Many commentators have used the idea of “vicious cycles” or “feedback loops” to understand the virility of the financial and economic crisis. (A nice example is this influential piece from last year by Larry Summers on the American situation.)
This schematic attempts to capture some of the feedback loops operating between the Irish banks, public finances and growth. One way to think about it is to view all three as facing some nasty headwinds. For the real economy, growth is retarded by an impaired credit system, budgetary austerity and various multiplier/accelerator effects that intensify the recession. For the public finances, it is harder to stabilise in the face of costly of automatic stabilisers, bank bailout costs and a self-fulfilling loss of creditworthiness as the risk premium on Irish debt rises. And for the banks, they are strained by falling assets values, lost credibility of government guarantees and a slow motion run on wholesale deposits. Everything seems to feed negatively on everything else.
The adverse dynamics became overwhelming in recent months and international assistance has been required to prevent an effective collapse of the Irish economy. The “bailout” means that the Government has time to implement a phased deficit reduction rather than face a sudden stop of funding, and the banks have access to recapitalisation funds and continued large-scale funding from the ECB. This helps to ease some of the most virulent sources of negative feedback.
The question now is whether it will be enough. While in no way meaning to minimise the challenge, I think it is worth pointing out some potential sources of resilience in the system. On growth, there are encouraging signs that despite severe headwinds the real economy is holding up surprisingly well (see here). With capital spending 16 percent below profile, this is happening despite a fiscal adjustment this year that is not that much smaller than the €6 billion adjustment that the economy will have to bear next year.
On the banks, a key point of contention is the likely future deterioration in loans, and especially mortgages. Time will tell whether the resilience view of Elderfield/Honohan or the mass impairment view of Kelly/Matthews is correct.
On the public finances, the key resilience factor is the capacity of the political system to generate the necessary primary budget surplus over the four- to five-year timeframe. The coming months will be especially revealing on that score.
93 replies on “Resilience”
FYI – I’m getting an error with the link to the schematic – page not found.
ditto on the error
It says “Sorry, the page (or document) you have requested is not available. Please check the address and try again.”
“While in no way meaning to minimise the challenge, I think it is worth pointing out some potential sources of resilience in the system. On growth, there are encouraging signs that despite severe headwinds the real economy is holding up surprisingly well (see here). With capital spending 16 percent below profile, this is happening despite a fiscal adjustment this year that is not that much smaller than the €6 billion adjustment that the economy will have to bear next year. ”
It would seem that the internal trade system which has seen hundreds of small business closures, trades that kept the citizens in employment and the normal domestic economy going, is where the depth of this crisis is hitting – thousands of emigrants who also for some months of their new exile have to receive savings from parents left at home, people who kept this entire country bouyant, and better represented to the tourist the image of the Celtic Tiger than any of or rich elite with their personal entertainments – this is the sector already really suffering and now set to suffer on this budget plan.
Forgive my ignorance, but isn’t the level of deficit spending, as well as the rate of change, of importance here?
While the noun ‘resilience’ is not a very common term in the Irish vernacular, the adjective conjures up the image of a deluded financial regulator, in the aftermath of the issue of the bank guarantee, assuring the public on the ‘resilient’ banks.
Ireland, Greece and Portugal account for 5% of Eurozone GDP, Spain is at 11%.
Trichet said last Thursday that the consolidated forecasts of the Eurozone deficit to GDP ratios for 2010 and 2011 were better than other major advanced economies despite the turmoil.
In 2010, the ratio for the Eurozone will be 6.3%, 11.3% for the US and 9.6% for Japan. The forecasts for 2011 are 4.6%, 8.9% and 8.9%.
Germany of course is the growth engine and Ireland is among the EU countries with the lowest ratio of exports to that market:
Irish indigenous exports are of course a lot lower.
According to a recent Credit Suisse report, total bank losses in Spain, Greece, Ireland and Portugal have so far been about €140bn — or 8% of GDP. CS set those figures against historical banking crises and estimated that the peripherals still have about €350bn of additional costs to go through, or 22% of their GDP.
What is important to do in assessing remain risks at Irish banks, is to look at the exposure on large non-property loans e.g Quinn, Arnotts etc.
Over 1,500 Irish companies will have collapsed this year by the end of the month; the increased corp tax from the FDI sector is welcome; the recovery in the UK is welcome as is the lower euro.
As for the “the capacity of the political system,” to deliver, that all depends on what portion of the electorate want to have their cake and eat it; in the US a do-nothing Republican Party won the mid-terms and Eamonn Gilmore may well become taoiseach on platform of waffle and aspirations.
At least, the IMF will also be in Merrion Street.
‘..and the banks have access to recapitalisation funds and continued large-scale funding from the ECB. ‘
I would question the assumption that continued large-scale funding from the ECB. is guaranteed.
We all saw the result of the threat by the ECB to withdraw liquidity. The war between Weber and Trichet is not over.
Only a guarantee of continuing liquidity written into the Memorandum will restore confidence that our large banks can survive. Traditional solvency measures mean nothing at this juncture.
When you start citing Larry Summers, you know all is lost.
The people who have been right so far believe we will have to default now on bank debt, or default on sovereign debt/be rescued in the next few years. The people who have been wrong so far or fairly silent believe we won’t. Apparently the country that has suffered the worst recession of any advanced economy since WW2 is now going to overcome its debt mountain, negative equity, bust banks and huge deficit to generate 3% GDP growth a year, presumably similar taxable GNP growth, and…a budget surplus! Even if we do we will have no NPRF, huge debt, have flogged off the semi-states at firesale prices and endure greatly diminished standards of living. We’ve lived through some very interesting times in recent years. If the wrong/silent types are correct the next five years will be equally eventful. I hope they’re right with their belief in a historically inevitable recovery, as it is the path that the FF/FG/Lab/GP establishment have been pursuing. Seeing as FG/Lab have acquiesced in an agreement with a secret bank letter they really can’t complain in future about FF hiding information from them. I wonder was it at the opposition’s insistence that there be no vote on the Dail bailout? It would have put them in the embarassing position of voting against it and then later accepting it. SF are increasingly seen as the only major party who can be believed when they say they oppose the bondholder bailout. That’s a shocking indictment of FG/Lab.
“While in no way meaning to minimise the challenge, I think it is worth pointing out some potential sources of resilience in the system.”
This is a crucial point.
One can ONLY build effectively on strengths. This is true whether we are speaking of a building, a person’s personal development, or our national economy.
We have to identify our national strengths from a realistic perspective. (Not a government spin perspective.) Our strengths might include certain national resources, cultural traditions, national qualities (e.g. verbal skillfulness among some), agricultural knowledge base, certain manufacturing know-how, logistics know-how, etc.
We need to understand and build on our existing strengths, those that have developed strong roots over an extended time period.
We shouldn’t count on importing strengths from outside as they can too easily pick up and go elsewhere, or the price might be hidden or too high. It’s ok to import new strengths, but it shouldn’t be our primary strategy, and we shouldn’t expect too much from them or become overly dependent on them.
Holbrook and Hugh,
Apologies for my technical imcompetence. I would be grateful if someone could let me know if the link is working now. There is also an addiitional link to the schematic at the end of the post.
Both links working now. Cheers. Now, if only govt departments would post more pdfs online instead of requiring users to download them and also have documents with clickable tables of contents (a pet peeve of mine in our knowledge economy).
I would say that the fiscal correction is partially cumulative. The economy does gradually adjust over time to past fiscal contractions, say through larger reductions in prices and wages and a corresponding increase in competiveness. In other words, the fiscal adjustment induces structural adjustments in the economy. These adjustments appear to be taking place.
We should also recognise that there are natural corrective mechansims that tend to work to pull an economy out of recession over time. In the early stages of a recession, the dynamics tend to work against you: loses in confidence, multiplier effects, financial accelerator effects, etc. But as the recession progresses, postponed spending decisions begin to work for you. Based on the bits and pieces of information we are distilling about the real economy, these recovery forces seem to be — surprisinlgly –holding their own against the contractionary forces of the fiscal adjustment, etc. The hope is that will continue into next year, with maybe the recovery forces even beginning to win the battle.
Of course, none of this is guaranteeed in the least. The fear of a “lost decade” is really the fear that the contractionary forces win out over a prolonged period, or at least hold the recovery to a draw. This possibility seems to be more pronounced with a balance sheet recession of the kind we are experiencing, so I understand where the growth pessimists are coming from. My point is simply that with all the gloom, there are signs of resilience (sorry Michael!) in the real economy.
Link at end works.
On ‘BANKS’ uncertainty re ECB changing present Policy [on which we take big hit] of ‘quieten us quickly’ … ‘events, dear boy, events ….’ big euro-bond [plan b] or cut seniors throughout [plan c and what should have been Irish plan a … plan b more probable so we need to figure out how to get a wad of irish banking system into it …. quid pro quo re providing more time to Jean-Claude to figure out how and to convince politicoes, and we avoid a full sovereign default.
Thanks Holbrook and David. I would like to think it was worth the wait — but it really just puts some widely discussed mechansims in one diagram.
