues that Ireland cannot afford a nominal interest rate greater than 2 percent.   To get an interest-growth gap of 4 percent, this means that the nominal growth rate would be just negative 2 percent.   While I share his concerns about the effects of Irelands balance sheet recession on growth, I think a medium-run nominal growth rate of positive 2 percent is actually still quite conservative.   But this means the nominal interest rate could be as high as 6 percent and still yield the 4 percent interest-growth gap assumed above.   Of course, this is all just illustrative, but the bottom line is that there is a clear enough path out of this crisis provided the political will is there. 

But do we have the political will?   This is where I have become more pessimistic watching an apparent failure to prioritise the national interest by our political leadership government, backbenchers, opposition, independents, social partners.    Unlike Morgan I think default is avoidable.   That would make it even more of a shame if it happens.   I remain hopeful that we will all get the message. 

114 thoughts on “Default Inevitability?”

  1. the bids on the ten year bond rose well over 8% John . coming back a tad now but were 8.07 at one stage. now 8.04.
    Apart from that things are grand….. JtO has told us so elsewhere

  2. We should be grand as long as the ECB-IMF lend us money at no more than 6%. They did lend to Greece at 5% – so we have a hope.

  3. There won’t be a default but we will be hitting the stability fund. As you say John, everyone in power needs to get real. The fact that we are still clinging to the croke park agreement shows we still have delusional people in positions of power. No matter what budget or four year plan we announce, the Market has already passed judgement and it’s not good. Time to stop trying to get them to change their minds, borrow from the fund and take our pain. Then watch as Portugal and Spain join us within the year.

  4. @John
    Well said. Those of us of a more pessimistic viewpoint generally have arrived there through a practical assesment of the most likely outcome, based on our ability to either long-finger a decision or take the wrong decision. So far so bad.
    But, as you rightly say, none of this is axiomatic. Different policy choices could have produced a different outcome. Could different choices tomorrow affect the outcome? It’s looking extremely unlikely but perhaps it is worth stressing: do something, anything, provided it is different to what you are doing now.

  5. Listening to the pension passion play today, International observers could be forgiven for concluding that we are unable to practise self governance….

  6. @John McHale

    But does Irish GDP reflect the health of the overall economy or just certain multinational sectors? Haven’t several economists argued that GNP is more accurate? If you stick GNP figures into the IMF model (substituting for GDP) what scenario emerges? Curious.

  7. @John,

    I don’t doubt the sincerity of your plea to those who exercise politcal and economic power and influence to put the national interest first, but what chance is there of that when all the incentives in place encourage the opposite. We’re moving into the “rats fighting in the barrel” phase and the only question now is the timing of entry to EFSF. I agree with Enda f; the market has weighed us in the balance and we’ve been found wanting. The Government obviously wants to keep going until the market slams the door in the face of the NTMA so that it can blame those evil bond vigilantes. Politically it can’t apply to the EFSF before this outcome – it would be dead in the water as a political entity, but, in the national interest, it should negotiating the terms of entry now.

  8. One plain fact is this. Whatever rule-of-thumb you use and whether you use GNP or GDP, Ireland is in a very serious position and has a high likelihood of defaulting. Whether that would be bad or very bad or very very bad is a sub-debate. It’d be bad enough.

    I still believe (or perhaps just hope a lot) that it’s avoidable. However, seeing Croke Park stand and a govt party coming out and say that one group is untouchable is all the more depressing in a context where survival remains possible.

    Our politicians can apparently still work diligently towards certain failure even when survival is an option they could chose instead.

  9. I have just a basic question about arithmetic and economic growth that someone might be able to help me with.

    Suppose that an economy’s GDP grows by 2% each year. And suppose also that the country must use 2% of its GDP each year to pay interest on an old loan.

    Does the economy’s GDP remain constant over time then? Or is the removal of 2% of GDP each year irrelevant here?

  10. @John McHale

    Firstly, I think for Ireland it more appropriate measure to measure the size of the economy in GNP or at least a number much closer to GNP than to GDP.
    The government has done so for quite some time. Funding for the NPRF has always been in terms of GNP, likewise our commitment to overseas development aid.

    Do you not have to to convert the interest payments and growth to the same base? We will be paying interest on GGD X ‘nominal interest rate’ while growth is ‘Growth Rate X GNP

  11. Does anyone believe we can afford another anglo? Morgan Kelly writes

    “Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.”

    Same exposure to developers + mortgage loses = another anglo (at a minimum).

    MK is right, any attempts at slashing and burning are futile now. The banks were too big to save. We had a chance to do a debt for equity swap but that chance has passed. Game over.

  12. I suppose this can be seen two ways:

    Either everything is fine and nothing needs to change – In other words no reforms necessary…..

    or

    There is a problem and to get the message through that reforms are needed the message is stronger than necessary.

    Ostriches & Austerians 🙂

    I believe Ireland can avoid default. Do I think it will? Depends on the eventual compromise between the austerians & ostriches.

  13. Thanks for the comments.

    A few people have asked about using GNP rather than GDP in the analysis. Assume initially that that the two are growing at the same rate, but allow them to have different starting levels (say GNP is 80 percent of GDP). This does not change the basic result of the model as it will lead to proportional changes in both the initial debt to income ratio and the critical (or theshold) value. In other words, if there is fiscal space when the model is speciifed in terms of GDP there will be fiscal space when it is specified in terms of GNP.

    Allowing for different growth rates does make a difference. Worryingly, the IMF forecasts that Irish GNP growth will lag GDP growth out to 2015. If, as commenters suggest, GNP is more relevant for fiscal capacity, then this lowers the critical debt to income value and thus lowers the fiscal space.

    @DE I am not quite sure what you are getting at in relation to the base conversion. My hunch is that you are not making a correct adjustment here, but I may not have properly understood your point.

    @Tunafish Interest on foreign borrowing has no affect on GDP. However, it is subtracted to calculate GNP. Roughly, GDP is a measure of the output produced in the country whatever the ownership of the factors of produciton. GNP is the value of income produced by a country’s factors of production, where ever that economic activity takes place. That is why we subtract the profits of multinationals from GDP when calculating Irish GNP. We must also subtract interest payments to foreign bondholders in the GNP calculation.

  14. @author
    You have taken Morgan Kelly’s €70billion bank cost without factoring in domestic mortgage crisis cost which he alluded to but did not put a figure on.
    We need to start thinking big on this. Provide for a long term bubble bond(Bertie Bond) of about €100 billion at a very low interest rate, separated from Govt borrowing and ring fenced. It could be paid off like war loans or reparation or land annuities.

    But you are right on the political front. There is no sign whatever that the people elected to govern the country are interested in the country’s fate.
    Traitors is far too kind a word.

  15. Nov 8 (Reuters) – European Union Economics Commissioner Olli Rehn has not discussed with Ireland any need for external EU help, he said on Monday, adding he believed market confidence would be restored once the country publishes its four-year plan to cut debts.

    Rehn, on a two-day visit to Dublin designed to bolster Irish efforts to lance the worst budget deficit in the European Union and convince markets it does not need a Greece-style bailout, has already welcomed Ireland’s plan to narrow its deficit.

