Not All About the Banks

The government has pushed the line in recent days that the flair up in the crisis is all about the banks.  There is little doubt that the trigger was ECB concern about their large and rising exposure to the Irish banking system.   But the idea that the banks are the problem and the state is fine – happily pre-funded as it is through the middle of next year – is nonsense.   As it stands, the Irish state is not creditworthy.   All else equal, it will become even less creditworthy as it burns through its valuable cash buffer.  The vanishing credibility of the ELG guarantee along with the creditworthiness of the state is the major cause of the banks’ increasing reliance on the ECB.  The intensified banking crisis is a (very significant) symptom of a deeper problem.

Of course, hopes are pinned that we can demonstrate political capacity to stabilise the debt to GDP ratio through a credible four-year plan and budget.  This will be a massive challenge.   Funding support on good terms – part of which could be used to “overcapitalise” the two main banks – would be a significant advantage in regaining market access; indeed, probably indispensible.   The last thing we need is another incorrect diagnosis of the problem. 

149 thoughts on “Not All About the Banks”

  1. This is why the Minister’s recurring lawyerly references to so-and-so being pari passu with so-and-so are not helpful.

    If the pie is not big enough and everyone is pari passu, everyone gets less than a full slice. And you don’t help by introducing more pari passuers to the party.

  2. The banks need to be taken off the backs of the State and the people of Ireland.
    The ECB should take all the Irish banks into custodianship.
    That is the only thing that will begin to stabilise the banking system at this point. The ECB after all is the central bank under whose auspices (nose) the mess was created and indeed at times encouraged.

    The ECB then needs to deal with the fact that pre-2008 interbank system no longer works. You could not run a casino based on the gyrations now happening much less a continent.

    Only when the bank issue is fully resolved can Ireland start to deal with the dire position of the State finances.

  3. A phrase about chickens and eggs comes to mind.

    According to an article in the FT today, most European leaders, and I assume Cowan and Lenihan are included in this, are privately blaming Merkel for digging her heals in last month on bondholders suffering haircuts.

    The surge in yields after this has caused clearing houses to increase margins. Even though the yields dropped last Friday on the back of assurances, the (thin) market can hardly be said to be bahaving rationally or responding a new fundamental information about our economy.

    How much of the current risk premium on Irish bonds is due to the fiscal deficit, growth prospects for the economy, the broken banking system, increasing talk of a mortgage crisis or external factors (induced by like German pig-headedness) is impossible to tell. But lets hope that a good proportion is due to our fiscal problems, because that is an area over which we have some leverage.

    Only a few weeks ago it seemed a successful budget would have allowed us to continue without a bailout, but that seems fanciful now, which suggests to me that the market, if indeed it is rational, is mostly concerned with future growth and an imminent rise in mortgage defaults.

  4. Surely we have some bargaining power to enforce loss sharing on the banks creditors (mainly ECB). Seems to me Debt restructuring is the only way out of this as the taxpayer will be unable to bear all the losses.

    This problem was in part created by the EU and EU banks by recklessly lending cash to Irish banks and the govt needs to be playing hardball with them in relation to this. The EU are running scared over the stability of the Euro and we should be using this to our advantage. The EU needs this bailout as much as we do.

  5. I largely agree with you.

    However one thing that does not require capitalisation is the word state. The Irish Times does it all the time 🙁

    It only requires capitalisation if used as a proper noun. Hope I’m not being to pedantic. I suppose I should raise my concerns with Madam Editor 🙂

  6. Funny, on the FT homepage right now it states:
    “Lenihan insists Irish banks have ‘no funding difficulties’”.

    Did he really say that? If so, has he been hitting the brandy to steady his nerves?

    How he can say the banks have no funding difficulties when they are propped up by the ECB? That kind of statement just blows a huge hole in his credibility.

  7. and so it continues…. now we are to “overcapitalise” the 2 main banks…. 🙂

    You really couldnt make this stuff up, it makes people who use one credit card to pay off another look good.

    @Joseph The banks need to be taken off the backs of the State and the people of Ireland. The banks need to be riding someone, thats what they do….. FF took them off the backs of their buddies and put them onto the State and the people of Ireland.

  8. The government strategy makes very little sense.

    Claiming we only need cash for the banks doesn’t make much sense with rates still above 8%. What are they going to do if rates don’t fall after the 4 year plan and budget?

    We will be heading into the new year with a few months funding and no choice but to go back to the IMF/EU

  9. The die is effectively cast and no blather will conceal what will be at least 3 years of external control of the country’s finances.

    There is some justice that the diminished Fianna Fáil – The Republican Party, which came to power in 1932; largely shaped the institutions that developed and the political culture which evolved and presided over two periods of monumental and reckless mismanagement, should be in power for this dénouement.

    Responsibility for the failure to use the best opportunity in Irish history to put the economy on a sustainable basis, also resides with those who supported Fianna Fáil and the Progressive Democrats together with the sectional vested interests who to the present day put their own interests first.

    There are also the individuals who grabbed what they could while the going was good; kept their silence despite what was going on around them and economists who gave a intellectual respect to ignorant politicians.

    Shame on them and let them think of the many victims.

  10. @ bazza

    Can I pass it off as a poetic turn of phrase? Maybe to pedantic can be the infinitive of a verb?

    I’m clutching at straws here 🙁

  11. John where exactly do you think money is created ?

    Get off the fiscal fetish argument – its a tired aull whore.

  12. @ Andrew.

    Paul Sommerville on Vincent Browne last night was of the same opinion. But who should we send to the negotiating table? DMcW, The Count, Michael O’Leary? Any suggestions………..??

  13. John McHale

    I watched you from on Prime Time and I was reassured by your calm reasoning. Now I wake up to review the horror story unfolding and I am less assured having read your piece. You say that ‘The last thing we need is another incorrect diagnosis of the problem.’ Can you go further?

    @Michael Hennigan
    ‘Shame on them and let them think of the many victims.’
    I am not at all persuaded that they care one iota for the many victims.

  14. @ John McHale.
    Yes you provided a very calm and considered analysis amid the turbulence yesterday evening although I remain to convinced about the 4year plan being the main answer. You didn’t mention the elephant in the room, i.e. calling the ECBs bluff on the collapse of the euro as a negotiating tactic. What is your view on this given the EU\ECB’s culpability in all this. Do you agree that the threat of default should be the quid pro euro that we get for surrending our monetary sovereignty via the political euro project?

  15. @ Michael Hennigan

    As a nation we squandered the riches we had accumulated over the early years of the 21th century. Everyone wanted to get rich quickly and spent money they didnt have on stuff they didnt need and houses they couldnt afford. Anyone who bought property in Ireland from 2003 onwards clearly did so without giving enough thought to the price they were paying (relationship between house prices and annual rents, average wages etc etc).

    In any proper democracy the people will get the government they deserves and thats exactly what has happened here. We all need to face the fact that we are a nation of chancers who have spurned our first chance at prosperity. Lets hope we get another before tthe harsh lessons we are now learning are forgotten as they inevitably will be!

  16. @Michael H,

    Well said. Once a face-saving formula has been crafted and the initial sense of loss has passed, this should be a time of hope that the innate decency, humanity, good nature and good humour of the majority of the Irish people will be re-affirmed. And that they will no longer elect or lionise those who appeal to the baser instincts.

    Redemption will be hard-won, but renewal is within our grasp.

  17. I see the Examiner reporting on the coalition Government

    ‘In a tweet, the Senator said the impending visit raised a “questioning of trust and an adding to
    uncertainty” that makes the basis for being in government “much more difficult”.

  18. @John McHale,

    I guess we won’t know for a week or two what the precise shape of this thing will be? If the Central Bank Governor is correct in his musings last week, then the four year plan with the 6bn frontload in 2011 may hold for the fiscal end of it with the fund largely used to overcapitalise the banks, as you suggest above?