“Based on the bits and pieces of information we are distilling about the real economy, these recovery forces seem to be — surprisinlgly –holding their own against the contractionary forces of the fiscal adjustment, etc.”
How important is a distinction, within the real economy, between the FDI part of it (I gather that’s the modern term for multinationals) and the domestic part? Are the two parts (if they exist) progressing at the same pace? Or if the domestic is lagging, would it be worth stimulating in some way (without falling into the errors of the past or relying overmuch on the, er, smart green economy stuff)?
“The “bailout” means that the Government has time to implement a phased deficit reduction rather than face a sudden stop of funding, and the banks have access to recapitalisation funds and continued large-scale funding from the ECB. This helps to ease some of the most virulent sources of negative feedback. ”
Ease, or just slow them down so that the perceived volatility that might make politicians and public get real about reform, never emerges.
It kind of looks as though the point of the Labour administration likely after the election is going to be to prevent real reform. All they will do is tax the accounting, legal and other professions a bit more. Any amount of money will be borrowed to sustain all aspects of Croke Park (except the one about unforseen economic circumstances).
I suspect a morphing of bailout of the banks into bailout of the civil service.
GOOD NEWS IN P&L OUTWEIGHED BY BAD NEWS ON BALANCE SHEET
While there is good news on the underlying economy there will be continuing bad news on our solvency as long as property prices continue to decline.
In short, improvements in our annual revenues and expenses (Profit & Loss account) are being swamped by catastrophic deterioration in our assets and liabilities (Balance Sheet).
Back in 2007, Bank of Ireland did a study, “The Wealth of the Nation”, which concluded that we in Ireland were the second wealthiest people on the planet. That report estimated that Irish private sector wealth amounted to €945b of which €671b was invested in residential property.
If one assumes that residential property has fallen 50% since then, that alone represents a €335b drop in wealth. One can easily reach an estimate of wealth loss since the peak of €400b by applying reasonable haircuts to the other asset totals estimated in 2007. A €400b wealth hit amounts to 3 times GNP.
This Balance Sheet hit is far, far greater in its impact than any of the positive developments on exports etc. It is massive wealth destruction (rather than uncertainty) which, in my opinion, is the main driver of our sharply increased savings rate. Citizens and corporations are trying to rebuild the shattered equity positions on their Balance Sheets. And there is no uncertainty about the budget. We all know that it will be horrible.
When we look at our Profit & Loss Account, it is important to note that GNP has yet to resume growth. The bulk of positive news appears to be occurring in the FDI/MNC sector which we don’t own.
BAD NEWS ON BALANCE SHEET NOT YET OVER
And I fear that the equity contraction in our Balance Sheet is set to continue. For I believe that residential property prices will roughly halve from here i.e. having dropped by 50% from peak prices, I expect them to halve again to a level around 25% of peak prices.
I base my house price expectation on rental yields (still way too low), massive supply overhang, accelerating net emigration, lack of credit in a banking system which now has deleveraging as a public policy goal and the fact that prices will not revert TO the mean but THROUGH the mean i.e. just as prices overshot reasonable yardsticks of value on the upside, they will overshoot them again on the downside.
VICIOUS CIRCLE A PRE-PROGRAMMED CONSEQUENCE OF INAPPROPRIATE MONETARY POLICY
John you refer in your post to the “vicious circle” effect.
But that is a pre-programmed consequence of joining EMU: we get a monetary policy inappropriate to Irish conditions. That means that we will swing from binge eating (1997-2007) to crash dieting (2008 – ???) as we move from a monetary policy that was too loose to one that is too tight. Apply a Taylor-Rule framework to Irish interest rates to see the effect.
Or simply note that the real EMU policy rate for Ireland rose from 0% at the height of the boom in 2006 (when HICP inflation was 3% at a time when the ECB base rate averaged 3%) to -4% in the depths of contraction in late 2009 (when HICP inflation was -3% at the time when the ECB base rate was 1%). That is a wholy perverse but direct consequence of EMU membership.
The same boom-bust cycle can be seen in Hong Kong which, like Ireland, imports an inappropriate monetary policy. HK ties its currency to the US$. So they import US monetary policy settings. At present they are far too stimulative for HK’s conditions, so they get a massive property boom.
If the boom becomes boomier that can lead to a massive overleveraging and (apparent) self-induced vulnerability to sudden debt-deflation. We know where that can lead. The HK authorities might eventually have to commission Professor Honohan to prepare a report on the matter. He might even assert that the resulting bust was “three-quarters home-made”! But why should any attentive student of monetary policy believe him?
CONCLUSION – WE’RE BANJAXED*
* Copyright: Ms. M.Hanafin, TD.
We are stuck in a situation where we have debts of €180b (4 year plan figure for public debt in 2013) + €20b for the banks (say) + €340b (private sector credit) – €180b (cash deposits) = €360b net public and private debt for Irish citizens. At an assumed average interest rate of, say, 5% that generates an annual interest bill of €18b or 14% of GNP.
With about 1.5 million people in full-time employment, our net debt is equivalent to about €240k per FT worker. Applying a 5% interest rate gives an annual interest bill per average FT worker of over €14k.
And the 4-year plan on which the government’s plan (and presumably the EU/IMF rescue plan) is based assumes 4.25% nominal GDP grwoth in 2012, 2013 and 4.5% nominal GDP growth in 2014. It does so despite all economic policy settings militating against growth:
a. monetary policy – high real interest rates.
b. fiscal policy – tightening fast.
c. credit policy – banks deleveraging.
d. foreign exchange policy – Euro +25% v. sterling since 2007.
This is why financial markets are pricing Irish government bonds at a price just 65% of their German equivalents. Markets expect that to get only 65% of their contractual entitlements from Irish bonds. Markets expect a restructuring of Irish government debt leading to an eventual haircut for those owed money by the Irish government. So do I.
Good sobering analysis. Cannot argue with anything you said. Where is jto?
You make good points. I hope my post also gave a sense of these headwinds. But to use your terminology, the P&L seems to be holding up despite the terrible balance sheet.
Your point about the lagging GNP growth is important, but a November 09 — Novemeber 10 comparison of tax revenues, suggests that even the domestic economy is holding up better than we might have expected, suggesting an overreaction in terms of negative sentiment to the Q2 growth numbers.
Now you are right that even with reasonable “flow” numbers, the “stocks” could well sink us, and indeed the stocks — bank and State — were clearly sinking us prior to the bailout. You may also well be right that some sort of restruturing will eventually take place in any case. However, in addition to the positive argument for avoiding an immediate default that we have a chance of turning the vicious cycles around, there are also the negative arguments of severe reputational damage and lost international support that either a defaut on guaranteed bank debt (or it would seem any senior debt) or State debt would bring. Putting it all together, the best bet for now is to stay the course.
@ Cormac Lucey,
Very interesting synopsis, but after reading it I have a question about your last paragraph.
“Markets expect that to get only 65% of their contractual entitlements from Irish bonds.”
Will that be enough of a haircut for us to survive? 35% trim is a considerable figure.
If it is not enough, then what figure would we be looking at?
Now thats a post!
The totally unjustified optimism from John Mchale the last few weeks on this site is not in the least bit helpful, in my opinion, unless the objective is to postpone large scale pay reductions and tax increases for those on middle and higher incomes.
The deficit for this year will be 18.7 Billion for this year according to figures released today. The DOF also believe that without adjustment that figure will be 22 billion next year. So we need to cut 3.3 billion to stand still?
What Policy would you currently recommend.
Would you recommend the Icelandic Solution of large scale default on Seniors (they are going to give them 26 cent in the euro!) now accompanied by a 19 billion adjustment in two budgets next week and another in six months?
Or would you recommend a hold in the hope of large scale QE? or what?
It should be obvious to economists that a debt crisis cannot be solved by adding more debt
I second ceteris paribus. Marvellous and pretty irrefutable analysis.
BUT John McHale has one very powerful point — and that concerns the wisdom or folly of the ‘Nike’ approach (‘just do it’ style monolateral bondholder haircuts).
Scenario 1 (consensus view)
EITHER default now [a la haircut] and have one hand amputated
OR default in a year’s time and lose both hands.
Scenario 2 (John McHale’s ultima ratio, I think)
EITHER default now and have both hands amputated
OR default in a year’s time and lose only one hand (or perhaps none at all).
Scenario 3 (Carolus Galviensis, at this writing)
Both hands will be amputated regardless of when we default.
Ergo, since we all discount the future to some degree, it is better to hang on in there.
This strategy is particularly to be recommended to all readers with a remaining life expectancy of less than 1 year (e.g. centenarians).
It’s hard to say where the burden of proof lies. The consensus belief appears to be that the state of play is so obvious that no further proof is required. It’s not obvious to me.
Good post. I do have two quibbles, though:
“This Balance Sheet hit is far, far greater in its impact than any of the positive developments on exports etc. It is massive wealth destruction (rather than uncertainty) which, in my opinion, is the main driver of our sharply increased savings rate. Citizens and corporations are trying to rebuild the shattered equity positions on their Balance Sheets.”