    On Monday, in a joint press conference with Irish Finance Minister Brian Lenihan, Rehn said that taking the necessary structural measures should pay off for Ireland in the medium term for sustainable growth.

    He also urged all parties to support planned cuts.

    Lenihan — who must get parliament next month to back his government’s budget plans when they are next presented in detail — insisted a united, national effort was needed to confront the country’s problems. END
    ———————————————————————————-

    Or, as they say in my neck of the woods, believe nothing until it has been officially denied. Do they seriously expect us to believe that they didn’t discuss the downside of the budget not getting through and the consequences of such? High caramba!

  16. If the implied cost of borrowing for the government is 8%, and the Irish domestic banks are entirely dependent on state aid to survive, then the domestic banks’ implied marginal cost of borrowing is 8% or more.

    Why are the banks issuing mortgages at 4-5% when they can buy Irish government bonds and earn 8% with greater liquidity than long-term mortgages? These sovereign bonds carry limited risk for the domestic commercial banks since if the government bonds go into default, the domestic banks will also default and have zero equity value.

    This positive gap between the government bond yield and mortgage rates seems to have very negative prospects for house prices in any case, and that feeds into Morgan Kelly’s scenario of increased mortgage defaults. So perhaps the banks are issuing some mortgages to aid the property market (along with NAMA) and avoid the impact of higher defaults if prices fall further.

    What does 8% government bond yield imply about NAMA profitability. Ronan Lyons or winelake should give us some updated analysis on that.

    The debt market pricing structure in Ireland seems very artificial and contrived at the moment, propped up by the ECB, Irish government actions, and domestic commercial banks’ playing along.

    When the government is facing a borrowing rate of 8% to pay for propping up the domestic banks, and the domestic banks are issuing mortgages at 4-5%, the centre cannot hold. OK that is a bit dramatic, but at least it is based on a W.B. Yeats poem!

  17. Does anyone think that the Yanks’ attempts to push the string on Quantitative Easing might backfire and lead to a bond market massacre by means of inflation of more than 5% which then spreads to the Eurozone and miraculously reduces Ireland’s debt mountain with the help of St Bernadebte? There are signs already that Asian bond markets are overheating…

  18. @Hugh
    “seeing Croke Park stand and a govt party coming out and say that one group is untouchable is all the more depressing in a context where survival remains possible. ”
    Indeed, it is not just these two. At every turn there is a government minister bleating about some group that cannot be touched:
    – no water charges
    – no property tax
    – can’t disincentivise work
    – can’t do this, that, the other
    It’s no wonder the bond markets are upset, the government appears to be reverting to its age old plan of do nothing, pretend that we have already made 14.5 billion of cuts and make another pretent 15 billion and hope for the best.

    Looking at a national debt of about 140 billion and a ten year fixed rate of 6% from the EFSF, we need to have no new borrowing and 8.4 billion available a year for interest (ultimately – we average 4.7% on the existing debt currently) – more if we want to actually pay some of it back. (Current interest payments are about 3.5 billion a year?). So the adjustment figure is rather large.

    Who is prepared to put their hand up for an uncapped PRSI rate of 15%? A further uncapped health levy of 5%? No PAYE allowance and a halving of personal tax allowances? 25% lower rate and 49% higher rate? With no indexation for years to come?

    Who is prepared to cut 15 billion from current and capital spending?

    Those are the levels we need to be talking about. Not dribs and drabs here and there with ring-fenced areas. The deficit needs to be closed in a couple of years, not on the never-never.

  19. @seafoid
    “Does anyone think that the Yanks’ attempts to push the string on Quantitative Easing might backfire and lead to a bond market massacre by means of inflation of more than 5% which then spreads to the Eurozone and miraculously reduces Ireland’s debt mountain with the help of St Bernadebte? There are signs already that Asian bond markets are overheating…”

    What inflation? Any inflation we are likely to see is going to be bad for us. It’ll be price inflation at a time when salaries have no traction for increase. It’ll save us having to make any cuts (as it did in the 1980s/90s when high inflation and currency depreciation did the lifting), but the effects will be at least as bad. Worse if inflation expectations become elevated and the ECB sticks to its mandate.

  20. @Greg: re that poem, at least Morgan does not lack all conviction.

    @Yoga: I agree with you that our living standards need to come down substantially and that this hasn’t been accepted yet.

    http://www.marginalrevolution.com/marginalrevolution/2010/11/ireland-facts-of-the-day.html

    http://www.economist.com/blogs/freeexchange/2010/11/european_debt_crises

    It isn’t clear to me that our political system can cope with this: one reason to welcome a programme.

    However, it is worse than that. Such a programme will be contractionary in the short run (and, indeed, drive many taxpayers overseas, if history is any guide). Given that we can’t devalue, and that the euro may actually strengthen, I tend to agree with the EIU that next year we will be lucky to see any growth at all. Nor am I convinced that in such an eventuality, markets will rationally anticipate growth in years to come and be assuaged — they are more likely to focus on the present and stay on strike. So if the aim is to keep the markets on-board, I doubt this will work.

    So, I tend to believe that a programme is inevitable. And, given the doubts that are circulating about whether the EFSF can cope with several countries, especially bigger ones, tapping it for money, perhaps it is better to get a programme before the EFSF explodes. (I’m assuming here, for the sake of argument, that for political reasons the EFSF-IMF route would be the one chosen, rather than the plain vanilla IMF route.)

  21. @Kevin O’R
    Yeah, grim isn’t it? Can’t be arsed to lose the seat if we are to avoid it, will have to inflict all the same medicine even if we don’t avoid it.

    I agree we are unlikely to see any growth, but I don’t give much credence to it anyway. With an external currency and little in the way of capital intensive native production, with a bit of luck the export sector and the agricultural sector will sail on. (So the growth that is being measured as falling is somewhat specious!).

    If we could see continuing high debt writedowns and paybacks, we’ll be in a better place in a few year’s time. As Mr. Krugman pointed out earlier this week, eventually enough debt is paid back that household balance sheets revive to allow spending.

    I don’t really hold with the deflation spiral in Ireland’s case. We don’t invest much of anything in anything productive. A bypass for Killorglin maybe, but only if there were no exits on it. So I don’t see that there is productive activity that is being crowded out by uncertainty about the future. The SMEs that were ignored during the property boom because they weren’t property are going to be ignored in the bust because they are not NAMA’d property. Even if there was credit, they still wouldn’t get it, because Irish people don’t invest in companies.

    Why do I have the awful feeling, though, that IMF or EFSF the same old hoary faces will be sniffing around the swill?

  22. @hoganmahew.
    Many people in private sector have put their hands up for very severe salary/wage cuts.
    In some cases it was the old Luca Brasi threat-your signature or your brains on the document.
    In others it was accepting the blindingly obvious. Either a serious cut or a P45.
    In all cases it took a leader be he right or wrong to force the decision. We now have no leader and no obvious alternative leader.
    I don’t know enough about the technicalities of the affordable interest rate. I do know that 8% is not on at all.
    Ireland must now impose cuts ie. the government must make choices, must finally govern on behalf of Irish citizens.
    We are in situation so well described by General DuCrot “Nous sommes dans une pot de chambre…”
    We need a Baron Von Stuben to see us through this winter.