    Politically, being able to throw an EU/IMF cloak over the whole business probably makes the austerity package easier for the government to impose than if they were trying to do it all by themselves, when they would have been much more vulnerable to pressure from interest groups, some deserving but others not-so deserving, seeking to protect their own patch from any cutbacks. And it really doesn’t matter who’s in government any more – they won’t be able to change an iota of the package. Voting down the budget is just a mechanism for changing the guard, since the FG/Labour coalition that replaces the FF/Green one will have to implement what they’ve voted against a few weeks earlier or else jeopardise the whole deal. It has to be on the cards though for the Greens to withdraw from government shortly after the budget – their remaining agenda is shot to pieces by current developments so they really don’t have much to gain by staying on in government any longer.

    Personally, I think the great missed opportunity by our political class was their failure to run with John Gormley’s initiative a few weeks ago. Demonstrating that unity of purpose might not have had much effect on what’s actually transpired, but all the main political parties would now have a stake in the EU/IMF process. As it is, all they’re reduced to is futile shouting at one another on the airwaves and across the Dail chamber. If it wasn’t so depressing it would be laughable.

  19. “The last thing we need is another incorrect diagnosis of the problem.”

    Sadly, that’s what we are going to get in a political environment where image (and the creation of teflon-like qualities in politicians etc.) is more important than substance.

    The taxpayer can hardly bear their own losses/debt let alone those of the banks.

    BTW – Do any economic historians out there know if Germany has ever defaulted or had to be given access to a bailout? If the answer is ‘yes’, would it be impolite to remind them?

    For you Paddy, ze var is over.

    I think this ‘name your dream negotiating team’ should have a separate thread! Dr. Gurdgiev and O’Leary for me, plus a really hardball lawyer.

  20. I thought the classic comment on Primetime last night was Miriam to O’Keefe: “I’m shocked you’re not shocked minister.”

    I don’t think he actually understands the implications of all this. Or else he’s in denial.

  21. @Veronica – I didn’t actually notice any Greens in the Dail at 5pm yesterday. I thought they had already withdrawn from government. Perhaps it was the camera angles.

  22. @ Joseph
    I think what Miriam was suffering what is called an ‘asymmetric shock’. Of course asymmetric shocks should in themselves not be a surprise given we are a member of a sub-optimal currency zone.

  23. The problem with the bank guarantee scheme seems to be that the guarantor is not credible.

    Would a solution to the banks’ funding problems be found if the guarantee could be taken over by a guarantor with deeper pockets – for example a European or Washington based institution?

  24. I disagree, I think it still is about the banks.

    Our structural deficit is large, but we have a demonstrated ability to grapple with that, and there is still a lot that can be cut. In particular, we have one of the lowest tax burdens in any oecd country and adjusting this upwards would do a lot for our structural deficit.

    The big question mark is the banks, and in particular AIB. While Anglo has unquestionably suffered far more sever losses, we have already internalised that. We have bought the bank at face value and are now essentially valuing it at close to zero.

    Bank of Ireland are not nearly as well capitalised as they make out, but they will survive without further substantial state support.

    The big problem is AIB, who are massivley underproviding for their likely bad debts, and who in any case will have a massive hole in their balance sheet even after they have sold off their foreign assets. As a core bank, the State will be obliged to bail out AIB, but it is already exhausted from bailing out Anglo and it is hard to see us coughing up another bailout worth tens of billions to rectify the situation at AIB. If Anglo hadn’t happened we’d have been able to look after AIB, but that’s water under the fridge by now.

    So I don’t take our structural deficit very seriously at all. It’s big, but it’s not like we have been running this for years without the cojones to rectify it. The Italians seem to be unable to deal with their deficit, but ireland has shown (not just recently, but consistently) an ability to get its fiscal house in order. We will do it again.

    But the State’s accumulated debts from previous bank bailouts leaves us unprepared for the next wave of trouble at AIB.

  25. @John

    “But the idea that the banks are the problem and the state is fine – happily pre-funded as it is through the middle of next year – is nonsense.”

    I would respectfully take issue with this. The State has funding to mid 2011. It has a pension reserve which would generate €14bn if liquidated (€25bn at end Sept less €11bn invested/earmarked for AIB/BoI) which will get us to mid 2012. Even if privatisations were at firesale prices we should get to 2013 at which point we should have a c5% deficit and if we can’t secure lending at that, then the problem isn’t the State.

    I would assert it is the banks. BoI and AIB were stress tested 4 months ago and ALL metrics in the base scenario have improved save for interest rates and the ECB is ensuring these are met also by providing the majority of short term funding. I would assert that it is not Ireland Inc that needs a bailout, it is Irish Banking Inc. And we didn’t need an EFSF for that, the ECB is already there – the lender of last resort.

    We’re too polite to say it but shouldn’t we suggest that the various delegations that arrived today decamp and sod off to Frankfurt and bail out the ECB? If your credit card company called up to ask if they could put a charge on your house, you’d be crazy to accept. Why is this any different.

  26. @Joseph
    You should read Lords of Finance – the Bankers that broke the World. From memory I think the Germans renegotiated reparations (debt) many times.

  27. Michael Hennigan

    ” …. failure to use the best opportunity in Irish history to put the economy on a sustainable basis …..”

    That is the true tradgedy of the situation.

  28. Tull has kindly provided me with a JP Morgan analysis of the fiscal arithmetic facing Ireland, Spain and Portugal. It is a proper analysis couched in terms of the necessary adjustment in the primary deficit in order to stabilise the debt/GDP ratio at a ‘solvent’ level. The arithmetic is stark:

    Ireland starts with a primary deficit of 9% of GDP, needs a 3% surplus; hence an adjustment of 12% of GDP. Spanish adjustment needed is 8% and Portugal 6%. The authors of the report acknowledge that these numbers are necessarily imprecise and dependent on lots of assumptions that could be challenged. But the point is made, at least in relative terms.

    Greece has managed to get its primary deficit down to 4% of GDP but still needs to do another 10% to stabilise the situation.

    The greatest historical fiscal consolidation in recent history was that of Belgium in the early 1980s who did an 8.7% adjustment over three years. Greeces adjustment this year is probably close, but has been accompanied by a 4-5% real economic contraction.

    So, if we need to do 12% over three years we have to acknowledge it ain’t been done before. Doesn’t make it undoable. Just means that an outsider observer expressing scepticism over our abililty to stabilse debt levels has some reason to do so. Of course, that scepticism equates to doubts over solvency.

    Insolvent states being asked to borrow more, or asking to borrow more, to over capitalise the banks seems to completely miss the point. Unless we are solvent to start with. Which means we need to do 12% of GDP…..

  29. No functioning banks no credit. No credit no growth. No growth no GNP increase. No GNP increase more taxes req’d. More taxes less spend. Less spend more cuts required………..

  30. “Meanwhile the officials from the International Monetary Fund and the European Central Bank will arrive in Dublin tomorrow morning to begin discussions on restructuring the Irish banking system.” –

    Quote from Guardian’s H. McDonald

    Am I being alarmist or could deposits be wiped?

  31. @John McHale

    Isn’t there a hint of naivety in your post above. Surely a couple of weeks ago they were emphasising that there was a 19bn hole in the public finances anyway and that the problem wasn’t all due to the banks

    -reason: public sussing out that bank guarantee was stupid and reckless so try not to cop all the blame.

    Now they emphasise the banks are the requirement for the bailout

    -reason: if the public work out that govt handling of the economy generally was so incompetent that the country looses economic sovereignty (per the previous line), they might get miffed. So shift the blame pronto.

  32. @seamus

    In theory yes, but in reality not unless there is a total, monumental international econopolitical cock-up of such proportions that would put a question over the whole European project.

    It is very unlikely even given the some of the idiots involved.

  33. Listening to a paen of my youth in work today, struck at the profundity:

    You lied, you faked
    You cheated, you changed the stakes
    Magnet toss that pie in the sky
    Unrehearsed, let the bubbles burst
    All in all, a three-ring circus
    Of unity with parody
    Tragedy or comedy
    Probably publicity

    Open up, make room for me
    Now open up, make room for me

    Lose myself inside your schemes
    Go for the money, honey
    Not the screen
    Be a movie star, blah blah blah
    Go the whole hog
    Be bigger than God

  34. veronica

    “Personally, I think the great missed opportunity by our political class was their failure to run with John Gormley’s initiative a few weeks ago.”