Much of the run up in ‘wealth’ was as a result of the effects of the bubble. It was phantom wealth on two counts:
1. It could not be monetised without disposal, which doesn’t make sense for a household. Therefore PPRs should not be considered ‘wealth’ at all. Only the debt counts as a negative effect on net wealth.
2. And more importantly, because it was phantom, it’s removal is not destruction, rather it is exposure of the negative effects of the bubble – that huge amounts of debt were built up by some to acquire it.
The second quibble is the ‘some’ of the last sentence above. The acquisition of debt was asynchronous. There is a break between those with no/low debt and those with high debt, it appears. The high debt load on some individuals (40% of PPRs have a mortgage, apparently) is undoubtedly a drag for them, and there is evidence that they are attempting to reduce this debt load (in the normal course of paying it back) and that most who have revolving debt are reducing their debt (again in the normal course of paying it back).
Individuals don’t have the ‘luxury’ of carrying debt forever (like some people seem to think that governments do). This is quite normal. The savings rate is only high because new debt is not being taken on at a high enough rate to offset repayments. In a situation where both the banks and indebted individuals need to deleverage their balance sheets, this is a welcome development, not one to bemoan. Demand will come from those without significant debt and it will be at a lower level. This too is to be welcomed.
Given about 160 bn of individual debt and incomes of 86 bn, even if you take a 40% figure for the incomes/PPR mortgage (110 bn), it is only 3x incomes. I run the risk of sounding like a bank-shilly-billy economist, but it is not excessive. It is, I would say, too high, but it is not unmanageable.
Of greater concern to me is corporate debt. 184bn, even though it includes the construction sector, is way too high given the poxy scale of corporations in Ireland. This will be a greater drag on growth, I suspect, than personal debt for two reasons –
1. Lack of investment capital.
2. Lack of lending to the business sector due to overall high levels.
It is P&L which (re)builds balance sheets
‘Markets expect a restructuring of Irish government debt leading to an eventual haircut for those owed money by the Irish government. So do I.’
Hoper that 25% does not happen.
So do I. IMHO – so does the ECB, and J.-C. Trichet: but we have been quietened quickly with bank bonds in EU protected for the mo – which gives Monsieur Trichet time. Real economy needed a 50b write off last weekend, so maybe we can toss in NAMA(getting bigger) to Frankfurt next March …. and in the interim show McHale’s resilience while working out how to do an over-niter. The psychological and motivational intangible benefits from such action are not to be underestimated in terms of cohesion and growth, if pragmatic fair-enough-distributed budget proposals – and I expect this to become ‘Party Policy’ for more than SF and Labour in upcoming hustings …
It is a no-brainer for Irish serfs to accept practically full socialization of banking system losses – this would be the real loss of reputation …
ECB is where it is at …
Why do you think property prices will only drop 75% from peak, what will stop them dropping further. If you look at all the the large bubbles in history asset prices drop at least 90%. Why do you think the largest housing bubble ever will be different.
Nice post though, the delusion that still exists with economists is scary. Growth, growth, growth, its over, get over it and move on to mitigating the storm thats coming.
there is another way out of the morass under that debt restructuring. 3 times in the last two centuries the UK&NI had a debt burden approaching 200% of national income-Napoleonic Wars, WWI and WWII. The US had a simialer burden after WWII. On each occasion, the burden was reduced not by buring the bondholders in nominal terms, nor by fiscal austerity but by a burst of higher nominal growth including inflation.
It is a sneaky and time honoured fashion of getting us out of the ditch. The bond holders cand blame their real losses on outsiders and not on stupid investments. The pols get off the nasty hook of austerity and the CBs take on for the team.
Next year the helmsman at the ECB changes, if the new Captain is an Italian rather than Axel, we can breathe a sigh of relief. If on the other hand if it is Axel or Juergen the the Euro is toast and the EU is gone as well. It is noticable that an envoy from DC was in Europe during the week with offers of help and support for the Europeans.
I think there’s a fairly fundamental problem with the framework, which is that we have two, or perhaps three, real economies that respond differently to developments in the public finances and in the banks, and that also respond to developments in each other.
The FDI exporting sector is largely immune to the first round effects of developments in the banks and in the public finances. If the second or third round effects of developments in the banks and public sector are to drive down prices in the economy, this will only benefit the FDI sector.
The indigenous exporting sector is largely immune to the first round effects of development in the public finances, and can be (probably is being) protected from the first round effects of developments in the banks. Again, if the second or third round effects of developments in the banks and public sector are to drive down prices in the economy, this will only benefit the indigeous exporting sector.
The sector that is not traded overseas gets it in the neck from the various feedback effects highlighted in the framework, but this is heavily damped by the spending that originates from the exporting sectors, which is insulated from the feedback loops. Once one looks at second and third round effects, falling prices in the economy boost the traded sectors, which benefits the non-traded sector, offsetting (by a small amount in the short term, but probably by a very substantial amount over the medium and long term) damaging feedback from the banks and public finances.
@ Cormac Lucey
‘For I believe that residential property prices will roughly halve from here i.e. having dropped by 50% from peak prices, I expect them to halve again to a
level around 25% of peak prices.’
This would put you very nearly in line with Morgan Kellys prediction of 80% from peak.
Considering ‘we are where we are’ I’d be interested in hearing where you think we should go from here. Should we force hair cuts now or are you with John McHale i.e The potential reputational damage is sufficent that we should wait for a Europeane wide solution or till we absolutely on our knees.
Apologies, only the top portion was meant to be in italics.
The fact that one can buy Irish government bonds which promise the same repayments for just 65% of the price of equivalent German bonds implies a 100% expectation of a 35% haircut, a 35% expectation of a 100% haircut or any combination in between.
I’m unsure what haircut might eventually prove necessary. It would depend on whether the financial fates of the State and of our banks were still umbilically linked.
If the State were to declare that the guarantee was procured under false pretences and that Material Adverse Change had occurred and that we were therefore reneging on the bank guarantee, the price of Irish bonds would probably rise as the expected financial obligations of the Irish State would reduce.
On the other hand, while that would reduce our obligations it is not wholly clear to me that it would solve our problems which would remain grave and severe.
I suspect therefore that Irish bonds may offer poor value at present i.e. my expectation of an eventual haircut would be higher than 35%.
@ Eamon Moran
What would I do? Hard question but I would aim very hard and very uncompromisingly at two goals.
GOAL 1 – EXTRICATE IRELAND FROM BANK GUARANTEES
This means a break with the EU and the ECB with unpredictable political consequences. It would mean the chaos of a bank run as ATM machines ran dry. So this is not an easy option.
But as our German friends might say, “Lieber eine Ende mit Schrecken als Schrecken ohne Ende”: better a horrible end than horrors without end. The EU/IMF package offers little more than an acceleration of the debt-deflation within the Irish economy.
GOAL 2 – EXIT EMU
There is no way we should have ever entered monetary union with the German-dominated currency zone. It is nearly guaranteed to always give us an inappropriate monetary policy.
Look at the FTSE index in the five years after “Black” Wednesday and Britain’s exit from the ERM. It rose to 250% its Sept 1992 level. With the value of assets rising in the secondary market, the incentive to invest in businesses in the primary market was significantly boosted. The seeds of the long economic boom which continued up to 20087 were sown.
But exit from EMU would be very difficult. It would be preceded by a bank run as depositors moved their money offshore to protect them from the looming devaluation. It would immediately render the banks insolvent as their assets would be mainly denominated in devalued Punt Nuas while some their foreign funding would remain denominated in Euros or whatever.
WHAT WOULD I DO?
If granted plenipotentiary powers I would therefore do a number of things:
1. immediately repatriate the foreign held assets of the National Pension Reserve Fund and NTMA so as to protect them from legal action abroad when we default. These monies would give us some very limited financial room for manoeuvre.
2. close the banks for one week.
3. use the week to pass bank resolution legislation allowing for the State to direct debt for equity swaps at banks deemed insolvent. Require banks to write down debts owed by personal and corporate borrowers so that they are no more than four times income (personal borrowers) or four times operating income (companies).
4. pass an emergency budget closing the €18-20b gap between State spending and revenue immediately. €3b tax increases, €15b spending cuts with capital budget down to €1b and large cuts in wages and welfare.
5. reform bankruptcy law so that bankrupts are in and out of bankruptcy in three years max.
6. exit EMU and set up the Punt Nua at a time when the banks are closed/bust anyway and the bank run argument no longer holds.
7. order NAMA to close down and to sell off all assets whose associated loans are in default within one year. We need a property market with real prices rather than state socialism with unreal prices.
In essence this would force an Icelandic-type outcome: an immediate purging rather than an attempt at a gradual healing. But I believe that the gradual healing currently on offer is a mirage for the reasons I outlined earlier. We have to reach a floor in property values, bank values and personal equity to be able to start lasting healing.
I think a key is to force everything together pretty quickly. That will deepen the eventual fall. But we have spent two years attempting suspended animation and we can see that it is not working.