  23. @Gregory Connor,

    That is right. A bank lending on residential property with a comparable maturity to a 10Y gilt has to think there is less risk of default on the mortgage than there is of the Irish State defaulting.

    If the bank management do not believe that then they are in breach of fiduciary duties to shareholders. Now, who are they again?

  24. @ Joseph Ryan

    As General Du Crot might have said about FF,
    quelle bande de blaireaux de bordel de merde .

  25. @John – The maths always make default seem avoidable. Yet markets need to roll over large debt for a long long time if we have a lot of it. This is where the maths don’t work. Investors need confidence for decades into the future that the government can maintain a large primary surplus. We have a government that is too unpopular to survive, a central bank head who has gotten the scale of this probelm completely wrong and lacks credibility, a bank supervisor who lies to us that bank balance sheets are ok when we all know banks have not written down loans appropriately, etc. How can any investor reflect on this and choose to earn 6% on Irish bonds when they can earn more on safer corporate or emerging market bonds? Once investors decide we aren’t credible, the “fiscal space” becomes small regardless of the maths.

  26. @ Gregory Connor,

    you’d probably need new loan rates to compensate for low yielding existing assets. There’s a
    huge number of tracker mortgages (@ about ecb + 1%ish) and namabonds (@ 6m euribor). MK suggests an unsubsidised cost of funds and even then it looks a little too high. On the liabilities side, banks are managing to get away with relatively low customer deposits rates, but should this or free-for- all ecb repo ops change, there’ll be a few more beached whales.

  27. Something else for Europhobes to consider is that the market pricing of Irl default risk is being distorted – downwards – by two ECB things. First, they atre buying Irl bonds in the secondary market when the yield goes up too quickly.

    Second, the excess reserves / excess liquidity that the ECB has manufactured is being used by banks around Europe as a source of almost free money with which to speculate. The easiest trade is to buy peripheral sovereign bonds, pocket the yield and take the default risk on the other side. This is another European subsidy in effect – of Irish bond yields. It is the LTCM trade.

    Without that, what do you think the 10Y gilt would yield to redemption?

    BTW, any econosavvy viewer of Frontline on RTE would have to lean towards yes, default is inevitable. There is a big gap from the economics to even the politicians they let loose on the telly, and from there to the politically engaged public the gap is not one that is going to be bridged in 4 weeks or 4 months. Pensions, pay, hours, rates, tax net, universal benefits….. – everything is “unacceptable”.

  28. Default can be deferred for as long as the ECB wishes. This will drive down the euro.

    This is what will happen, even if it is not the best solution for Ireland, as it means more borrowing.

    Effectively, it is a form of QE for Ireland. Even if it does not feel like it. Neglecting the time element in these matters is a mistake! Deferral can be made for decades. The Irish economy, meantime, becomes ever more Japanese like! Talk of running from the euro is simply childish. All these matters were considered before we went in. Dolts! Kleptocracy thinking, always trying to evade the consequences…..

  29. @ John McHale

    The model shows that default results when a country’s debt to GDP ratio passes a critical point. 

    Japan is not currently at risk of default despite its high debt, because over 90% of its debt is funded from domestic savings. Ireland relies on foreign lenders for 75% of its funding according to the latest data from the IMF.

    So for Ireland, the big question is what would trigger a bond strike?

    Once we would get EFSF support, a restructuring would then be in our interest as may happen with Greece at some point.

    As regards the DoF growth rates of 3.25% in 2012 and 3% in 2013, we will know in 12 months time how realistic these targets are.

    If the 2012 target looks like undershooting significantly, we will essentially be out of ammunition.

    There is also a likelihood that the GDP data could look reasonably respectable but the domestic economy remains in the doldrums.

    Batch chemical production may not be a saviour.

  30. @Pat Donnelly.
    Why do people refer to the Japanese situation in a negative fashion.
    After all they have a very successful economy, huge value added exports and to my knowledge a high standard of living even if it is hectic.
    Some commentators warn us about Japan. Right now, in economic terms Japan would be a great place to be in.

  31. IMF forecasts released last week show that Ireland had/will have the biggest deficit in the world for 5 years in a row from 2009 through 2013. (In 2014 we drop to number 3 behind Japan and India). Also the projected rate at which the debt/GDP ratio increases from 2007 to 2015 is also by far the largest in the world: the 2015 value will be 3.7 times the 2007 value. The rate for Iceland is 2.9 and Greece 1.6. The overall net debt/GDP ratio in 2015 will be high at 85%, but still behind countries like Belgium and Italy and well behind Japan, so we’re not number one in that category.

    However since we easily win the crash velocity prize, it can’t be surprising that we’re locked out of the markets, and I doubt the December budget will make any difference. Time to take the cheaper EFSF money and use the IMF as the bad guys to force through the needed structural reform.

  32. @ Joseph Ryan

    As regards Japan, in a high cost economy, 35% of the workforce are temps even in companies like Toyota and they work for less than the Irish minimum wage and have few rights.

    Its gross public debt is over 200% of GDP up from the mid 30s in 1990; defaltion has become endemic becuase the population is declining but there is a general antipathy towards immigrants.

    Japan has the world’s best public infrastructure because of construction stimulus spending since the bust.

    The business culture was once seen as worthy of emulation but no longer.

    Sony was once the world biggest consumer electronics company but now Apple is, having stolen a march in mobile music. In Asia, it’s very evident that Sony is being eclipsed by Samsung, the world’s biigest makerof flat screen TVs.

  33. I would like to second Zhou’s and Eoin’s comments. But the real problem is in the politics.

    Parliamentary democracy is supposed to be a deliberative process to reach the least worst trade-off between competing interests that is in the broader public interest. It is for the governing factions to set out policy principles, objectives and criteria with the detail being worked out as facts and evidence for policy options are considered, the policies worked out in detail guided by the top-level principles, objectives and criteria and then subject to counter-evidence, rebuttal and counter-rebuttal in open hearings before Oireachtas Cttees who make their decision before final decision by government and subsequent approval by the full Oireachtas.

    And this has to involve a willingness to research, analyse and present the case for policy changes, invite and deal with scrutiny and counter-arguments and convince the people’s representatives to enact these changes.

    What has happened in the years since the Celtic Tiger took off in the early ’90s has been the complete opposite of this. The 15 members of government with their special advisers and senior department officials have assembled all packages of policy in almost final form, squared – insofar as was possible- all different interest groups, fired up the spin machine to brow-beat any dissenters and driven these policies through without sufficient scrutiny.

    This was fine when it was goodies that were being dished out. How on earth does anyone expect this process of governance to deliver measures of pain in an equitable and effective manner? It simply can’t and that’s what we’re witnessing now.