    John Gormley is an absolute chancer.

    If he had an integrity he would let the Citizens decide you should manage our way out.

  35. Watching TV last night one felt RTE’s Business Editor at 6oclock understood what was happening, that Paul Sommerville on VB knew what was happening and Joan Burton on Primetime knew what was happening. Unfortunately I don’t think I grasped what they were saying.

    I think that’s because Miriam didn’t understand nor Vincent Browne. Why should they ? They are not bqnkers or economists. Is it not time that RTE and TV3 allowed people like Paul Sommerville and Peter Matthews to do the interviewing so that those trying to muddy the waters don;t slip away so easily all the time?

    I can’t grasp the significance of the ECB stopping funding the Irish banks. Why is it so much different if the money goes to the government first and then to our bank?. Surely it could only matter if you were contemplating the failure of one of our banks. Am i missing sometyhing ?

  36. Minister for Finance Brian Lenihan today said the Government will accept European support if the banking crisis is too big for Ireland to fix on its own.

    “Speaking this morning, Mr Lenihan said Ireland would work with its EU partners to address structural problems in the Irish banking system, but he refused to set a deadline for the end of talks, which are set to begin tomorrow.

    He said a “short focused consultation” with officials from the European Central Bank (ECB), EC, and International Monetary Fund (IMF) would start in Dublin tomorrow.

    Mr Lenihan, speaking on RTÉ radio, insisted Europe stood “shoulder to shoulder” with Ireland and that the ECB was “fully behind” the Irish banking system.”

    I’m confused.

    The Governor of the Central Bank and the Financial Regulator assured us that the banks were now well capatilized. This was a few weeks ago.

    Were they wrong.

  37. @Greg,

    If Gormley’s a chancer he has plenty of company up in that place – 165 others in the Dail for starters. That doesn’t mean his idea wasn’t right. The truth is: our political system has failed us, and not for the first time either.

  38. @Tim O’Halloran

    The problem is, in my opinion, that the collateral which the banks are offering to it is basically worthless/ incredible and the state guarantee that comes with it is a guarantee of nothing substantive.

    I’ve said this for some time in various threads, but it seems nobody wants to study the NAMA bond term sheets. I would like to know experts views on this.

    So, the ECB doesn’t want this silly paper filling up its vaults. So, it proposes that the irish government, if prepared to guarantee NAMA bonds for the banks, should provide funding directly to them

    The reality is that NAMA has been an enormous failure and it is the main problem with our bank rescue programme. We- the State- took the banks property and gave them back worthess bonds.

    Conceivably, it can suit both the banks- AIB-BOI, I mean- and the State if NAMA returned their property to them. In any case, they should not attempt to sell off these privately owned institutions until the State pays them back what they took…in AIB’s case, for example.. c. €24 bn of commercial/development loan assets, + €4.5 bn. in sovereign debt +, who knows…perhaps €5 bn in deposits provided to Anglo at government urging, which I’m not sure has been returned. Maybe more, too.

  39. @Tim O’Halloran

    The difference is who take the risk.

    ECB as lender of last resort accepts all sorts of stuff as collateral for lending to the banks. Come January they will have had enough and consider themselves full of Irish property related credit risk.

    If the Irish state borrows money to lend to the banks, or invest in them as owners, then the risk is bourne by the Irish state., which has a liability to repay the money it borrowed from other states.

  40. I agree with Jagdip. It is all about the banks and specifically about the fact that one quarter of all liquidity support being provided by the ECB is concentrated on the Irish banks. Nobody will roll over their bonds.

    Maybe it was all inevitable in a world economy where total financial assets are around 3 times global GDP and grossly inflated in value.

  41. @ Jagdip Singh

    Irish domestic banks account for 20% (up to €100bn) of the ECB’s short-term facility which is part of the emergency liquidity funding it put in place after the onset of the credit crunch.

    It plans to run down this emergency facilitity and it doesn’t want to be a long-term funder of Irish banks.

    The banks have to provide colalteral for ECB borrowing but €20bn was also provided by the Irish Central Bank since August suggesting that the banks have problems both with collateral and rolling over their bond debt.

    Besides, the yields on this debt have risen in paraellel with sovereign yields and the cost of default insurance has rocketed.

    This unstable situation for the main banks is not good for the economy.

  42. @seamus – “Bank restructuring – default – bank run?”

    Followed by cashpoints shutting down, riots, looting, deaths, police state, stagflation, lost decade.

  43. @Michael Hennigan

    ‘The banks have to provide colalteral for ECB borrowing but €20bn was also provided by the Irish Central Bank since August suggesting that the banks have problems both with collateral and rolling over their bond debt.’

    I’m trying to understand where it all went wrong and why the ECB clamped down. Was it the collateral or the bank bonds or both.
    Surely the Central Bank should have seen it coming.

  44. @ Tim,
    part of the problem is that the RTE heads you reference have party allegiances, which colours much of what they say.

  45. @Jagdip Singh
    re: If your credit card company called up to ask if they could put a charge on your house, you’d be crazy to accept.
    There are two reasons why you might agree neither of which would indicate insanity.
    1. You are unable or unwilling to stop spending and require a large monthly stipend to keep yourself in the manner to which you have become accustomed. [ This reason, I admit may hint at a certain instability]
    2. Your life on earth is intertwined with fellow customers of the credit card company and your failure to accept a charge may bring all these customers to the same cliff edge you are currently standing at such that you force them to take the decision to push you over the edge in order to protect themselves.

  46. @ ceteris

    “The Governor of the Central Bank and the Financial Regulator assured us that the banks were now well capitalized. This was a few weeks ago.”

    I think the Government thought that with the budget, yields would come down and some sort of normality would be restored and that the banks could wean themselves off the ECB by tapping the markets again. Instead the markets lost patience. Perhaps the September announcement about AIB was one of the major nails in the coffin. Credibility shot to pieces and there are only so many corners turned that Brian Lenihan could present to the markets with a straight face.

    So the banks probably are sort of capitalised for the moment but nobody in the markets believes this for the medium term.

    I don’t know when the banks started to go to the ECB but they racked up a massive bill in a relatively short time and now the ECB says enough is enough. And that plus the haircut talk last week were probably the clinchers.

  47. @ ceteris paribus

    The ECB were planning to tighten rules earlier in the year as regards the credot rating of the eligible collateral but they deferred the change to coincide with the bailout of Greece.

    The ECB must have looked at the state of the Irish banks, led by Anglo, and as the central bank wanted to cut its emergency funding, Irish banks were becoming more dependent on it.

    The ECB simply must have concluded that this was a fiscal/country issue rather than its responsibility.

    The final straw was the rise in yields in response to the slow-motion handling of the banking crisis and the related rise in the demand for ECB borrowing by Irish banks.

  48. I think our political classes are really making far too much of this economic sovereignty line. It’s almost like a deal with the IMF would turn us into Vichy France. Clearly that is not the case and our EU partners are not about to invade.

    Any deal is likely to include sensible reforms (I found this instructive in return for a credit line.

    The IMF has no intention of crippling us, that is not what they are about. They will compel on us necessary changes which -for whatever political reasons- we have found impossible to perform ourselves.

    All this talk of loss of sovereignty is merely backing us up into a corner from where it will be difficult to accept any reasonable deal.

    I am all in favour of us looking at the possibility of a deal, as long as the outcome is openended. We might be able to struggle on without help (although I doubt it, as I feel sure that the 2 big banks have further losses to digest). But even if we think we can get by without this credit, it is still worth our while to secure it. Who knows, in 12 months time, Italy or Spain could be in serious trouble and the chances of any money being available to shore up irleand would be remote. If we investigate the prospect now, we will be able to negotiate from a stronger (admittedly not strong) position, secure funding that will see us through the next few years without having to rely on turbulent markets and at a time when Europe has the strength and interest to help us, rather than later when bigger MSs will be hogging the limelight.