The above strategy would have huge reputational cost and highly uncertain political implications vis-a-vis the EU. And it would take some time before we could return to financial markets to borrow. That’s why I would repatriate our foreign assets asap and move – with enormous resolution – to close the budget gap immediately.
The biggest threat is that this would spark a more generalised break-up of the EZ as others followed our example. Competitive devaluations could soon lead to trade wars etc. But I would run that risk in preference to my feeling of certainty that the EU/IMF deal condemns to limp along as the walking wounded watching gangrene creep inexorably up our body towards our vital organs.
I agree with you that it is an error to consider a house you never intend selling to be financial wealth.
The wealth build-up may have been artificial but the wealth effect and associated spending was not. Now we are experiencing the opposite phenomena.
You’re right. It is the P&L which rebuilds balance sheets. But our current rate of saving is being exceeded by continuing falls in property prices.
So we are running faster to move backwards.
Tip of the hat to Cormac and Hogan
Radical solution. Why did you only get 10,000 votes in the 2002 Senate elections?
If you use your plenipotentiary powers to both resolve the banks and close the budget gap then leaving the euro is unnecessary. The effective default removes one problem (the bank debts), the closing of the budget gap the other (the deficit).
With no foreign reserves and the likelihood of short-term capital flight, I think it is a risk too far. The shockwaves from an Irish bank default will ensure that the euro declines in value to a level that will please many in the eurozone…
What could be done would be to introduce a punt nua for state payments while keeping the euro as the formal currency… much as Irish is the national language. This would quickly find its level and could, perhaps, be extended to new lending from the banks? e.g. mortgage lending (since we own the banks…).
In terms of the banks, I would start with the two dead ones. It is possible that the current situation is not unmanageable, but it will require effectively zero interest rates (or interest rates pegged to Irish GNP growth rates) for a large proportion of bank debt. I would take precipitous action with those two, while following your deficit reduction program. This would effectively be castling and reinforcing our lonely prawn with both castle and bishop… your move ECB…
As namawinelake has said, it is a chess game, not a poker game.
Tip of the Hat to Cormac Lucey!!!
If any other competent people out there could offer similar in detail plans?
That post should be carried in the Sunday papers!
Enough of the kindness of strangers!
Better to regret something done than regret something never done!!!
There’s some compelling stuff on this thread, but I still believe the risks of default are not yet worth taking.
Though much has gone badly wrong, a helpful starting point is that the existing debt stock has been borrowed at low rates. The 5.8% EU/IMF deal means that, over the next few years, we’ll move steadily to a 5% – 5.25% average cost of funds. Nominal growth should come in pretty close to that, albeit with a delay. Any shortfall will have to be taken on the primary balance chin, but the numbers aren’t huge.
I took a look at historical data in five year chunks going back from end-2009. From 1985-1989, the average bond yield was 10.5%. Nominal GNP growth was 7.4% annualised (GDP 7.9%). The starting debt/GDP for that period was 91%. With an adverse 2.5% to 3% i-g dynamic, we should have been er, banjaxed. But we weren’t. Debt/GDP rose to 99%, but didn’t spiral out of control.
From 1990-1994, the average bond yield was 8.8%, with nominal GDP at 7% annualised. Again, there was an adverse i-g, albeit lower at just under 2%. Despite this, debt/GDP fell to 89%.
That said, we were the recipients of good chunks of EU money back then, rightly so as the per capita GNP numbers were nothing to brag about. These funds would have made stabilisation easier.
Notwithstanding this caveat, I don’t see the numbers supporting the “unbearable burden” hypothesis, absent a very bad growth outcome. We are now a wealthy country (though poorer and wiser) and we have to get back to a decent primary surplus, plain and simple. At 5% or so borrowing rates, and a good shot at a similar nominal growth number, stabilisation and subsequent reduction is an achievable goal. It may not be a just outcome in many people’s eyes, but it is achievable.
Page 32 of the IMF’s November Fiscal Monitor takes the default issue head-on (in general, not just us). Among a number of robust points, they claim that “.. the needed fiscal adjustment will not be much lower even with a large haircut ….. the problem in the advanced economies is the large primary deficit, not high interest rates and a high interest bill …”. They go on to claim that the primary adjustment needed to stabilise debt/GDP would be reduced by only .5% of GDP on average (max 2.7% for Greece), even with a 50% haircut.
They conclude: “… a large fiscal adjustment is unavoidable ….. and that a restructuring would be no substitute for – and would probably end up as a distraction from – the fiscal and structural reforms that are necessary for a durable increase in economic growth.”
I’d like to see those in favour of default (or those who believe in its inevitability) come up with some numbers showing what the primary adjustments are going to be even if we did default. Without a significant improvement over the no-default scenario, it will be hard see what the point is, at least for the next few years.
1) If we are deadly serious about being ready to default, then it is likely that we will not have to do. Frankfurt’s latest bond-buying strongly suggests what was very probable already: the ECB was effectively bluffing with its move to withdraw support from the Irish banks. Spot the pair of twos. When faced with a stark choice between keeping trash on its balance sheet and knocking down the financial house of cards, it will apparently do the former.
(By the way, for this reason I have some sympathy with the government’s much-derided Baghdad Bob antics over whether we were negotiating a bailout. As soon as we’re perceived to be in negotiations, the perceived blame for a spill shifts from the ECB to us. Probably the government should have gone further and sent the ECB heavy squad packing.)
2) Misery loves company. If our default does indeed knock over dominoes across Europe, there will be egg on everyone’s faces. We may not end up being all that conspicuous in our unpopularity.
3) Our actual lender of last resort, the UK, will probably be forced to play the Nordics to our Iceland if things get rough; partly out of affinity, partly from self-interest. Neither dealing with nor turning back a flood of Irish semi-refugees into Gatwick and Holyhead would be much fun for the British government. Of course they will be hopping mad about the financial meltdown, and it would be really, really helpful to us if Ulster Bank were to stay open. So we should cut them a less-bitter deal and repay UK bondholders as fully as ever possible, which will at least soften the direct impact of the explosion. Obviously there might be some scope to play favourites with a few other supportive or feared creditors.
4) I agree with Hogan that a Euro exit would probably not be immediately necessary or desirable even if we default. For one thing, the ECB might well capitulate and offer us liquidity support if we haven’t ejected ourselves already. The one thing that might change this calculation is if the UK were blistering-keen on an immediate sterling peg.
5) It would be helpful if the government were actually to make some serious effort to explain and justify its position to world audiences, instead of relying solely on the goodwill of foreign economists and financial media.
6) I think it might help a lot if the foreign claims on Irish banks were sorted out into one bad bank per EU member state or other significant creditor country. This would help with the perception war, as it makes clearer who and what we have been supporting with out bank bailouts. It also gives the creditor countries a way to avoid default that is less messy than negotiating some kind of financial-stability fund or ECB action between all stakeholders: each country is welcome to buy its own bad bank for €1, then bailout, haircut, or extend-and-pretend it as it sees fit. This might also give us a certain ability to divide and rule.
The Irish Times had a link to this very impressive project today and I think it’s like Ireland coming to terms with the fact that the banks are bust even though nobody wants to admit it and the wider EU society doesn’t accept it. And there are no kind adults in Europe to talk to. And Ireland is in a very dark place.
Scared and confused and lonely. It takes a tremendous amount of strength to come to terms with who you are. Or where your country really is.
And it gets better
Very brave of you!
Well, I would be happy to join you as a self-styled philosopher-king, but I think we will both simply have to dream on as the real existing Ireland would probably have us hung from the nearest lampost before we got to stage 3!
re: “There is no way we should have ever entered monetary union with the German-dominated currency zone”.
Cue for me to insert an excerpt from the eerily accurate forecast made by my favourite prophet — crypto-Austrian school Bernard Connolly, author of ‘The Rotten Heart of Europe’ (1995), and former employee of the European Commission:
[from: Dark Vision]
I can’t see the ECB making a banking deal with Ireland and wanting to keep it secret because it’s so positive. Ditto with the IMF and the EU. But I can easily see the Irish government agreeing a deal on the banks with ECB etc and wanting to keep it secret because it’s terms are highly unfavourable. The revelations about the blanket bank guarantee deception are just further evidence – not that it was needed after they denied in the face of global derision that they were negotiating a bailout – of the government’s duplicitous nature. Remember when commenters on this blog used to argue that we should trust a certain minister because he was the one with access to the real information on the banks and therefore – despite all evidence to the contrary – he was not fibbing? I hope it is not more bad news but it needs to be published now. Because if it is it bad it could sway many now in favour to reject the bondholder bailout.
‘I suspect therefore that Irish bonds may offer poor value at present i.e. my expectation of an eventual haircut would be higher than 35%.’
Didn’t someone eminent recently say they were great value. I think you are right. A 50% would only net us about 50b on about 100b outstanding now. Not enough to cover the banking debacle. Maybe a 50% haircut on sovereign and all bank bonds would do the trick.