  34. @Eoin and Zhou Thanks.   But I should say that I am far from “anti-Kelly”.  I think highly of this academic work and contributions to the policy debate.   Given his record on this crisis so far, I don’t disagree with him lightly.   Having said that, I do think his pessimism on the fiscal side is over done and, with the stakes as they are, it is important to say so.

  35. @J McHale – surely the problem is not that even if Morgan were right and it cost us an extra 1.5bn in interest payments it wouldn’t push us over the edge etc. etc. ….. if that were to happen, the real problem would surely be that any shred of confidence in Ireland would just go up in smoke when we said, “sorry lads, it’s not 15bn it’s 16.5bn.”

    Every time we get a forecast wrong, it’s another nail in the coffin…. and we seem to be making a habit of it. Our credibility is being shot to pieces and nobody seems to believe a word Brian Lenihan says any more.

  36. As a non economist and a struggling architect I would like to thank John McHale for giving us a balanced analysis on Morning Ireland this morning that spoke to me of recognising the seriousness of our situation while demonstrating that we can deal with it as opposed to the respected but doom laded apocryphal analysis of Prof Kelly which offers no hope.

    We can deal with difficulty, even grimness, but hopelessness is no substitute for taking action to correct our fiscal and monetary imbalance.

    Needless to say , I dont believe, that Mr Hales analysis will fly as far into the consciousness of the domestic and word media as Prof. Kelly’s will.

  37. @John,

    Thank you. I’ve downloaded Frank’s paper previously. All good grist for t’mill, but the political classes are genetically unable to respond. I see Philip Lane has opened a thread on FG’s 100 proposal document on re-inventing government. (Labour also has a similarly long ‘me too’ list.) This is further evidence that the political classes haven’t got the message.

    I reckon we’ll have time to sort all this out while the EFSF provides expensive shelter from the bond market and the IMF gets to work on the cosy clubs and profit gougers.

  38. @ John

    the stakes are so high that we need to have a two-sided debate on it. Thing often do have an ability to become self-fulfilling if you just accept it and let them happen. While Kelly has impressively called things right for the most part in the past, he is by no means infallible. Moreover, some of the things he suggest would indicate that a lot of people here are going to become very bad, very scared people in the next few years. Maybe he’s giving up on the country, but i don’t think the rest of us have yet.

    Spelling out what options remain is of key importance for the medium term economic outlook of the country – bringing in the EFSF will have major negative implications for the way foreign investors see not just the sovereign risk, but also private sector risk. A solid and serious budget, a credible fiscal adjustment plan, an early new year election, and an investor roadshow alongside positive sentiment-raising actions/comments from both the EU and ECB could see us returning to the markets before Easter. Its not over yet.

  39. @Kevin, Hogan
    While I believe that – like the X-files – a solution is out there, both of you mention one area that I think we need to be very careful to avoid. That’s driving people overseas with high taxes, punishing work in the future to pay for a problem that his now ended and “only” needs to be cleaned up.

    On the work side, I remember the 1980s all too well. I remember people graduating from university and immediately paying punitively high tax rates, and that was if they could get a job in the first place. But the logical reaction to being taxed to death if you did find a job? Even more emigration of people that we badly needed. By the time I left university the tone was essentially this “there are no jobs, and even if there was a job you’d be better off leaving”. Belfield was jokingly referred to as the airport and picking up your degree was akin to getting your boarding card.

    It’s bad enough that we’ll almost certainly have lots of construction workers with no employment prospects in Ireland, but if we drive even more people to leave because we punish skills and work then we’ve really lost the plot and we’ll be an even longer time bringing the economy and the country around. And don’t forget, the rest of the world isn’t booming like it was in the 1980s, but plenty of places are going better than here. The losses would be significant.

    We should first look at undoing the spending and recovering things that should have been taxed in the period 2002-2008. On a quick list; on spending, undo most of the increases back to 2002 or 2003, pensions, social welfare and state salaries. That’d get us most of the way on spending. Many people feel entitled to their entitlements, but the sad truth is that the government has blown all the money and more. It’s not just workers that have been lumped with the costs. That single mother owes someone thousand of Euro. The pensioner is in significant debt. The government has put them there so appeals to legitimate expectations are misplaced. They’ve been scr**ed too. It’s already happened. The money is gone.

    On the revenue side, widen the tax net. IMHO everyone should dislike taxation about equally. The current system where one set of people like increasing taxes on other people but not paying themselves is a rotten system, no matter how much you wrap “progressive” around it. It breaks any social contract. [note, the rates for very high earners are potentially an exception, where they can still pay lower rates than moderately high earners]

    Then, as an emergency measure we could look at more radical options, partially for revenue purposes and partially for the optics. Perhaps for instance a once off levy on some wide categories of assets acquired in or income from the period between 2002 and the date of the guarantee. (Bank bonuses at 95%, land sales above 2/3 of the Gilmore limit at 25%, are some initial examples) . One could view it as the “Vincent Browne solution”. This is potentially constitutional under the Nursing Home judgement. If this isn’t a financial crisis then I don’t know what is.

    [Pay in the private sector should be left to companies to figure out with their employees themselves, but we need to make sure that there are no more protected and sheltered sectors to abuse their positions and to keep high costs in the economy.]

    Of course, VB and many on the left would like to punish work in the future too, but if we punish the future for the mistakes of the past then we’ll be a long time building a future.

    If we’re going to engage in structural reform, which we badly need, then we need to bring Ireland to a system that’s just and sensible. We need a zero base approach and not a leftover system that has so obviously failed.

    The first step cannot be to punish the future for the mistakes of the past.

  40. @Eoin,

    I agree it isn’t over yet, but, in addition to your suggested approach, the government will need to throw the kitchen sink – NPRF, semi-states and all – at this. Do you see the most likely combo – FG + Lab – agreeing to do the needful?

  41. @Eoin
    “Maybe he’s giving up on the country, but i don’t think the rest of us have yet. ”
    I think this is unfair. If he was giving up, he wouldn’t bother doing the research and publishing the papers. More likely that, as others point out, it is not enough for there to be a possible solution, there has to be a willingness to implement it. That willingness seems to be totally absent.

    @Sean Kearns
    “the respected but doom laded apocryphal analysis of Prof Kelly which offers no hope.”
    Apocryphal? Come now, the scale of the losses at the banks has been easily estimated since mid-2008. I don’t count myself as any sort of expert, but even cursory reading about property crashes gives a likely figure of 54 bn in an average crash, more if there is an accompaning financial and fiscal crisis. Guess what, we have both!

    So it is untrue to say that the numbers are apocryphal. It is also untrue to say that they are doom-laden. The numbers are what they are. It is the policy response that is doom laden. Time and again the easy option of spoof and bluster has been taken.

    There are no easy solutions. A lower standard of living will be the result of the bubble. Not just lower than the debt-fueled jet-set of the bubble, but lower than the years before the bubble (so heading back to somewhere around 2000 adjusted by average european HICP). The reason for this is the overhang of debt that has been generated.

    The question then becomes how do you allocate that fairly? The current government has not even addressed that question. That is the problem that gives no hope for resolution. The current course cannot be maintained. A change of course might give hope for some solutions.