    Indeed, many of the likely changes that the IMF would seek from us should be done regardless of whether we seek their assistance or not.

  49. Some of you gentlemen seem to forget that the NAMA Plan was to exchange long term assets—which the banks could NOT use as collateral for ECB borrowings – for liquidity instruments, which the banks were told COULD Certainly be used as collateral.

    But these NAMA liquidity instruments–bonds guaranteed by the state- are not acceptable to ECB. Nor are they tradeable in the secondary bond market. Therefore the banks have received from us, in exchange for their property, only useless paper. THAT’s the number one problem and the biggest contributor to our credibility gap.

    @ Grumpy…The ECB does NIOT accept ” all sorts of stuff as collateral “.

  50. @Michael Hennigan

    ‘The ECB simply must have concluded that this was a fiscal/country issue rather than its responsibility.’

    Therefore Dr. Honohan knew what was coming down the track.

  51. @ Ger

    Correct I feel AIB is the elephant in the room. Has been for some time. Until sorted, or more drastically killed off, we cannot move forward. EU opinion is moving away from too big to fail to now it is maybe time to let a few banks go to the wall.

    Step 1: Sort AIB and the banks. Has to involve some form of EU/bondholer hit to some degree. To have credibility we cannot sustain the burden alone on pure numerical terms.

    Step 2: Implement the budget correctly either by the IMF or our esteemed Govt (preferbaly with the IMF sitting on their face whilst its done).

    Step 3: Move forward as a country, at least then we may have some idea where we all stand.

  52. @Michael Hennigan

    “This unstable situation for the main banks is not good for the economy.”

    Yes that is agreed. It should go without saying that we need capitalised banks. But we have signed up to the euro which means we can’t devalue our way out of the mess (disadvantage) but we have a giant lender of last resort in the ECB (advantage). CEBS along with the ECB stress tested the two great white hopes – AIB and BoI and they passed using assumptions that in the main were far worse than pertain today. Unless the loss situation (solvency) has deteriorated since September then it should surely be the ECB’s role as lender of last resort to assist with any liquidity issue.

    @Joseph Ryan

    You may well be right about the action of our neighbours but given they have lent us (six Irish guaranteed banks) €100bn at end Oct and apparently last week alone €186bn was lent by the ECB with the majority reputed to have gone to Ireland, I’m not sure they can afford to toss us off any cliff. Without being arrogant about it, we may have become too big to fail (or be pushed anywhere).

  53. Is it just my imagination or have the ratings agencies been unusually quiet at this time of crisis? No threats to downgrade or anything like that. Not a peep out of them. Whatever can be the matter?

  54. @Jagdip,

    You make valid points, but the key problem, as I see it, is that Ireland is positioned as the ‘head’ of the battering ram that the market is using to extract some clarity and certainty from France and Germany on how they intend to wind-down the large, but largely hidden, losses in their banking systems. While the sovereign is fully funded for a number of months, ireland can probably sweat this out for a while, but it’s not the place to be and i can’t see the NTMA being able to re-enter the market at affordable yields.

    The banking story is being spun to provide the Government with some cover for its climb-down. The MoF started the spin today. It might make sense not to try and strip away this cover, as they might push the brinkmanship too far to protect their politcial hides.

  55. @ Johnny Mc

    its not all about the banks – correct. However, people will back us and give us the benefit of the doubt (at this stage) on the deficit, assuming the 4yr plan and the budget are “real”, verifiable, and permanent in nature. They know we really are working hard to bring it down, making painful decisions, and its an easier “concept” to understand and get your head around.

    However, in the last few months, the banking problems have flared up again, and its scaring the hell out of people. Its a much more difficult problem to get your head around given the problems banks have cuassed in recent years – how do you fix them without dragging the Sovereign or foreign banks down with you? The ECB doesn’t know how to get us off the liquidity addiction, and so they’re pushing it on to the political system, but the politicians don’t want to be writing politically and fiscally expensive blank cheques to us that Portuguese, Greek or Spanish banks may seek to replicate. And the Irish state is no longer capable of simply throwing another 5-10bn of capital at the banks given the difficult general fiscal situation.

    So everyone’s trying to come up with a compromise situation, which as you suggest, will need to (i believe) involve both a cheaper collateralised funding mechanism backed by the EFSF (L+200bps has been suggested…), as well as large capital top-ups for the banks via the NPRF, and an extremely aggressive approach taken to sub-debt, ala Anglo, to raise even more capital (though won’t this mean burning though the prefs at AIB?). Is it doable? Maybe, but only just. This is literally the last bullett we have left.

  56. @ Joseph

    expect the verdicts of the ratings agencies around a week or two after the Dec 7th budget – they’ll probably wait to see how spreads narrow in after the budget.

  57. @Eoin,

    Your fiscal and banking scenarios might work if (1) the costly and inefficient non-tradable sectors were not having a growth-destroying impact on the tradable sectors and will make deficit reduction more painful and (2) we could be sure that Ireland is not a proximate or surrogate target for the markets in place of their ultimate targets – Berlin and Paris.

  58. @Eoin

    Largely in agreement. And Libor (?) + 200bs would be fantastic — though seems too good to be true.

    One question: What exactly would the State use as collateral for loans from the faciltiy?

  59. @ John McH

    we’d basically step into what the ECB is doing anyway, so the same collateral the banks have right now (this may in fact stay with the Irish CB, rather than the EFSF, but it would be the ‘cover’ for a cheaper funding). Greek 5% funding was uncollateralised, so reducing this down to 4% (which is basically L+210 right now) via collateralisation is sell-able to the European politico’s. It would mean the ECB can normalise the standard liqudiity operations, and the Irish banks get a bit of longer term tenor on their funding, albeit at a more expensive price relative to the current ECB repo (which they’d still be using a good bit anyway).

  60. The almost 2 year slow-motion response to the banking crisis was inviting trouble.

    It took until Jan 2010 for the poor state of the loan documentation/securites to be discovered.

    Alan Ahearne and others were using an LTV ratio of 75% in 2009 in its arguments about value, when it was obvious to some of us that 25% cash was rarely being paid as a deposit.

    See the chart here tracking the crisis;

  61. @Jo
    “Start visualising a parallel domestic currency chaps.”
    Yup. Not just in Ireland. Perhaps we can have some of the experts gve us some guidance on what the effects of having parallel domestic currencies in some states in the eurozone would be? There must be examples from South America?

  62. @Jagdip
    I would respectfully take issue with this. The State has funding to mid 2011. It has a pension reserve which would generate €14bn if liquidated (€25bn at end Sept less €11bn invested/earmarked for AIB/BoI) which will get us to mid 2012. Even if privatisations were at firesale prices we should get to 2013 at which point we should have a c5% deficit and if we can’t secure lending at that, then the problem isn’t the State.L

    You ate forgetting interest and debt repayments. We have amount €4.5bn in bonds maturing plus about €10bn in bills and the EC, about €4bn in interest payments and we might also need €3bn in capital repayments for the promissory notes.

    That is a total of €21.5bn.

    Take the €24.5bn in cash at the end of September plus the estimated €11bn from the NPRF, would leave €14bn to the fund the deficit without borrowing. That is only 10 months from September

    Has anyone considered that even with a credible4 year plan that gets enacted plus the €50bn for the banks the debt we will have accumulated for a real economy of just €130bn

  63. @Eoin

    I think I may have misunderstood you. Are you taking about support that is aimed soley at the banks — hence the collateralisation, though with the State on the hook in some fashion. I am thinking in terms of direct funding for the State, some of which could be used to inject additonal capital to the banks.

    From the sovereign perspective, the idea is that a significant funding line at reasonable interest rate would provide a valuable support to the four-year plan in regaining market confidence.

    From the banking perspective, it is a two-part startegy to regain access to wholesale funding: (1) the ELG would again have value if the State is creditworthy; and (2) capital levels could be brought to levels the market is demanding. The banks could then wean themselves off ECB funding.

  64. “overcapitalise” the two main banks – would be a significant advantage in regaining market access;

    The banks were stress tested a short time ago.Nothing much has changed and now they need more capital. Something is wrong.