‘the ECB was effectively bluffing with its move to withdraw support from the Irish banks. Spot the pair of twos. When faced with a stark choice between keeping trash on its balance sheet and knocking down the financial house of cards, it will apparently do the former. ‘
Some bluff. They nearly brought down our little house. Which is why I keep harping on about the futility of relying on promises of liquidity from the ECB which we have seen can be withdrawn on a whim. And the reports today of Dr. Merkel threatening the Greek Prime Minister with German Withdrawal from the Euro would not inspire confidence.
The details released in recent days by the Fed on the 21,000 emergency transactions used to prop up the system in the USA and Europe demonstrate the ineffectiveness of the ECB.
I know that the word isn’t liked on this blog but IMHO two senior members of the government are, beyond any doubt and with no exaggeration, pathalogical *****. Pathalogical *****. We can’t trust anything they say on the state of the banks, the state of the public finances, the bailout or the secret letter. Pro-government commenters on here have been talking for years about how they were bounced into making the guarantee by AIB and BOI on the night of the 29th Sept. If they could *** so brazenly about this then they could do so about anything (missing words: forks, zoo).
I hope you don’t take this wrong, but I can’t see that your diagram says anything more useful than “Everything is connected to everything else, man!” Perhaps true, but hardly actionable.
It’s interesting to read your view on our balance sheet situation and to compare it with Ronan Lyons’ analysis almost a year ago. The area under his curves was a lot less than you’re saying now. http://www.ronanlyons.com/2009/12/22/what-will-irelands-government-finances-be-like-in-2015-a-five-year-view-on-the-budget/
If our balance sheet is as bad as your view, then default is unavoidable somewhere down the line and the govt’s main planning should be on how to survive it and the EZ’s planning should be on how to minimise the damage caused. I hope there’s some joint planning going on. If there isn’t we’re screwed.
Whichever way we go on default (not, complete, partial), the future trajectory of our P&L must depend on the balance sheet too. If high interest payments are to be extracted from taxation then investment will be drastically reduced and growth will not come without it – well, unless we create a credit bubble again.
Even if companies don’t pay lots of corporation taxes the money has to be extracted somewhere from the system, right? Why should I invest here to pay someone else’s back taxes? That’d be the investor logic and it’d be right. Stagnation would be the unavoidable result. IIRC Poland’s corp tax rate is 19% and the top personal tax rate is 32%, and costs are a LOT lower. If Ireland has to gouge tax, even if only from workers, then it’ll damage investment. The P&L will not thrive under such conditions.
On your two main Goals, I agree that Goal #1 would be good, albeit no-one has proposed a legal way to do it. I don’t see the benefit of Goal#2 except in managing the default event itself, and frankly having a banana republic on a new currency doesn’t seem like a good plan.
On your six actions, I’ll buy 1, 3, 4 and 5, with small reservations. On 2, we need to close the banks for a couple of days, not a week. On 6, I’d prefer to stay on the Euro and I think that our EU friends would prefer that too, which might give some mileage to negotiate #1. On 7, I don’t want to quote myself too much.
Finally, I still wonder how effective a default can be unless it’s part of a grand scheme of things, a big EU plan. Wouldn’t we be pursued through foreign and even domestic courts, have assets seized around the world, find Irish owned companies, ships, etc being arrested, etc., ? Wouldn’t it be better if a new govt were to work on convincing the German and other peoples that this is not the fault of the average Irish taxpayer and that the guarantee needs to be undone? It’s basically true, after all. It might take quite a few months, but the consequences of default could last a lot longer than that.
Thank you Cormac for putting forward an alternative route. I for one would back your alternative 100%. Anything is better than this death by 1000 cuts – particularly the Irish version where the 1000 cuts are applied to the lowest socio-economic classes first before a single cut is applied to the next level up and in this way the elites can carry on and who knows – maybe even get a away with just a scratch or two.
Good link from politics.ie:
The crucial 5 mins from the interview regarding the Bank Guarantee.
“Meetings with “bankers” on the Fri 26th, a Cabinet meeting at 10am on the Sunday, mysterious “private appointments” on the Monday…look even further back, a meeting with the (named) CEOs of AIB and BOI on Sept 4th but the Fri 26th meeting is with “bankers”…and when, exactly, was that report from Merill Lynch first commissioned? They delivered it on the 26th! Also, it appears that the night Lendahand arrived at McWilliams’ door stinking of garlic was the 17th!
The Guarantee was calmly and carefully planned over a period of weeks, not a panicked late-night emergency decision”
“Same process for the IMF all preplanned, state agencies hijacked for maximum effect and pesudo legitimacy all the while in the shadows the cunning work their grander plan..”
“But the “finer” detail was the adding in of Anglo and INBS to the guarantee at the last moment against all considered advice. That “detail” is why the IMF now runs the country. I would not be too surprised if the name Anglo Irish is not mentioned once in the cabinet minutes.
AIB and BOI could have been firewalled without having to save Anglo. Would have meant going cap in hand to the ECB to get a Basel II exemption but that should not have been too difficult at the time if presented as just getting what the Spanish had.
Think of Ireland being bounced into the clutches of the IMF as a direct payback by Merkel for being forced into a hugely expensive German bank guarantee in late 2008 by what the Irish did a few weeks earlier.”
Through the night of Monday, September 29th, 2008, and into the early hours of Tuesday, September 30th, crisis-management talks took place, involving the Taoiseach, Brian Cowen, and the Minister for Finance, Brian Lenihan. Their purpose was to prevent the collapse of Anglo Irish Bank later that day – and possibly other banks later that week.
The country’s four most senior bankers, at the two largest financial institutions, Allied Irish Banks and Bank of Ireland, were so alarmed by the events of that Monday that they sought an urgent meeting with Cowen and Lenihan to stress that the banking system was on the brink.
After hours of deliberation, the Government chose the guarantee from a range of options. The catch-all solution was unparalleled in its scale and in the risk that the State took on, guaranteeing liabilities amounting to 10 times the national debt and more than twice the value of the economy.”
I wonder if the “Night of the Guarantee” horror fiction was concocted in part to protect Gormley and the Greens. Last winter Noel Dempsey took the fall for Snowgate 1 and then Willie O’Dea, in unprecedented fashion for FF, voluntarily declared that it was his responsibility. Thus the minister with primary responsibility escaped public opprobrium. Or maybe Gormley is blackmailing FF into passing his climate change bill before they leave office….
Foreign observers should note the lack of prominence – 15 hours after the event – in our publicly owned media for a huge revelation about one of the most important decisions in independent Irish history.
Instead they are going with a comedy routine on the fact that we have lost our sovereignty.
“Après Match (comedy troupe) get together in the form of Brian Lenihan (Finance Minister) and Fintan O’Toole (Left-wing journalist) with a mysterious third member from the Fianna Fáil party to talk to Ryan Tubridy about the EU/IMF bailout.”
And I used to think the Pravda nickname was harsh…
@ Cormac Lucey
At last a solution that is brave, focused and which might save the country from the gangrenous end the two Brian’s have in mind for us. I would fully support your strategy.
If you are correct about not having to exit Euro, then so much the better, but it would not be long before the Germans would find a way to throw us out so best factor that in. Wolfgang Manchu is encouraging us to go default within the Euro.
Let the secret meetings with the next minister for finance begin
“Department of Finance secretary general Kevin Cardiff told a Dail committe that after a rapidy evolving crisis on september 29th the guarantee was chosen yet John Gormley says that the cabinet made the decision on the previous sunday.
Something else John Gormley said you could not make a decision on the moment, you would have to discuss it for days, yet Kevin Cardiff told the Dail committee, by the Monday evening, the banking meltdown across Europe had reached the point that saving one bank wasn’t an option, said Cardiff.
“A significant decision had to be taken on that day and not in relation to one institution”
But John Gormely says it would have to take many days to make that decision.
Who is telling us the truth?”
“I applaud the decision taken by the Taoiseach and the Minister for Finance to bring this issue to the attention of the Government yesterday evening.” http://www.kildarestreet.com/debate/?id=2008-09-30.216.0
“Members opposite will understand that decisions were made early this morning and the statement of principle made at 7 a.m, after which a Cabinet meeting took place at which the heads of the Bill were approved.”
Prediction: The Irish media will downplay this and will accept without question whatever line the government gives them.
“it is public knowledge that in meetings held over the course of 29 September and into the early hours of 30 September the appropriate response to the difficulties facing Irish banks was discussed.”
I think I see it now:
Minister: “I never said that we didn’t discuss it at cabinet previously. I just said the decision was made on the 29th”.
Journos: “What brilliance! He didn’t deny there was any cabinet meeting He just didn’t mention it. Bored now. Let’s move on.”
“Let me see, so – I think I’ve got it now – the decision they’ve been telling us for two years was made in an emergency situation they had landed in their laps late one night was actually a decision they’d carefully considered and made in advance just in case it was unexpectedly landed in their laps one night.”