  42. @Hugh
    I’d missed that article. That ‘budget’ should set the benchmark. I assert that if that budget was delivered, it would form a key step in getting us back to the bond markets. If we are truly a society we should collectively lobby for it to be delivered, in full and without amendment.

  43. @Hugh
    “That’s driving people overseas with high taxes, punishing work in the future to pay for a problem that his now ended and “only” needs to be cleaned up. ”
    Well, as an exile of the ‘eighties I understand this; but the logic of then applies now. The absolute cost has to be covered. Cuts can only go so far, so revenue will have to be raised. Certain classes of revenue will have to pay for their associated costs (e.g. PRSI will have to pay for welfare – it will initially be high, but should decline as the economy recovers and the welfare fund builds back up; for it to really work, there will have to be reform of pensions and probably a move to a funded system).

    I agree with many of your ideas, BTW.

  44. @ Paul Hunt

    i think with some political cover (ie EU) FG are willing to do it, they seem more serious now than in previous years. Although for the same reasons, they may decide that entering into a short term EFSF stint is the better option politically for them. As NCB (and you too in fairness!) has suggested this week, it would not be the complete end of the world if we did say 6-9 months in the EFSF, though i still think it should be the last resort after everything else has been tried.

  45. @hogan
    Don’t get me wrong….arithmetic has to be respected. The numbers need to add up.

    As for the 1980s, the numbers could have been made to add up without doing what was done. Remember the PAYE marches? A lot of good they did. Not. Remember people whose parents were well off farmers and businessmen getting university grants because their taxable income was so low? Remember Charlie’s Charvet and the damage that was done to our civil service in that era?

    @Eoin
    FG’s document – from the exec summary at least – seems on the right track, but can we trust FG to be serious for long? They’ve spent so long wishing they were FF.

  46. @ Hugh

    said this on the other FG tread, but seeing as you brought it up! The word “union” appears zero times in the 89 page FG document. Not entirely sure we can treat is as being a realistic program on that basis.

  47. @Mr. Bond,

    What may work in our favour is that the institutional and political EU (I&P EU) wants us in the EFSF even less than we want to be forced in. There’s a line of big dominoes behind us. But the markets will want to see a popular mandate for the fiscal adjustments and Ireland throwing the kitchen sink at the problem.

    The politics are not encouraging.

  48. @John McHale,

    To add to Zhou and Eoin above, your performance on MI was all the more impressive for the obvious respect which you hold for others even when you challenge their analysis and perspective.

    In the Dail last week Brian Hayes spoke passionately about the party straitjacket that prevents members from speaking their minds. I’m beginning to think that it’s time the more progressive members among the opposition broke out of that straitjacket and asserted themselves, first within their own parties and if that fails, by revolt against the whips when it comes to the Budget itself.

    If the government fail to get the Budget through the Dail and a general election ensues, whoever takes over from the current administration will, as Garret Fitzgerald has pointed out, have no realistic option other than to introduce much the same Budget very shortly after they assume office. Failure to get the Budget through would be a disaster for the country and a general election will not change the substance of what has to be done. In any case how could an incoming FG/Labour administration agree a new budget when Labour has stated it will not agree to go beyond a 4.5bn cut in Budget 2011, at least half of which is to come from taxation increases?

    What is needed are individuals of courage and integrity among the opposition parties who are prepared to risk their political careers for the sake of the country and come out and tell it like it is. They could start within their own parliamentary parties and tell their respective leaders and finance spokespersons that they are not prepared to see their country lose its economic sovereignty to personal ambitions for high office or the pleadings of special interests that party spin machines have identified as likely voting fodder.

  49. Default is evitable unless something is done with the Euro not just for Ireland for also for some of the others PIGs including Greece. The European stability fund is just putting off the evil day. You cannot sustain interest rates of 5% + on national debt when inflation is nothing and deflating as in Irelands. Directly all the existing Irish bonds are redrawn at these penal rates the draw on the national finances will be become too much for the exchequer. Reductions of greater than about 3 €bn in national expenditure will only bring forward the day as the reducing GDP caused will kill off any chance of Ireland growing out of the problem. The only other solution that could happen is that quantative easing is used by the ECB to right off some of the PIGs and other countries debts (Germany could use to save some of its city councils some of which are in a desperate state). We need to get some sinorage on the euro and now is the time to do it after the 600 bn dollars printed by the USA. The resulting fall in the Euro would also make Irelands exports more attractive and could lead to growth. The other point is that very high debt/GDP ratios are sustainable when the country has control over its financial policies and can set interest rates AND that most of the debt is domestic so interest transfers are not leaving the country as in the case of Japan. The threshold of default is much lower for Ireland were most of the transfers will go to Saxony and the Rhur region and we have no control over our interest rates. Nothing that has happened in Ireland suggests any changes in how to deal with huge percentages of sovereign debt. 1 Default 2. Devalue by printing money or directly manipulating the exchange so the resulting growth reduces the ratio. In ten years time all that we will text book examples of how not to do things.

  50. @veronica
    I agree.

    It is too late to fail the budget, whatever it contains.

    If the opposition don’t agree with it, they should refuse to vote for it, but they should ensure that independent pork is not represented by not voting against it either.

  51. @ Hugh sheehy

    Some good points in your post but I think it is unrealistic to unwind spending back to 03 desirable as it may be. The boom was unfortunately spent on salaries and benefits and those sals and benefits were then tied to mortgages which made the boom boomier with disastrous consequences.

    I also wonder where 200,000 Irish tax refugees would go. Most will presumably be tied to undervalued homes but still- what economy would take them? Taxes are going to go up everywhere to pay for the cost of containing the fallout from the near depression experience. Asia may be doing well but how many senior AIB audit managers and CBRE property consultants would Mumbai need ?

  52. @seafoid
    You don’t see any contradiction between raising taxes and not reducing salaries? Instead of reducing salaries for a few, you are reducing salaries for all to limit the reduction for a few. You’ll have to give some utility or econometric argument for that position.

  53. @seafoid
    I understand that the current govt awarded very generous pay and benefits and that many people believed that these would last forever. It may even have seemed a reasonable assumption. Unfortunately, it was wrong.

    So, as the next step, do you try to keep paying these high pay and benefit levels across the board in order to keep some of these people in houses that they’ve tragically overpaid for – thereby overcharging everyone else in the country for the benefit of a few – or do you recognize that this has to end? If it has to end then when? Now, or later?

  54. @Pat Donnelly
    On your point of EU QE. There is a worldwide currency war unfolding, China wont float its RMB, the Fed introduced QE, the Brits followed and the yanks saw BoE’s QE and raised the pot with QE2, all in the interest of strategic advantage for their exports. As long as the Germans are at the tiller they will not tolerate even talk of QE(aka devalueing). Fortunate then that Bonn has a string of potential defaulters within the Euro to keep the Euro:Dollar/Stg/Yen etc. subdued whilst their exporters power ahead. Where would Germanys exports/economy be in Q1 and 2 without the Greeks bailing them out and Q4 without Ireland bailing them out.