    Eoin Bond suggests using the NPRF but as someone else has posted they have about 14b with 11b already in the banks. The losses are massive.

    So we put the entirety of the pension fund into banks in the hope that they will prosper at somepoint in the future.

    Looks like a business plan NAMA would reject.

  65. @ John

    yes sorry – banks cannot directly access EFSF, so it would have to be routed via the State/CB.

    Using EFSF funds to recap the banks is also doable, but i suspect the government may want to say “we can recap them ourselves, but we want you to help fund them” – also makes it an easier sell in downtown Munich, as they wont be bailing out bondholders directly via recap (even though its probably their own savings involved!!). The big question would be whether a simple massive recap (as you have suggested) could regain investor confidence? May take a while to bring private funding back onto the table.

  66. @Dreaded_Estate

    Apologies, you did raise these funding outflows elsewhere and I should have responded to you there. However I was basing my estimate on the NTMA presentation from last week which I see has been removed from their website but the relevant page which sets out the funding requirements for the State over the next four years is at the link below but for 2011 they say the deficit will be 16bn, promissory notes will be 3.1bn and debt redemption of 4.4bn – ie a total gross of 23.5.

    Where do you get the additional debt redemption? I have looked at the NTMA site and they have a section for “government bonds” and there is a redemption schedule which just shows for 2011 “4.0% Nov 2011” redeemable in Nov 2011.

  67. @John McHale, Eoin,

    The difference as I see it between your respective big state recap and bank-focused recap is primarily political. The Government could spin the latter as a minute dolution of sovereignty to help stabilise the EZ; our EU partners would require the full involvement of the Troika for the former – and it would need to be seen to hurt to secure voter support in the core EZ countries.

  68. @hoganmahew

    Probably few here remember the now-defunct ‘investment’ rand & aud which disappeared in the early 80s.

  69. @ DE/Jagdip

    DE is referring to the tbill program which has 8-10bn outstanding.

    However, you are both forgetting the domestic demand for Irish debt. Even if foreigners refuse to buy Irish, local banks and funds will, a process which could (will) be augmented by changes to pension discount curve rules in the budget. Normal bond buying should comprise rolling over c.2 per cent of bank assets into domestic bonds annually (which would bring us to the EU average) so thats 6-7bn next year, and domestic pension demand could create another ‘new’ buyer foranother 8-10bn over the next 12-18mths.

  70. Separately, Enterprise Minister Batt O’Keeffe said he wanted to make it clear that what he said over the weekend in relation to talks taking place about the banking crisis was that he had been ‘unaware’ of any talks taking place.

    He said the same could be said of Minister Dermot Ahern.

    Mr O’Keeffe said he understood that anything that was happening was part of the natural partnership approach with other coutries.

  71. @D_E

    Perhaps the NTMA presentation was rubbish – I see that it has been removed from their website but I did save a copy of the PDF which I have substituted for the link on the blog entry linked to above.

    I see the maturity profile at the NTMA shows some €12bn redeemable in 2011.

    However their bonds redemption page (http:// w ww bondOutstanding.php remove spaces) confusingly says “treasury bonds” and shows only one redemption in Nov 2011.


    Agreed that there are other means for boosting funding and we should emphasise these in any “technical discussions”/negotiations with our friends from the ECB/IMF/EFSF/EU.

  72. @D_E

    Perhaps the NTMA presentation was rubbish – I see that it has been removed from their website but I did save a copy of the PDF which I have substituted for the link on the blog entry linked to above.

    I see the maturity profile at the NTMA shows some €12bn redeemable in 2011.

    However their bonds redemption page (htt p:/ / w ww .ntma. ie/Government Bonds/ bondOutstanding.php remove spaces) confusingly says “treasury bonds” and shows only one redemption in Nov 2011.


    Agreed that there are other means for boosting funding and we should emphasise these in any “technical discussions”/negotiations with our friends from the ECB/IMF/EFSF/EU.

  73. @ Jagdip

    i actually slightly underdid my numbers there. I believe most banks have an average of c.8% of assets invested in domestic government securities. Hence the 2% per annum rollover on an assumed 4yr duration. HOWEVER Irish banks, as we are aware, have been massively underweight Irish bonds in recent years, with AIB holding c.4.5bn and BOI c.1.5bn in Irish per the CEBS stress test results. This represents around 2% of their assets base, correct? So in year one, to get back to a normal European bank average, would require Irish government bond purchases totalling c.5.5% of assets = around 15bn.

  74. @Jagdip

    Cheers hadn’t spotted that page before.

    Looks of it the commercial paper program is maturing in 2010 rather than 2011.

    We are funded until precisely June so long as we have no payments on the promissory notes to make in the first half of the year.

  75. @Eoin

    Getting domestic banks to buy government bonds may be a good strategy to increase demand. But while they are shrinking their balance sheets it would effectively mean next to zero new lending.

  76. Simpleton,

    So two of the most senior members of Cabinet after the T and the MoF were not told that matters of concern to their portfolios were being discussed. It might have been wise to tell Ahern that the IMF might be coming and there could be civil unrest. Similarly, I would have thought that Bateen might be told that a core tenet of our industrial policy was under threat.
    I presume Minister Gormley was in bed asleep as per normal.

  77. @ DE

    some of it would be at the expense of other assets (corp/financial bonds, other EU govvies). I see now point in Irish banks buying corp/fin bonds, or any non-Bund (for a true liquid asset) eurozone govvies.

  78. FYI…from Twitter page of Editor of Biz and Finance Mag…what he’s heard…

    # interest rate still not determined. gov has been haggling on a number of key details ir being one of them

    # option of going near senior or sovereign debt not seen as option. ire would be shut out of markets for foreseeable future

    # bailout money will be thrown into banks to get them sufficiently capitalised. that doesn’t mean they will start lending.

    # the option of ECB providing a long term liquidity backstop for irish banks was ruled out by merkel as politically unacceptable.

    # 12.5% cor tax rate is likely to stay on the basis that EU does not want to be seen to be prescriptive given other states will need bail out

    # corporate debt markets are at lowest level of issuance in 15 years on the back of irish crisis. no choice but to accept bailout

    # the visit by IMF/EU/ECB officials was organised last week ie tues 9th nov

  79. Eoin,

    last point is interesting. Rumours of an indeterminate amount of money at 4% were doing the rounds in Leinster House last week. It appears the bulk of the Cabinet did not hear them.

    How do you throw 3 year money into banks as equity. Is that not a CFD in another guise.

    Why is Merkel ruling out a liquidity backstop on the part of the ECB. I though that the ECb was a) indpendent and b) a lender of last resort. It looks like the ECB no longer wishes to carry out its mandate.

    I bet the nerves are calmed for a few weeks before the bond vigilantes go looking for a stagnat economy, with a tottering banking system,a dependence on wholesale funding.

  80. @ Brian O’Doherty

    I suppose it depends on what you mean by “all sorts of stuff”; for me that’s reasonable shorthand for what has been going in – all the way to BBB with varying haircuts

    Stuff put forward as collateral from 2009 data:
    30% uncovered bank bonds
    23% ABSs
    covered bonds 13%
    non-marketable instruments 13%

    They have been trying to have a go at weeding in the peripheral ABS using the last bit of:

    “The Governing Council recalls that, if required, the Eurosystem has the possibility to limit or exclude the use of certain assets as collateral in its credit operations, also at the level of individual counterparties.”

    My reading of it was that they had signalled enough of being stuffed with stuff, a few weeks ago, when they started referring to “addict banks” in the periphery.

  81. This actually boils down to the interest rate.
    If it’s not good enough we should overthrow the government, default and walk from the Euro in that precise order.
    You see I think Lenny’s got one of those inferiority complexes from studying in London. He’d only be too happy to sell his serf subjects back into the claws of the UK.
    I know we try to refrain from personalizing things on this site but I think the word for somebody who continuously exagerates things is hyperbolical. Or some might just cut the al and end it with an x

  82. It would seems that you only ever had 2 choices with the banks extract all losses and fully recapitalise or close them down. The deusional and continually reinvented ways of fixing them as proffered by the Govt and supported by many academics. Mr Honohan , Mr Ahearne et al have cleary only made a bad problem worse.