“are FF/Veggies trying a change of tack?
up to this the garuntee story was that FF pulled a fast one on europe by making the garuntee without asking them.
as in “we pulled a mighy stroke there me boys” …. you know the usual underhand sneakiness that is highly regarded by the FF sleevens.
this was at the beginning when they thought this garuntee would work/be managable.
now that the garuntee is held up as a perfect example of theft/corruption/incompetence (delete as appropriate) and the great unwashed are linking the garuntee with themselves being out of cash – FF are now trying to spin it that the Euros knew .. and the unlying plot is that since the euros knew , then the euros must have made l… lenny and the d… moron go along with it.
“an older boy made me do it””
Another theory: the “Night of the Guarantee” was concocted so Europe didn’t know that it was premeditated rather than spontaneous and hence explained why they weren’t consulted.
RTE website news stories for posterity:
“More subzero temperatures forecast
22:45, Saturday, 4 December 2010
A mild thaw today offered a temporary reprieve from the severe weather that has hit the country, but temperatures are expected to plunge again overnight.
Government confirms record 32% deficit
22:17, Saturday, 4 December 2010
The Government has confirmed that the deficit will be 32% for 2010 – the highest in the eurozone.
Spanish airspace reopens after strike
22:57, Saturday, 4 December 2010
Spanish airspace has reopened following a wildcat strike by air traffic controllers. Passengers are advised to check with their airlines before travelling.
Saturday’s weather and transport updates
22:57, Saturday, 4 December 2010
Dublin Airport is open – most Bus Éireann services operating fine – Dublin Bus operating with curtailments – full Irish Rail services except M3 Parkway to Clonsilla – Luas operating near full service (Connolly stop closed)
Two men held after 20kg of cannabis seized
22:57, Saturday, 4 December 2010
Two men have been arrested after 20kg of cannabis pollen with an estimated street value of €250,000 was seized in Dublin.
Tax protest forced Topshop in London to close
22:56, Saturday, 4 December 2010
Activists protesting against tax avoidance by big businesses and individuals took over one of the UK’s busiest stores today and forced it to close its doors to customers.
€1m cigarettes seized by customs
20:16, Saturday, 4 December 2010
Customs officers have seized more than €1 million worth of cigarettes in separate operations in Cork and Rosslare.
Funeral of Gerry Evans takes place in Armagh
22:23, Saturday, 4 December 2010
The funeral has taken place in south Armagh of Gerry Evans who was abducted and murdered by the IRA 31 years ago.
40 new jobs announced for Cork
22:26, Saturday, 4 December 2010
One of the world’s leading food companies is to create 40 new jobs at Macroom in Co Cork.
Man charged over Lucan murder
19:19, Saturday, 4 December 2010
A 25-year-old man has been charged with the murder of another man in Dublin on Thursday night.
Dissident suspect questioned by PSNI
22:55, Saturday, 4 December 2010
A 21-year-old woman has been arrested by PSNI detectives investigating dissident republican activity.
UN offers help to battle Israel fire
22:54, Saturday, 4 December 2010
UN Secretary General Ban Ki-moon offered to mobilise international help for Israel to battle a major forest fire which has killed at least 41 people.
Gbagbo sworn in as Ivory Coast president
22:55, Saturday, 4 December 2010
Ivory Coast’s incumbent president Laurent Gbagbo was sworn in as president after his victory was rejected by world leaders but accepted by the army.
Two dead in Russian plane crash
22:54, Saturday, 4 December 2010
Two people died and dozens were injured when a Russian plane ran off the runway during an emergency landing at Moscow’s Domodedovo airport.
Snow ‘traps’ seven in pub for eight days
20:01, Saturday, 4 December 2010
If you are going to get snowed in during the big freeze then many would say there could be no better refuge.”
People will start referring to them as state controlled media if they keep this up.
to coin a phrase. 😉 I’m certainly not saying we can or should rely on the ECB. (There’s also the little detail that the ECB’s non-liquidity liquidity support is a violation of its mandate.) But what happened in the past few days happened. Of course the ECB had to nearly bring down Europe (not just us) in order to motivate the EFSF and Ireland to act; again, it’s a game of chicken.
We are in common with many other nations, not very good at looking at ourselves in the mirror, as individuals or as a people.
Like it or not, the politicians are us and like them, others are as good at passing the buck and grabbing as much as possible from the public treasury.
Some months ago, former Senator Alan Simpson, the co-chair of Obama’s deficit commission, wrote to a rep of an interest group: “If you have some better suggestions about how to stabilize Social Security instead of just babbling into the vapors, let me know. . .We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!”
This week the C&AG’s latest spotlight on the contrast between the way most people handle their private finances and the wanton/shameful Irish lack of a duty of care when it comes to public funds, was on the academy of music. It could surely be replicated in many areas and it would for example be a shock in the morning if a university president said he could manage with less and produce more (I’m not talking about a Ford assembly line process but the rail lines of the bubble gravy train traversed every area of public spending including badly managed big value IT contracts for private consultancy firms).
There is no constituency for change and the Irish Left makes common cause with the richest professionals in wishing to maintain the status quo in an unfair society; in contrast, there is a big constituency for default.
There would be immediate credit downgrades; what then would be the impact of the loss of over 50% of deposits at Irish banks, which are held by foreign residents?
@ Cormac Lucey
We have both been accountants and I have experience of the fear of impending doom at a large manufacturing plant and later in another company, in the labour court where a young woman was claiming unfair dismissal with her mother beside her, understandably viewing me as the devil incarnate.
I do believe that the best way of handling a company restructuring is not to do it in installments as fear will persist but in one go and where possible to increase benefits/incentives.
As for the dried out ‘Caitlin Ní Uallachain,’ I’m not in favour of Kim Jong-il style shock economics.
It is of course unfair to have to take responsibility for private bank debt but now 2 years after missing the boat, the European powers fear contagion.
Let’s wait for a few years; nobody knows what the international recovery will be like and in the interval use that period to reform a system that is rotten to the core, with pressure from the IMF.
Iceland had the IMF and Nordic neighbours to support it – – recall they were toying with taking a loan from Putin; we would not be independently supported by the IMF, which would require the support of a Republican-controlled House of Representatives.
Who would be our friends as companies and citizens were at a loss from the bank collapses?
Who would be at most risk from an economic collapse?
Not those who are specifically guaranteed job security in the four-year plan — they would at least get guaranteed confetti currency – – but the unemployed with less prospects of work; SME private sector workers and thousands of self-employed scratching to make a living — it’s an alien world to those who live in comfortable cocoons.
Argentina and Iceland had commodity exports to tide them over; our economy would be a hollow shell without American FDI exports.
If it was Martin Naughton of Glen Dimplex who made a proposal like yours, I would certainly give it more attention.
Given our poor skills in project management, the impact of the chaos on struggling firms would be hard to imagine – – it’s bad enough as it is, with as much time spent in collecting money as in generating business.
Texas, Ireland and Ten Little Indians.
@ Richard Stone
Yes. Residential prices could eventually drop 90% from peak. But I’m currently guesstimating 75%-80%. But my guesstimates are trending downwards.
Yes, the UK escaped large debt levels by partially inflating. We can’t do that within EMU. Even outside EMU it would be a difficult as a policy to follow: (a) why would anyone lend you money if you enunciate it publicly? (b) how can you calibrate it to avoid it going hyper-inflationary? Better perhaps to be up-front early and renege on the bank guarantees.
You say I got 10,000 votes in the 2002 Senate election.
Strictly speaking, in Senate count terms, that is correct. But as the Sancho Panchez to my Don Quixote campaign back then, you know that senate counters multiply single votes by 1,000 to facilitate transfers of fractions of single votes. So when you say that I “only got 10,000 votes” you mean that I only got 10 votes.
@ Hugh Sheehy
I believe that EMU has the capacity to significantly destabilise our economy even if we wiped the slate clean on our current debt levels.
INTEREST RATES THE KEY EMU TRANSMISSION MECHANISM
In looking at EMU, people have understandably focussed on the European sticker on its side and welcomed it. But EMU essentially imports German monetary policy into Ireland. How doe we evaluate whether that is correct? We should use the Taylor Rule
This was used by Rossa White (then with Davys) in 2006 when he estimated that Ireland needed a base rate of 6% at a time when the ECB rate was just 2%. At that time – and for most of the period 1997 – 2007 – Ireland got interest rates which were too low because (a) our economic spare capacity was lower than the EZ average and (b) our inflation was higher than the EZ average. For those reasons an interest rate policy appropriate to the EZ as a whole was then inappropriately loose for Ireland.
The impact of super-low interest rates for differing EZ members can be seen in this brilliant OECD paper. Look particularly at the graphs at the bottom of page 18 where a correlation coefficient in excess of 0.8 is found for deviation of national Taylor Rule estimates from ECB base rates and (i) change in housing investment and (b) change in construction investment across the EZ for much of the last decade. The outliers then (and now) were Ireland, Greece and Spain.
Since 2008 the situation has reversed because (a) our economic spare capacity is higher than the EZ average and (b) our inflation is lower than the EZ average. For those reasons an interest rate policy appropriate to the EZ as a whole is now inappropriately tight for Ireland.