  55. @Veronica,

    I can only applaud your search for patriots among the current political class. The spoils of power are too great and suppress the better nature of those who aspire to grasp it. The people have conceded too much of their ultimate authority and, once conceded, it may prove impossible to regain.

  56. @hoganmahew,

    sorry , that should have read apocalyptic rather than apocryphal-I got my big words mixed up there, sorry about that
    I am not in a position to dispute MK numbers, but many others on this blog are and have been doing so. It is MK prognosis that is doom laden,on the extreme pessimistic side whereas JmcH and others lays it out in terms of difficulty that can be overcome by taking action, much of which is being debated on this blog, rather than the despairing approach by MK and others. I have experienced at least two property bubbles and busts in other countries and I fully expect that we will go backwards for a while, even to 2000 levels , but we can trade our way out of this and there are plenty of examples of other countries who have done the same and we can learn from them. To state that the country is dead as MK does is, in mind ,excessive, to say that it is sick and needs urgent treatment that will be painful but essentially beneficial is more beleivable to a layman like me

  57. @Sean
    “To state that the country is dead as MK does is, in mind ,excessive, to say that it is sick and needs urgent treatment that will be painful but essentially beneficial is more beleivable to a layman like me”
    Yeah, it does depend on your view of the ability of government (both permanent and elected) to change, well, basically themselves and to drag everyone else along with them. Some have an optimistic view of the likelihood of that change happening, others not. I bounce between the two, but tend towards the likelihood being low.

  58. http://www.swst.com/Pages/OurCompany.aspx – The homepage of the august Southwest Securities. This is the firm that produced a spokesperson on Bloomberg TV yesterday saying “Ireland will run out of cash in 60 days”. Obviously they’re trying to cash in their profits before Christmas, and were delighted to be allowed on TV to talk their book. Could they dared have hoped that some Irish clown would then tweet the link to their unsubstantiated claim – and thence to the RTE News at One?

    Strange to see those who claim to care turning themselves into shills for hedge funds.

    “You cannot hope to bribe or twist
    Thank God! a plump economist
    But seeing what the man will do unbribed
    There seems no reason to”

  59. Congratulations to John McHale and to all the commentators for this excellent thread.
    In the distant day of the mid 1960s, I read Political Economy & Politics at UCD at Earlsfort Tce. It was a given at that time that Economics and Politics were manacled at the hip. Thus, I welcome the political comments that are emerging in this discussion. I am deeply shocked at the gradual erosion of our system of governance since the last election. The Coalition Government has debauched any semblance of democracy with their attitude to holding overdue bye-elections.
    Mr Rehn, to his credit, has consulted with all the Opposition parties and even with the non elected Social Partners to communicate EU views.
    An interesting letter by Professor Ged Martin in to-days Irish Times suggests that President McAleese should use her constitutional powers to intervene in the debate that now confronts us all.

  60. @Hoganmahew
    “Certain classes of revenue will have to pay for their associated costs (e.g. PRSI will have to pay for welfare – it will initially be high”

    This is an orthodoxy that has often puzzled me.
    Why is it employees and employers through PRSI are expected to pay the full burden of the unemployment assistance rather than society in general through general taxation.

    The association above seems pretty ludicrous to me. Is there an element of let the comrades pay for their fellow comrades?
    Maybe we should have pensioners pay for other pensioners?

  61. Aiman,

    You cannot hope to bribe or twist
    Thank God! a plump economist
    But seeing what the man will do unbribed
    There seems no reason to”

    Who are you referring to?

    Today’s Question in the Dail was slightly unerving. We now appear to have aa consensus of sorts emerging between FF and FG that a budget should pass with around 4bn of cuts and 2bn of tax measures. the devil is in the detail though. FG will be reluctant to support it for fear of giving a free pass to the GP and FF backbenchers to desert.

    Labour on the other hand are still defending their constituency and holding out for a longer adjustment period & one wiighted towards taxation. The now slightly Haugheyesque Gilmore is beginning to run the old 1987 line from FF “health cuts etc….”

  62. @Tull
    As a labour party supporter, I am disappointed that they have not nailed their colours to the mast on their vision for a new Ireland. They appear stuck in union speak which is not labour speak. The salary of the DG general of a govt department or an overpaid ESB worker would appear as sacrosanct to Labour as the wages of of the Kitchen porter. What a pity.
    Nevertheless Labour did not bankrupt the country. The governments of the last 12 years did. And still they have not put a solution on the table.
    The real pity is that they still enjoy the fruits of power and show no inclination to relinquish them.

  63. @tull – economist should’ve been in inverted commas. It scans better than the full job title, though.

  64. @Joseph Ryan
    “Why is it employees and employers through PRSI are expected to pay the full burden of the unemployment assistance rather than society in general through general taxation.

    The association above seems pretty ludicrous to me. Is there an element of let the comrades pay for their fellow comrades?
    Maybe we should have pensioners pay for other pensioners?”
    Erm, isn’t that how social insurance is supposed to work? How else would you fund the payments other than by some sort of tax on income?

    If you are arguing for a move away from PRSI and Health benefit and a move to only income tax and only means tested benefits, then out with it. Personally, I find the tie of universal benefits a binding force.

    And I agree, current pension contributions should pay for current pensioners, that is how the paygo system works.

    I don’t see any other way of paying for pensions than employment related taxes? Perhaps VAT on nappies? Or on baby formula? Let’s see, how else can we stiff the young. Bubble, check; increased national debt, check; forced emigration, check; no change in pension provision… bingo!

  65. @ Hogan and Hugh Sheehy

    Salaries have to come down but it is a case of plucking the goose carefully rather than killing the creature. Public sector salaries are too high , sure but a scorched earth policy won’t get you anywhere. I don’t know where the dividing line is. Suggestions welcome .

    Do you know the song gugalai gug ca ndeanfaidh me nead? Where will I build my nest? If it build it on the bay the ducks will eat it. If I build it on the ditch the geese will eat it. I think that is where the Government is now.

    The wreckage of the property boom is a corset around everything.

    BTW Many Irish directors and senior management considering value added are way out of line on pay. So are many professionals. How much do the head box wallas of E&Y and the rest of the accountancy top 4 take home every year? It’s known as “tearing the arse out of it” in Galway.

    How much are the top photocopiers at AIB on? The ones who drove the share price down to 27 cent yesterday.

  66. Every few months there’s a new orthodox line that is constantly restated. At one time it was ‘Nama – only game in town’. Now it is “We must pass the budget to keep our economic sovereignty” or “We must avoid the EFSF to keep our economic sovereignty”.

    This implies there is already an economic sovereignty to keep, which isn’t the case. The 4-year 2014 3% target is defined by the EU, and whether adjustments are 6+4+3+2 or 4.5+4.5+3+3 or whatever can hardly be called “sovereignty”. “Local empowerment” is a better term. On a scale of 1 to 10 the sovereignty level is about 3. Maybe the EFSF would bring it temporarily to 2, but what really matters is how soon the level can be brought up to 6 or 7, say. The inability to devalue, set interest rates or do QE is gone forever, so economic “sovereignty” can never exceed what a regional government is allowed to do, so a higher level is not possible. Right now Irish interest rates are controlled by how much or how little the ECB intervenes in the bond markets – not much sovereignty to keep there.