  83. The way I see it, 150 billion is required to get the ECB off our backs:
    100 bn in ECB repo (I am presuming the other 30 bn is Depfa and the Landes)
    34.5 bn in Irish Central Bank repo
    20 bn in Irish sovereign bonds that the ECB is reputed to have bought (though I have no idea if some of them are rolling short maturity).

    As Morgan Kelly has already alluded to, this will have to be cheap money, since ECB repo money (even at the marginal rate) is under 2%.

    There’s not much point in the state taking on another bill from the EFSF to subsidise the banks even more.

    I am presuming all the 150 bn is required as that appears to be the amount that has left the Irish banking system in deposits and bond redemptions.

    I am also presuming that the state will set up some form of SLS with the money to allow ‘Irish-repo’ for the domestic banks, probably with a penalty rate? (to avoid market distortions). Either that, or the state ‘buys’ bonds from the banks of various durations to provide funding that way.

    The worst outcome would be to just bung the money in, buy more bad assets with it, or buy more equity.

    And all this just to keep the banks in the current persistent vegetative state they are in.

    Alternatively, they could just close all the banks down, pay everyone back (who didn’t want to be sold on) and sell on all the bits, using An Post and Ulsterbank as a basic banking infrastructure until it was all worked out.

  84. DS,
    Define radical
    Tell me who will champion that version which you define
    Then ask the electorate



  85. hogan,

    Lets assume your numbers are correct. The ECB accepts what it defines as eligible collatoral. It is its definition. It either takes Irish paper or it does not. If it tightens up on the criteria and the Irish banks have no other avenue to obtain liquidity in the private market, then they fail. That has conseqences for us and for the ECB. Both parties are dancing toward the cliff edge. Who blinks first?

    It seems to me that the ECB is trying to opt out of its role as a lender of last resort and as an actor in the regulatory process. It cannot withdraw liquidity and simultaneously hope to avoid the spread of contagion in the Eurozone.

  86. @ Tull
    Perhaps the ECB has had it with the Govt’s vegetative speed in dealing with the issues.
    Its not like we tore the arse off it, is it…

  87. @Tull
    Mr. Weber, I believe, was again stressing recently that exceptional liquidity support would be withdrawn Q1 next year. I think the ECB can quite easily withdraw this support if there is another mechanism in place. The rest of the eurozone banking system seems to be reducing its reliance. Perhaps enough so that periodic liquidity tender operations will be enough.

    Having said that, we amount to only ( 😕 ) 25% of ECB liquidity support so there are clearly others sucking at the teat. Whether they would be able to get, albeit more expensive, money elsewhere is what is at issue. It appears that the Irish banks are solely reliant on exceptional liquidity support from both the ECB and the ICB.

    Would the Irish banks represent a distortion if they bid at competitive tenders? Perhaps so, as they appear to have no other means of support. It is not so much ‘cheap’ money for them as ‘only’ money. In addition, if the ECB reckons that in general there is enough liquidity, it may not hold tenders at all for some period. This would leave the Irish banking system permanently lurching from one rollover crisis to another.

    What would normally happen with banks that require recourse to the lender of last resort on an emergency basis because they are unable to raise cash otherwise? Remember, when Northern Rock first went looking for support in 2007, the BoE wanted to keep it a secret because of the negative consequences on market perceptions. Likewise with the US banks and the Fed. (it is still the case there I believe). In the case of Northern Rock, the negative perceptions spilled over into a full-scale run and it was taken into administration.

    The alternatives for the Irish banking system are, as I see it:
    1. Arrange a longer-term source of funding (as emergency funding cannot be long-lasting).
    2. Enter administration.

    I don’t see other alternatives.

    I too believe that the ECB should be managing this situation; that it should be regulating banks more closely. This would, however, require some measure of unanimity. Until one of the bigger countries gets into trouble, it is not going to happen.

    Likewise I believe that the ECB should have resolution authority and ‘taxing’ authority over financial transactions that take place in the eurozone to fund the resolution. It and it alone should be responsible for bank resolution, it should fund it and it should provide deposit insurance/collect premia. These would appear to be the normal functions of a Central Bank apparatus (whether directly under the ECB or some sort of co-functionario – the evidence from Britain is that it is preferable for it to be directly under the Central Bank, not separate to it).

    None of these are new opinions for me. Indeed, some of them are also old for you…

  88. Kieran O’Donnell just said that the three Wise Men of the EU, IMF and ICB won’t be bringing any gold or ‘mirth’…

  89. Hogie,

    God, I was so innocent back then. So the ECB should either keep a)extending liquidty because they believe market is wrong in doubting solvency b) use it moral suasion to put them into administration and wind them down. What it should not do is try to pass the parcel onto some other supranational body and say “not my problem”.

    Putting them into resolution, might lead one to conclude that there might be other black holes out there.

  90. Tull

    When I said “Radical” Political Reform . I mean considerable and substantial reform, I do not been unlawful.

    What I believe is that you must isolate the local vote over the national vote. So that if an election was called in the morning you could vote for 1 candidate to represent your area in the dail and another vote for a government of the state. Look at the Donegal By election , the only governments are formed in Ireland is through an aggregate of all that nonsense, a candidate is compromised by local v national, inter parliamentary and inter party conflicts and only those who intentionally play the game, partake in the charade and put their own ambitions over the national interest can suceed. The results are all around you.

    In short I am saying a strong government elected directly by the people who are answerable to a parliament liberated from the party whip system.

  91. @tull
    “So the ECB should either keep a)extending liquidty because they believe market is wrong in doubting solvency b) use it moral suasion to put them into administration and wind them down. What it should not do is try to pass the parcel onto some other supranational body and say “not my problem”. ”
    Eh none of the above.

    The ECB doesn’t believe 1) (who does?), it is, I believe, trying to force 2) and 3) which you do not number is exactly what it should do since it doesn’t have the authority itself to do anything about it (and nor, for domestic political reasons in many states is it likely to be given it until something ‘big’ happens).

    If the ECB doesn’t believe 1) then it is no longer a temporary liquidity issue. The lender of last resort role than needs to pass on to the relevant authorities who can make it happen. As far as I can see, only the Irish Central Bank can place an Irish bank into administration/liquidation. The ECB is not permitted to fund the Irish Central Bank directly, so the funding has to come from elsewhere. I am presuming that EFSF bonds are acceptable with low haircut to the ECB for repo, so they will be money good in a way that NAMA bonds, promissory notes or even Irish sovereign debt no longer is, that is, they can be traded for cash to repay depositors and bond holders.

    Is this a wind-down for the Irish banking system we are seeing? I begin to think so.

  92. David,

    I thought you might say that. That is classic top down Irish Times op ed baldersdash. The people are sovereign. They elect the type of people they want to represent them. Indeed in multi seat constituencies you can and do get a mix of legislators and ward heeelers.

    I suggest that if you want a technocratic, renaissance man parliament you change the electorate.

  93. The banks must be dealt with with sufficient finality credible to all involved. Anything less will fail. Debate the intricacies all day long but there is a huge bill to be paid, the Irish State cannot pay it all on its own depsite the best efforts of the FF government and it is really a matter of deciding who is going to pay what. All need to make compromises. I hope that the costs are apportioned in a fair and constructive way with all involved focused on a solvent and prosperous Ireland in a solvent and prosperous EU

  94. @HoganMahew.
    The alternatives for the Irish banking system are, as I see it:
    1. Arrange a longer-term source of funding (as emergency funding cannot be long-lasting).
    2. Enter administration.

    As they say in this locality——spot on.

  95. Tull

    The electorate are solvent but I do not agree that all now elect the people they want to represent them on a national level. If I vote in my constituency, there is an initial conflict between what might be of benefit to the local area (an established cabinet member) or what might be right for the country (an independent with views I support). I have to chose the local over the national and furthermore I know that my vote and the vote of the electorate is only half the deal for after the votes are cast it is the conflict of inter-parliamentary and inter-party bargaining that will then select the individuals to make the critical decisions. This system has failed us.