EMU INTEREST RATES: FROM STRUCTURALLY TOO LOW TO STRUCTURALLY TOO HIGH
We can see that the shift from inappropriately loose to inappropriately tight monetary policy between 2006 and today in the course of real interest rates which went from zero at the height of a bubble (2006) to +4% at the depths of a bust (2009 – my first post above incorrectly counted real 2009 interest rates at “-4%” when I meant “+4%).
These were the main points I was making in a piece I wrote for the Irish Times over a year ago:
CRITICAL THAT WE GET MONETARY POLICY RIGHT
My personal opinion as an economic observer is that monetary policy is far, far, far more important than fiscal policy or FX policy. It is therefore much more important for us to get MP right. By remaining within a Germany-dominated monetary union we will have the wrong monetary policy most of the time.
PUT ECONOMICS BEFORE POLITICS: EXIT EMU IF WE GET THE CHANCE
To get our monetary policy right, I would therefore set exiting EMU as a key objective. I fully accept that this is a view which most people do not accept. But I have lived through the effects two botched monetary unions. Weissenfels, the east German town near Leipzig where I worked immediately post German-reunification, has seen a population drop of over 25% since 1989 as a result of Helmut Kohl ignoring the intelligent objections of the then head of the Bundesbank Karl-Otto Pohl on the DM-Ostmark exchange rate back in 1990.
Then, as now, politics were put before economics.
Now is a chance to put economics before politics. That is why I would exit EMU if we got the chance. We could either set up our currency or readopt sterling (with whom we share major trade flows, exposure to the US, citizens who view houses as investment objects and a banking-centric domestic economy). Now that we are friends, I am sure if we opted for sterling that Britain might even allow us nominate a person to the MPC.
If we adopted sterling we would have to do some thinking to get the exchange rate on entry right.
You say nominal growth should come in close to 5%. With all policy settings militating against growth, why should it? Our current policy settings are set on: DEPRESSION.
The ESRI may regard market participants as “lemmings”. I don’t. Financial market prices impart valuable information. We need to pay much more attention to that information.
The Dow Jones Index dropped 87% from peak to trough between 1929 and 1933. The ISEQ index dropped 80% between 2007 and 2009 – and that’s with a massive chunk of ISEQ earnings coming from abroad.
I accept the point about the large fiscal adjustment needed. That remains stupendous whatever other arrangements we may make.
@ Hugh Sheehy
Not only will investment contract as a result of our high interest bills pre-empting fund availability. For, by sharply raising the cost of government borrowing, recent market developments have sharply raised the cost of capital for nearly all Irish businesses. This sharply reduces the proportion of projects they might be looking at which would generate a positive net present value (NPV) i.e. private investment can be expected to fall off sharply because of the sharp rise in cost of capital as well as drastic interest payments pre-empting the availability of funds.
“It is of course unfair to have to take responsibility for private bank debt but now 2 years after missing the boat, the European powers fear contagion.”
I couldn’t agree more. How can stiffing the senior debt be right in principle from 2013 but wrong in practice in 2010? Answer: because the EU wants it so.
I lent senior debt as Head of Acquisition Finance for Rabobank Germany back in the 90s. It is called “senior debt” for the simple reason that it ranks ahead of junior (or subordinated) debt in an insolvency. The very term “senior debt” presupposes insolvency events. Our government’s supine acceptance of the Euro-diktat on leaving senior bond-holders whole is a disgrace.
That’s a very interesting quote from the ever-insightful Bernard Connolly. I had an interesting chat with him on the Damien Kiberd lunchtime hour on Newstalk some weeks back.
The Dail statement that introduced fear about the impact of default on FDI into the mix looked to me like a piece of misdirection of the sort we are accustomed to getting from the current government. Every statement of fact within it was literally true, as is usually the case when the government tries to misdirect.
Yes, all the FDI players have investment in Ireland. That’s the point of FDI. Yes, many of them do funds management out of Ireland. But the statement leaped from those two statements of simple fact to make suggestions as to the response of FDI to a default that could only be logical if our FDI friends were exposed heavily to Irish bank and government debt. The statement carefully avoided actually saying this, which leads me to believe that it is not true. I believe we should discount the risk to FDI that was implied unless the government can actually come up with a logic for its suggestions that stands up to scrutiny.
Good one, Cormac. I don’t agree with everything you have said, but there’s a lot of good sense in there.
Your shock and awe tactics seem radical to many and will never happen in the form laid out. However, the basic analysis is as as applicable to Ireland, Greece, Spain, Greece, Portugal, Italy and maybe even one or two of the alleged core as this country. These countries are over indebted and their growth prospects are constrained due to the current fiscal and mnetary policy settings. This will give rise to political pressure for change within these countries.
This will lhave to be a radical change by the ECB to tolerate inflation in order to keep the union together or many countries will choose to take off the straightjacket.
@Michael H & Tull,
Yes there is a huge constituency for default as its members will continue to thrive in relative terms by virtue of their access to the public purse and let those without the same degree of access to, or support from, the public purse go to hell in a handbasket as they did in the ’50s and ’80s. This is the fundamental political divide that is beginning to emerge and many of those proposing default are able to conceal their agenda by wrapping the Green Flag around themselves – and secure the unwitting support of less ersatz patriots.
And, yes, Tull, political pressure will compel major institutional and procedural changes in EMU or, as you suggest, it will collapse. The very nature of the EU means that this sort of change will happen quite slowly and is unlikely to be rapid enough for the markets or for a number of member-states who are suffering. But politicians in the core EZ countries have an additional problem in that they sold their voters a pup in the Euro and rammed the process without securing their consent. They now have to try and bring these voters around without provoking revulsion at the extent of their duplicity. This will be hard-won, but the effort is being made.
And, in addition to all the reasons being advanced here against Ireland doing a solo run, we need to bear in mind the nature of Ireland’s recent relationship with the EU. You don’t have to encounter many European mainland officials, politicians or voters to get a flavour of their annoyance at the BS and spoofery that was emerging from Ireland (accompanied by a cockiness and arrogance) in the decade up to 2008. This culminated in the June 2008 no to Lisbon. (The principal concession to secure the subsequent yes vote of retaining the commissioner per country has left a residual deep annoyance as it prevented coherent allocation of responsibilities and more effective decision-making in the Commission.)
Once the faeces hit the rotating blades at end 2008, a whole new strain of BS and spoofery emanated from Ireland. We seem to have no idea of the extent to which Ireland’s reputation and credibility has been destroyed. So far as the Troika is concerned Ireland is a problem to be managed – and they are doing so, perhaps, not very well, but as well as might be expected. We need to take the medicine, hope that the bigger game will be resolved in a way that will provide some medium term relief and focus and internal reform to position ourselves to take advantage of the inevitable eventual upswing.
It seems we could have ridden out the effects of overly loose monetary policy fairly well if only we’d reined lending by domestic banks and let HBOS and RBS make all the bad loans. But of course that would have involved a loss of market share for AIB and BoI, and the first duty of the Irish State is to protect the two ugly sisters at all costs. What do you think of MH’s argument that under the same conditions of “Great Moderation” and failed Irish (and foreign) bank regulation, higher interest rates would have seen an influx of Euro deposits to Irish banks, leaving us in an even worse (and more Icelandic) situation?
I’ll admit that I’m not aware of a similar way to cope with overly-tight money. (I feign no knowledge of economics or finance.)
The only resilience that I see is that of the inexorable rise in Government expediture trends as evidenced by the pre-budget white paper.
How the Dept of Finance can produce a document that sees current expenditure going from €41billion to over €42billion despite all the talk of cut backs etc is beyond comprehension.
Even if one allows for the dubious €1 billion extra in Social Welfare, the document makes a mockery of the reported claims of expenditure cuts.
Where are the savings from the recruitment embargo to be seen in this document?
Where are the savings from the thousands of public sector workers whose contracts have not been renewed?
Education expenditure to rise by €400 million? Not credible surely?
The Taoiseach’s department to increase by 22%?
Surely these documents are not credible unless there are continuing pay rises occurring in the public sector?
Having worked in the private sector for many years, some of that time with multinationals, one could be absolutely assured that if an expenditure profile like that was produced, its author and a lot more would be getting immediate p45s.
I go so far as to say that it is an irresponsible document at least in the absence of a very good explanation which is not forthcoming.
To return to the main theme, why should anybody else adopt a mantle of resilience when it is absolutely clear that there is a mantle of mink being worn elsewhere?
re We are stuck in a situation where we have debts of €180b (4 year plan figure for public debt in 2013) + €20b for the banks (say) + €340b (private sector credit) – €180b (cash deposits) = €360b net public and private debt for Irish citizens. At an assumed average interest rate of, say, 5% that generates an annual interest bill of €18b or 14% of GNP.
With about 1.5 million people in full-time employment, our net debt is equivalent to about €240k per FT worker. Applying a 5% interest rate gives an annual interest bill per average FT worker of over €14k.
I assume private sector credit includes corporate debt? Corporate debt is covered generally by corporate assets.