    The real power in Europe is with the EU council and the ECB and not with the Commission.The current visit by Mr. Rehn is a dog and pony show, of no real significance other than his role as a messenger boy/report writer. I don’t see all that much difference between being in the EFSF and living on the edge just outside it, other than that money might be cheaper and there would be an extra push to overcome inertia. If you are going to have the highest deficit in the world for 5 years in a row there isn’t much ‘reputation’ to lose.

    I think it is understood that almost all the trouble was caused by about 100 people out of a workforce of 2,000,000. It is no reflection on Irish business or industry in general – you can have well run companies in an indebted country, so private sector investment would still be made on a company-by-company basis. An environment where it was seen that a country was trying to fix its finances as quickly and efficiently as possible, using outside assistance as a tool to get this done, is likely to be more attractive to private investment than one where the government is struggling on using let’s pretend/make believe sovereignty arguments.

  67. @seafoid
    Your point on scorched earth is valid, but as long as the state is paying people more than it can afford then someone else is getting scorched instead.

    Which person is more deserving of protection from the flames?

    @Bryan G
    Agree 100% that a major aim should be to get ourselves away from the edge. Living there is expensive and discourages investment, both domestic and foreign.

  68. @ Aiman/Tull

    just had my dad on the phone, having a goo ‘aul rant after the RTE news, wanting to know who these, quote, “f***ing idiots” were saying that we only had 60 days of cash left. He’s an engineer and doesn’t use Twitter, so he doesn’t understand the important work that our publicly funded economists are doing…

  69. @ Aiman

    fair point. Philip (Bloomberg radio) and John were both very insightful and far more helpful with their commentary on the airwaves today.

  70. @ Hugh Sheehy

    The goal has to be to get the deficit under control but it won’t all be done in one go. Did you ever see the play “Who shall be happy ? ” about the French Revolution ?

  71. Hogan,

    Its a ref to the Prof that relayed the story from Southwest Capital. I think the lads are being too hard on the Professor from Trinity. He cares deeply about the issues and he has the right to say what he says. I hope he continues to annoy and provoke us.

  72. @Sean Kearns

    I don,t think you can handle the truth as can,t John McHale. I am not an economist but Morgan Kelly,s article was written for the punters out there and very well too. The part that jumps out at me is the potential 70billion for the banks which has to be repaid and sweating over 15billion is ducking the issue. By the way its probably 20billion not 15billion.
    Finally, to see Brian Lenihan march in behind Ollie Rehn leaving the press conference today speaks volumes of his state of mind. Sorry, Ollie we are still a soverign state. Preception is Reality.

  73. @Tull
    I think so too. Unless assuming the ostrich position and thinking that everyone loves the Oirish and thinks Lenny is a saint has become national policy. Oh, sorry, it has. North Korea here we come. Block the internet, zap the satellite feeds, get Gaybo and Dana back on RTE… good work on getting at least one of them done double-quick, what?

  74. Oh now I get it. My bad. Imagine my temerity retreating something that had been seen by hundreds of thousands. That interwebby yoke is shocking. Shut it down now I say. How dare someone bring to the attention-profess, if you will- of the genral public what is being said of us. Imagine.

  75. @ Brian L

    did you think that we really had just 60 days of cash left? Did you note this was likely inaccurrate or did you just ignore it? Did it later become a retweet on your page, complete with the tagline about the 60 days of cash left? Did you not consider that many of your Twitter followers work in the media and are under the impression that you’re supposed to be an expert on this sort of thing and might take it as a statement of fact? “Don’t shoot the messenger” works with opinions, not obvious falsehoods.

    Simply clueless, or “mischievous nonsense” (per NTMA), your call…

  76. Brian Lucey

    I was amused by your reference to hundreds of trades at over 8%. Back in my day when the long bond was the 8T 12 or the 8H 10 of blessed memory, the things might trade once a day or maybe 5 times on a busy morning. I just do not believe in hundreds of trades. There are no buyers out there. Good to see proper coupons coming back, none of your runty little 3 & 4%.

  77. @Hohanmahew.

    I don’t see any other way of paying for pensions than employment related taxes?
    In some Arabic countries, they have no income tax. Just wealth tax. I think its called Zakkah. We need to broaden our perspectives.

    I was simply asking a question. Why are all govt taxes not collected centrally and decisions then made as to how they are allocated rather than the ring fencing of the social fund by artificial criteria as to contributors and beneficiaries.
    As I understand it the money collected is not even recorder as revenue but netted off as some kind of “appropriations in aid”.

  78. It appears that the most bone headed decision ever taken by entity Ireland was the unconditional bank guarantee.

    To my mind it was/is tantamount to a government declaring war without the approval of the populace.

    I think its time now for an investigation focused now at the government at the time. With the possibility of criminal charges if wrong doing is found and with request for resignations if idiocy is found as I am sure it will.

    The people of Ireland are suffering and it seems on the part of government there is no accountability.

    For shame the sitting government should allow an election.

  79. @ Lucey

    c.180? Eh, c.262 actually. So 437% of the previous claims. Better hit rate than your suggested likely price of a deposit book though, so suppose its progress, just…

  80. I hope Brian Cowen isn’t talking down the economy with that headline this morning.

    If I wanted to drive up interest rates further, I would tell the people who lend the money that I didn’t have any money left and I’m desperate.

    I would imagine the reaction of ‘the markets’ when we next come out with the begging bowl will be “Fill your boots fellers.”

  81. @joseph

    Surely “the markets” know how much cash there is, how much is spent per day and can do a simple division.

    I get the feeling with regard to bond yields it’s all a bit of sport like a souped up game of dare. As Tull says volumes are very thin. What has changed fundamentally since June? “The markets” have lost faith in FF and AIB came out with a shocker plus there was the Anglo mess. So “the markets” are worried about more banking shockers. And the deficit. It’s a bit like worrying about the girlfriend being pregnant. Potentially a game changer but then again maybe she isn’t and you are just imagining it. And you will know for sure by Friday week.

    It seems to me that “the market” wants :

    – A new government
    – The political will to go at the deficit
    – No more banking icebergs .At least not until things have calmed down.

    Now does mark to market accounting have any relevance here? Even if the banks have higher levels of bad debts why can’t they just amortise them? Surely the mark to market fad has gone too far especially now that the cupboard is bare.

    So if there could be some sense with regard to expectation management concerning the banks and the political problem is overcome and the budget is passed and there is a new Government and the deficit is cut by 6bn it does seem that there will have been some effort expended on changing the dynamics. I think that is what Governor General Rehn was talking about yesterday.

  82. @Eoin

    Did you see the 9 o’clock news last night? Some Dublin bondwalla said the game is up. Do you think that reflects the thinking in the market ?