  96. @ Grumpy

    Thanks Grumpy (your post at 8.38)

    It certainly seems like a lot of strange stuff. But where do you rate the NAMA bonds in this matter…Were they not conceived as a means of providing ECB liquidity into our banks?…and..are they “fit for purpose”?

  97. While trimming down the number of TDs might increase professionalism, a national list system as suggested in some quarters would be a disaster. List systems shift power from the electorate to political parties, specifically the party leaderships.

    The best reform would be a thorough reworking of local government: 10-20 local governors, councils with powers of oversight and eliminate the county managers. This would give potential ministers administrative experience and liberate regional politicians from central party control. TDs are mostly useless. If local politicians weren’t so beholden to the whips and party leadership, there’d be more variety of thought and opinion.

  98. Hogan,

    I think we are going to see some interesting things which would work for Ireland in isolation.
    a) capital stuffed into BOI -another 2-4billion to endeavour to make it fit for purpose
    b) the resolution of AIB including imposing losses on subbies and the sale of the UK operations and the recap of the Irish ops
    c) the provision of a term funding back stop
    d) the provision of a backstop for the public finances
    e) the sale of EBS to Wibur
    f) resoultiion of the Permo-have not a clue how to do it &
    g) a credible fiscal adjustment

    All of this might fix the banking system here if we were an isolated case. Rates would come down, funding costs would come down and the banks would have capital and liquidity to operate again at some level.

    Now the problem is that the world will likely move on to rake over the Spanish banking system. What is the real level of loan loss in a sytem with stagnant GDP, 20% unemployment, 50% house price depreciation. It is not 5% NPL. Try 2-3x that.

  99. How is borrowing via eu-imf bailout for banks supposed to restore the sovereign’s access to debt markets? Though it does sound like a strategy a garlic junkie would concoct.

  100. David,

    I am fighting on two fronts. I have tallied for close on 30 years-more fool me. In allof the counts that I have ever watched, the people with the most votes (= transfers) usually win. I kind of thought that was a definition of popular will.

  101. @tull
    Yep, I agree with a) to g) as the likely plan. Don’t forget immediate closure of Anglo and INBS too. I think BoI will require a tad more. Double figures probably in long-term bonds ‘bought’ by the NPRF for funding, high single figures for capital.

    One of the issues with attacking the Spanish banking system is the size of it. It is quite big. Some of the banks appear successful. It does not have the same apparent weaknesses. Perhaps I’m insulated by language, but then so is much of the chattering internet…

  102. Ahura,

    Fair point. Unless you are talking about borrowing money for three years and investing in the equity of a bank and hoping that you will be able to realise your investment in that period and pay the man back. It looks like a CFD to me.

  103. @Al 10:19
    You wrote just over an hour ago:

    “Highly, highly recommend that you read the first few blog posts on the Guardian link.”

    And yet no response from the blogging community. Do commenters on this blog just flick thru the threads to vanity-check the progress of their own hobby horses?

    Reading WhistleblowerIRL’s eye-opening, belief-beggaring blog posts should be mandatory.


    I resigned from my position as the risk manager of a foreign bank operating in Dublin in 2007. We breached minimum liquidity requirement by BILLIONS of Euro on a regular basis. I made sure the Regulator was notified at least on one such occasion.

    I have brought the matter to the attention of several senior TDs (MPs) and Senators at all the major political parties; alas, silence prevails.
    Whilst the catastrophic over-night breach that I had reported to the Regulator could have been theoretically remedied immediately, it is virtually impossible for it to have been a ‘once-off’ event, had we been abiding by the terms of our banking license. Chaos prevailed and by the time the Regulator’s team arrived for a scheduled audit, they made sure that communication with the London consultancy whom I had brought-in to sort out the mess, was promptly cut-off. By then, I was no longer attending the office, but was on ‘garden leave’.

    Although my position had been confirmed by the bank’s board of directors only shortly before my resignation, and my resignation clearly stated that it was due to integrity issues at the bank, the Regulator’s team made no attempt to contact me then, or at any time since then.

    Scroll down to comments section at:

    Anybody listening out there?

  104. @ Hoggie

    the big two or three are good banks (Santander, BBVA), but the Cajas are like our bad credit unions on steroids. If we had a true estimate of their losses, the Spanish banking system wouldn’t look all that disimilar to ours. Ditto the Landes in Germany. But at least those countries have some big and genuinely solvent large banks to fall back on and to act as some sort of anchor for the financial system. We never had one of those unfortunately. (for UK read Lloyds, for France read BNP, for Holland read Rabo…)

  105. @Tull

    ‘It seems to me that the ECB is trying to opt out of its role as a lender of last resort and as an actor in the regulatory process. It cannot withdraw liquidity and simultaneously hope to avoid the spread of contagion in the Eurozone.’

    Agreed. This appears to be the catalyst for our current predicament. As Hogan has pointed out we need 150b to get the ECB off our backs. Replacing 1% money with 5% money will not solve the problem of ‘addict’ banks being zombies unfit for any normal purpose.

    The only solution I can see is that proposed at no.2 on hogan’s post.

    Interestingly the French and Germans have in the past got considerable debt forgiveness from England and the USA.

  106. Peter Power -half car for Foreign Affairs. It seems we gave up our sovereignty in 1973 when we joined the Common Market but inviting in the IMF is a sign of our sovereignty (the one that we don’t have presumably). Hwever,I thought we did not invite them in.

    So we are not sovereign, yet calling in the IMF would imply we were sovereign but since we did not call them in we are not sovereign. Ah I got it know, I think.

  107. @sapient ones

    Is it really likely that any Irish bank rescue involving neither senior bank debt haircuts, nor serious amounts of free money (not loans) from abroad, is going to properly fix the problem? Never mind the blowback from problems in Spain or elsewhere, can such a fix-up really survive the coming round of unexpected surprise disappointing housing news? And in the meantime, how well will it convince investors? I suspect that Mr. Market now shares my cynical belief that a stable Irish banking system, like fusion power or a united Ireland, is always another twenty [billion euros|years] away. (In which case, maybe it really is mostly about the banks after all?)

  108. It really is all about who pays. As I see it there are only three groups of potential payers (A) Irish taxpayers, (B) Bondholders of Irish bank and sovereign debt, (C) Non-Irish EU Member State taxpayers. I don’t include the ECB here, since while they could continue gathering up poor quality collateral, at the end of the day any ECB balance sheet problems would become the problems of Group C – i.e. Member State taxpayers would have to fund recapitalization of the ECB. I guess the ECB could also just print money and monetize the debt but that won’t happen anytime soon.

    I think nearly all the current events can be explained by political moves to ensure that it is group A that pays to the maximum extent possible. Group B is protected until 2013 and then the rules change. A default, i.e. failure to pay Group B, will mainly be passed along to Group C, since each state will have to recapitalize its own banks as long as the no bondholder left behind rule applies. The English and German popular press need to be reminded that the Irish ‘bailout’ is a mechanism to facilitate a wealth transfer from Group A to Group B. Group C are just intermediaries and will actually make money in the deal, assuming no defaults. Tougher ECB liquidity rules reduce Group C’s exposure at the expense of Group A.

    Since Ireland cannot raise money either for government borrowing or bank funding at reasonable rates, a source of cheap money has to be found to lend to Ireland to keep the ball rolling long enough to extract all the necessary money, in the long term, from Group A. If the money for this bailout/loan is not found then Groups B and C will take the hit when Ireland defaults, so it will be found, and most likely will be paid back in full, with interest.

    It is basically a “you broke it, so you pay for it” situation. There is no debt forgiveness anywhere in the picture until 2013, and even then any new rules probably won’t help much as it will only apply to (and increase the cost of) new debt, and not to the €200bn Ireland will owe at that time.

  109. A minor point in the overall scheme of things, but I am highly sceptical of this

    # corporate debt markets are at lowest level of issuance in 15 years on the back of irish crisis. no choice but to accept bailout

    There was an FT article “Europe and US bond issuance taking split paths” on this topic a while back. Ireland, or the PIGS, or sovereign debt are not mentioned at all as reasons for low rates of corporate debt issuance.