  83. @ Seafoid

    the game isn’t up yet. Though only just. Basically buyers have called for an extended timeout until they know whats really happening here. We have 6 months or so of cash (end July is what is being suggested at a push), but we also have the NPRF if we really needed to. So basically we have that window to change the markets mind.

    Getting the budget and fiscal adjustment plan out of the way is phase 1, then sorting out the political uncertainty which has become more obvious this month is next, so an early 2011 (jan/feb max) election is the next phase. Assuming that goes to plan, with a clear FG leadership role (however the govt is formed), March could be spent roadshowing (alongside EU/ECB cheerleading) to investors with a very clear portrait of Ireland in place – 4yrs of clear fiscal policy, 5 yrs of clear political leadership and a strong mandate, NAMA fully in place, and (hopefully) the banks fully recapitalised at that point. Thats a good story to sell into a big syndicated deal at end March 2011. That, i imagine, is what the NTMA is currently setting itself up for hopefully.

    We’re on the edge, but we’re not over the brink just yet as Kelly suggests.

  84. @ Eoin

    Thanks. It’s mostly about politics now, isn’t it ? I got the impression that that was the whole point of the Rehn visit. In a way so was Morgan Kelly’s article.

  85. @seafroid
    @Bond
    Yes. It is all about politics now. Contributors to this site have played an enormous role in nudging Irish public opinion to an understanding of the stark realities of our economic plight over the last year or so. Remember Aherne’s comment that economists should all take a jump or Lenihan’s plea to wear the green jersey! This morning, Cowen lectured Labour in the Dail that the State would run out of cash if the Budget was not passed. In other words, he will brook no debate whatsoever with the Opposition parties on its terms; i.e., it is my or no way. This is not the way to seek consensus. The irony of talking down the economy seems to escape the Taoiseach as it did with King Canute.
    FG and Labour should make any support they give to the Budget conditional on a General Election in January. They should inform the Irish public that they support the rescue of the Irish economy but not the present Government. I think the electorate will understand the difference.

  86. Is it me or has it gone quiet?

    @Eoin Bond

    But Eoin, The markets have already priced in the 6 billion cuts/taxs as a given. So that argument doesn’t make sense. The 10 yr bond have raised another .5% since your last comment at 11;16. Does that put us over the cliff?

    We need to start talking strategically about the size of the default we can make (bigger the better). We might as well go down with a fight!
    The State needs to Default on bonds on the basis the guarantee was given under a guise of lies from Private Banks. As Moore Mc Dowall said last night on TV3 as a sovereign “we can basically do what we choose to do”
    It also can use the argument that they had to follow the ECB policy of No bank left behind.

  87. @ Bond. Eoin Bond

    We have six months of cash left? Right-o then. I believe you, so we are solvent as long as we still have a few borrowed cents, rattling around the bottom of some jam jar down the NTMA? If I am not mistaken this 40bn “cash” includes “liquidating” what is left of the NPRF. A fund that was not supposed to be touched until 2025.

    Any ideas what we will get for that portfolio as we scramble to sell it off? Where is the pension money going to come from as ‘we go forward’?

  88. Robert Browne

    Do you seriously expect the state to honour its pension liabilities 25 years hence. Public servants will be lucky to get next year’s salary.

  89. This thread could possibly be renamed to ‘Reform inevitability’.

    If the Irish government would default, it is fairly certain that the Irish government would be shut out of the bond-market for a period of time. That time may or may not be longer than the savings of NTMA would cover. It is likely that the savings would run out sooner.

    Supposing that the Irish government runs out of cash. Then suppliers to and employees of the Irish government would not get paid all they were due. Suppliers could take the Irish government to court and the EU directive regarding prompt payment would force the government to pay its suppliers before its employees. Employees would then have to be paid in IOUs or PNs…. Sooner or later this would not be accepted & reforms would have to be implemented. (Government IOUs – the new Irish punt & it would be a bit ironic to see it introduced this way. Would it be accepted at face value or at a discount?)

    Alternatively reforms are implemented now.

    The difference?

    Reforms would hurt some & the longer the reforms can be postponed the better it is for the beneficiaries of an un-reformed system.

  90. @Eoin

    Never ever forget that Brian Lucey has publicly posted on this site that he wants to see the economy crash. All his comments must be viewed in that light. Every comment he makes is directed towards that end. If Lucey worked for Ryanair, and he publicly posted on this site that he wanted to see Ryanair crash, Michael O’Leary would kick him out the door, if not the window, within 15 seconds. But, one of the little perks of being on the public sector payroll in Ireland is that you can work towards trying to crash the economy, and still taxpayers have to cough up to finance your activities in this regard. I suppose that’s what democracy is all about.

  91. @ Eamonn

    “the state can do what it likes”.

    Legally you’re correct, but not entirely sure how we fund the deficit of €19bn or so next year. So unless you’re suggesting a 19bn cut rather than a 6bn cut, thats not really an option. And don’t suggest the EFSF – the EU aint gonna let us touch that if we go for a short term default.

    @ Robert

    the 6-7 months of cash = around 20bn. Does not include the NPRF. That would keep us going for another 5-6 months.

    @ JtO

    I have no idea if Prof Lucey is happy at the current bond market dynamics, but he sure has hell doesn’t seem sad. At the very least, using your Ryanair metaphor, he seems to get a kick out of watching car crashes. At least i see genuine angst in the posts from 99.9% of other people on here.

  92. Bond, are you innumerate? There aren’t 1000 people commenting on this site so 99.9% is demonstrably false. I wouldn’t let you calculate the yield on my bond :p

  93. @ Garo

    touché! Though if JtO really is, as alleged by some more exciteable elements, actually a big grouping of nefarious statisticians, then i could yet be right! :p

  94. @Eoin

    I can assure you that, unlike Ian Paisley, of whom there are two, the senior and junior versions, there is only one JTO. But, it is really exciting to be suspected of being, not simply a government secret agent, but a whole department of government secret agents. If I was 30 years younger, I would use it to attract girls.

  95. @ JtO

    you never know, you could multiply via an “I’m Spartacus” moment on here if your optimism proves correct! Keep it up sir. Anyway, im off to the pub to watch Ze Berba bash some goals in against Citeh, i know you’ll be watching too!

  96. @ Eoin Bond
    Actually that is what i would suggest.
    10 billion between taxes and cuts now 10 billion between taxes and cuts next year ( we can keep ourselves going that long) and do as Angela Merkel has told us and burn as many bond holders as possible.
    Painful? Very. But the best available option by far.
    It was also the best option in Sep 2008 but we stupidly tried to avoid the inevitable

    @JtO

    Duh!
    ” But, one of the little perks of being on the public sector payroll in Ireland is that you can work towards trying to crash the economy, and still taxpayers have to cough up to finance your activities in this regard. I suppose that’s what democracy is all about.”
    Even though you said it with sarcasm you are for once correct.
    Ryanair is not a democracy.
    Believe it or not, the fact that all sorts of different academics can have opposing viewpoints is what makes us a democracy.
    Or perhaps you think all academics should agree with government policy?
    Sure just look at the growth rates in China! Thats what we should copy.
    Now thats sarcasm.

Comments are closed.