    Sounds like a talking point that you might use to ‘encourage’ someone to accept your kind offer even though it has no basis in reality.

  110. EU Officials Fly to Dublin as Talk Shifts to Government Bailout

    “We are in the end game,” said James Nixon, co-chief European economist at Societe Generale SA in London. “A bailout is desperately needed, not just for the sovereign but for the banking sector.”

    The mission to Dublin has eased investors’ concerns about Ireland’s fiscal prospects. The yield on Ireland’s 10-year government bond fell 13 basis points to 8.327 percent yesterday, cutting the spread over equivalent German bonds to 551 basis points.

  111. Bryan G

    ‘if the money for this bailout/loan is not found then Groups B and C will take the hit when Ireland defaults, so it will be found, and most likely will be paid back in full, with interest.’

    Where do you think it will be found?

    With ECB screwing up existing source of cheap money and/or unwilling to continue funding banks it would appear that the only currently existing source of cheap money is closed to us.

  112. @ceteris paribus

    I believe the money will be found since the strong EU countries can still borrow at reasonable rates (e.g. 3yr German rate is 1.17%), impose a markup and hand it over. Overall the EU is in a stronger fiscal position than the USA or Japan, though this may change as the bank problems unwind. There are lots of foreign reserves in Asia looking for a good home. Now obviously it isn’t just Germany and the composite EU rate will be higher but it should still be reasonable.

    It is clear that the EU Commission thought that the Irish budget a year ago in 2009 was a work of fiction in terms of projections into the future. Their own assessment (in March 2010) was that Ireland’s debt/GDP ratio would grow linearly without bound and hit 200% by 2018. The EU’s patience ran out when the true Anglo/INBS numbers surfaced in the Summer. Since then the EU Commission forced a 4-year budget planning cycle with an annual review; the ‘adjustment’ jumped to €15bn; the ECB money tap is being turned off; and the bailout means that the EU/IMF will be formally involved in structural reform. They believe that there is a better chance that Group A will pay all the money back if they have this formal involvement in the decision making process. For example they will no doubt be able to control the growth rate projections which are a key part of the whole process in figuring out what ‘adjustments’ are actually needed.

  113. It seems the government were not merely incompetent and probably fraudulent in their dealings with the banks since 1999, but completely misjudged NAMA and recapitalizing the banks.

    It is all about the lack of government, as Chow and Lie admits on another thread, this indicts the permanent public service as much as their masters.

    Corruption has flourished and until it is stamped out, more bad news about the banks and government is highly likely. This is only the beginning of the bad news as the economy will be crushed.

    The people get the government they deserve!

  114. Joseph Stiglitz was right when he stated in Chicago a week ago that the Irish gov’t was so entangled with its supporters that it was incapable of determining what was in the national interest from what was in the party’s and party’s supporters interest. He went on to say that the solution does not lie with the incumbent gov’t. As sound an assessment of the predicament we are in as I have seen anywhere. Time to stop the fumbling, bumbling, dreaming and fantasies, now is the time for an election. Out of the mouth of a Columbia University professor comes the truth and the solution.

  115. In Brian Cowen’s latest campaign to demonstrate that the bank funding currency problems and euro issue problems that are affecting Ireland are separate from the fiscal problems, I hope nobody tells him what his Minister for Finance said on Sept 22 to an Oireachtas committee:

    […] the difficulty with the guarantee is that the vulnerability of the banks becomes apparent and the world markets see the banks are tied to the sovereign. The reality is that in a small country like Ireland, it is entirely unrealistic to think one can detach the banking system from the sovereign. That is the other crucial point. It is very difficult to distinguish the two.

    I guess those currency problems are like the volcanic ash cloud. It affected Ireland and other countries as well. Nobody could have forseen it. However we’re working with our European partners to alleviate its effects. Got it.

  116. To continue Kieran O’Donnell’s seasonal metaphor:

    To some they will be 3 wise men, doing what needs to be done.

    To some they will be 3 shepherds, protecting us from the wolves in the markets.

    To some they will be 3 kings, seizing our sovereignty to rule us.

    Personally, I prefer the first.

  117. Tull,

    I was just making the point that an eu/imf “bank only” bailout does not seem plausible. I’d think along the lines of funding for 3yrs and additional bank capital.

  118. @ grumpy

    ” The difference is who take the risk.

    ECB as lender of last resort accepts all sorts of stuff as collateral for lending to the banks. Come January they will have had enough and consider themselves full of Irish property related credit risk.

    If the Irish state borrows money to lend to the banks, or invest in them as owners, then the risk is bourne by the Irish state., which has a liability to repay the money it borrowed from other states. ”

    I thought it was a given on this site that both banks would end up nationalised. In that case are we not stuck for any bank borrowings anyway. Are we not stuck for bank borrowings anyway , whether the borrowigs come directly from the ECB or indirectly though the state borrowing European money ?

    Its like there are unstated assumptions that the experts do not advert to in front of the children.

    Disputing who borrows , the banks or the state can only matter if you are leaving open the possibility of letting a bank fail. Is this too simplistic ?

  119. Jagdip Singh

    I think it is going rather well. Frau Merkel was spot on her mark and spoke clearly. Message delivered. Please remember that this GFC has been known about for over 10 years, and even by economists for 3 years. Plans have been made but of course, not in Dublin!

    Brian O’Doherty Says:
    November 17th, 2010 at 3:45 pm


    seafoid Says:
    November 17th, 2010 at 3:53 pm


    Paul Hunt Says:
    November 17th, 2010 at 5:03 pm

    Yes! But the truth is going to come out soon enough.
    Reform of government is likely, again, with some face saving.

    David Sherwin Says:
    November 17th, 2010 at 8:57 pm

    Carolus Galviensis Says:
    November 17th, 2010 at 11:31 pm


  120. The Grauniad pieces are not a surprise. I predicted these defects and the whistleblowing a year or so ago.

    I have said that corruption is firmly rooted in the civil service. I was gently admonished by a firend, now dead, that I might be honest in giving my testimony, but that they, the other side, were honourable.

    The events we are seeing now will recur! More problems with the banks will be revealed. The IFSC is the elephant in the room. But “ordinary decent” banking will still produce a few more shocks. I wonder will the money laundering come to light? I would not be surprised to see some “banks” from the IFSC, walk out the door some Friday and disappear….

    More taxes as the budget will not impose enough, given the rate of collapse of the bubble economy, which has been artfully maintained by borrowing to fund eg bank employment!

    Christmas may be fun for some…..

  121. I’m testing to see if this comment arrives. It was submitted as a comment to “nama bonds at the ECB” by Gregory Connor today, but his blog will not take the comment…So, here goes..

    The state/taxpayer was never at risk in the NAMA scheme, if only because there is no firm date for redemption of the bonds.

    They were written and presented to the ECB in either a fraudulent or ignorant manner…either our officials did not understand ECB repo mechanisms or they did and fooled the ECB (and our banks)

    As I have said before in this blog, you should study the Term Sheet for the NAMA bonds. There is no capacity to redeem them “at maturity” and there is no firm commitment to ever redeem them other than for more bonds.

    So, our government “guarantee” for these bonds is actually a guarantee of nothing. I figure it took a few months for the ECB to twig this and one can imagine how angry they now are. The result is we are driven into the IMP, in truth.

    Its an outrageous scandal, and a very severe embarrassment for Ireland–and no journalists have picked it up. I have written about it before:

    The State should now return their property to the banks. Given the present facts, the NAMA scheme is theft of private property by the State.

  122. @Bryan G

    The motivation may be less “you broke it, so you pay for it” (for anyone paying attention knows that we didn’t break it on our own) than “we’ll do what we can get away with” or “we don’t want to open the can of worms by trying an alternative”. Secondly, you need to add groups B’ and C’, composed of groups B and C respectively at some point in the not-too-distant future. It may be one or both of these groups that is really being fitted up for the bulk of the losses here.

Comments are closed.