Therefore it seems unfair to divide total debt including corporate debt by the numbers employed to come up with figure of €240k per FT worker.
Regarding your WHAT WOULD I DO…
A la guerre comme la guerre!!
The Bank of Spain showed that the Irish central bank foolishly believed it was impotent; recall the nonsense coming from the US on how Ireland was showing how tax cuts could raise revenue and also it’s worth noting that over 60% of the equity of all the major Irish public companies was held overseas.
These shareholders from outside the Eurozone weren’t worried about currency risk; Ireland was a ‘miracle’ economy.
Outside of the euro, monetary policy would have been run from Merrion Street; FF’s cronies wouldn’t have tolerated too high an interest rate, while a higher rate than sterling would have attracted carry trade hot money.
I won’t mention the war again but Saturday’s DoF pre-Budget paper says that the 1% of GNP that is due to be paid into the National Pensions Reserve Fund for 2011 doesn’t have to be paid because the State had assumed in 2009 and 2010 the assets and liabilities of the pension schemes of the 5 older universities and ‘certain non-market public corporations’ including FÁS. The paper notes that these funds have assets of about €2bn, which is more than the 1%. There is no reference to liabilities.
Strangely, there is also no mention of the confirmation in September last by the Minister for Finance that the university funds were in deficit amounting to about €630m led by Trinity College at €315m. The total deficit in the transferred funds was about €1bn which puts the liabilities at €3bn.
If you take agricultural land values (in Wicklow admittedly) prices peaked at a little over €30,000 an acre. An 80% reduction is down to €6000 an acre. I bought the farm here in 1993 for £1200 an acre. At the moment prices, I guess, are still well over €10,000 an acre. And if you value land on rental (even at a high €200 an acre) over 20 years and add in a bit of luck/speculation land prices for agricultural practises should be €6000 an acre. I haven’t dreamed of buying land for 12 years and still wouldn’t.
Govt borrowing might drive up the interest on domestic commercial borrowing, that’s true….but surely we’re not going to continue borrowing, are we? Also, it might not impact the cost of company funds or equity investment or international borrowing, but if we keep having to extract money from companies or their staff investment would be damaged either way.
On the Euro, while the interest rates may well have been lower than ideal for Ireland, this would have been technically easy to correct for. Higher deposit requirements and lower possible multiples on Irish mortgages would have limited risk in the residential sector. Instead we had 100%+ mortgages at daft multiples and the whole “affordability” lie.
Low interest rates for most other businesses were an unalloyed good thing.
Now, it would have been politically difficult for a govt to bring in mortgage limits but that’s an argument against our own ability to manage ourselves – which kinda contradicts the idea that we’d have been better off if we’d had our own money to manage too.
re I won’t mention the war again but.
If I understand your figures the Government bailed out (in the true sense of bail out) various university and other pension funds to the tune of € 1 billion at a time of cut backs all round for everybody.
€630 million to make sure that that the pensions of university staff would not suffer any diminution?
The Waterford Crystal workers were not favoured with such a deal.
As a budget measure can I propose that this pension subvention be collected from the said organizations over a period of 10 years starting in 2011. That is about €63 million per year.
The government may have needed the cash. It did not have to accept the pension deficit.
Keep mentioning the war.
The next 20 years are about who will bear the pain. There should be no sacred cows!
Apart of course from TDS not turning up in the Dail due to the shnow but still getting paid for turning up and getting full travel expenses for not travelling. Shure don’t they work hard hard for it!!
“As a budget measure can I propose that this pension subvention be collected from the said organizations over a period of 10 years starting in 2011. That is about €63 million per year.
The government may have needed the cash. It did not have to accept the pension deficit.”
Now, whil i think that the entire pension issue was farcical, how, exactly, when 90% of the university monies come from the state, do you propose to do that? Id be interested…
Oh, and dont forget, “smart green nanobot economy”…
An additional pension levy for those who are to receive those pensions?
Convert them all to defined contribution (including the retired)?
Plenty of ways that involve the beneficiaries paying, not the rest of the taxpayers.
@Joseph Ryan, hogan
Joseph Ryan raises an important point.
No-one bailed out the Waterford workers’ pension, but in general the Waterford workers have always bailed out the PS pensions and will again – well, if they’re lucky enough to be working.
@ Cormac Lucey,
Many thanks for your detailed and truthful response. I would agree with you about the 35% figure not being certain, perhaps it could be a starting snip. If it fails to work then starting snipping upwards.
The grave and serious ramifications which politically could occur between Ireland and the EU / bondholders scares me.
As Mr Paul Hunt mentioned above Ireland may not have that many friends in Europe after all. And I suspect that to be the case, I have a feeling that we are viewed as a immature spoilt child sometimes.
If we are to pursue the points which you outlined in Punt Nua, then we are talking about very serious professional political leadership running the country. Somebody with the nerve / cunning of a modern day Hitler. The country would have to be unified from the very top to the very bottom of Irish society.
I don’t see that occuring on the Irish political landscape just yet. Irish society is just too fragmented.
I have very deep reservations about Irelands future. I think we are in too deep to try any stunts on our own.
It might be best to wait until Spain or Italy go belly up, then when all hell breaks lose, Ireland might be able to bolt for the door.
Agree or disagree is irrelevant.
Maggie Thatcher was right. UK did not enter the give away its currency or its interest rates to the ECB. When shi* hit the fan both the US and UK pushed the nuclear button. Both put rates at 0%, both devalued their currencies, both took over huge portions of “bad” companies (meaning ones who couldn’t fund), and both monetised government debt to a huge extent. The devaluation trick of both the UK and US seems to be working for just one reason, the market is “confident” that US and UK policy makers can with time fix the obvious imbalances of the boom times.
Germany is no saint in the process. Germany joined the EU and euro for one reason, it was a significantly undervalued currency which allowed the German export machine to power ahead. Have you seen the recent trade and current a/c surpluses. If Germany followed Thatcher then the DEM would look similar to the YEN, that is 50% higher, and the pain of the export machine would be notable.
UK and German policy makers carry as much blame as Irish policy makers. Iris banks’ through domestic assets are significantly lower than reported. Foreign loans at Irish banks could be sold to highly liquid global banks such as the Asians like HSBC and MUFJ (95% plus of the 150bn foreign loans on “Irish” bank assets remain perfect).
What you have highlighted it the choices that can and need to be debated. The data set is fairly clear but is getting lost in a lot of nonsesne. Japan lost over two decades 300% of GDP for exactly the same factors Ireland now faces, collasping asset values. Check out Japan’s GDP today, it stands at a record level of JPY500tn, signifcantly higher than 1990, when everything there turned down. Even after two decades huge problems remain in Japan, the main one been the labour market has got pummeled continuosuly.
So exiting euro is an option, exiting EU is an option. I think giving over currency and rate setting to BOE might be an option at a later date but not today. Defaulting is an option. Threatening to default on sovereign and bank debt is an option and should be a measure discussed with EU, IMF, ECb.
If the entire cost of the above exercises results in say a total bill of euro100billion then why have we not employed the services of debt experts and why are we relying on policy makers in politics, civil servants, bankers, central bankers, who all failed to do their jobs.
This issue is a simple banking, real estate crash that has happened many times around the world and will happen again in places like Russia, LATAM, Asia again and again. We need experts. We need (say) 100million euro or “new punts” spent on “paying” the best experts to deal with all the options and tactically work out the best ways to proceed.
I would recommend that fixing the mess on worrying about Mr Market is 100% wrong. My experience is that not only does Mr Market have a short-term memory but 95% of Mr Market is in fact brain dead and would rape his “cousin” for a dime. Do not follow Mr Markets advance. Use the intelligence of debt experts (NOT economists) to get the best workable solution and implement it with an aggressive and highly paid crisis management team (recommend external experts outside of this country).
@Joseph Ryan 10:10
Yes, the myth of public sector ‘cuts’ still survives because people confuse the reduction in per capita outgoings with the increase in aggregate public sector expenditure on pay and pensions. This increase is due to the unfortunate fact that public sector workers do not drop dead on retirement and that their number is growing. It is explained on page 71 of the National Recovery Plan itself:
It’s the old public sector story — they cut, and they cut, and they cut ….
… and they still end up spending more than ever before.
According to Michael Hennigan’s figures, the deficit in university pension funds of €630 billion was set to zero by the State taking over the liability.
The deficit should have in equity been translated into a pension reduction for both retired and prospective employees or an increased special pension contribution.
Therefore if both pensioners and prospective wished to maintain their existing entitlement, a pension deficit levy should have been imposed on all beneficiaries.
I understand that pension law is a mess but the above is a more equitable solution that foisting the deficit on all taxpayers.
That is exactly how I believe the situation should have been dealt with, not just for universities but also for the other pension schemes whose deficits were absorbed.
The fact that there is a new pension levy anyway should have no bearing on the fund deficit at the point of transfer.
re “This increase is due to the unfortunate fact that public sector workers do not drop dead on retirement and that their number is growing”
I was generally aware of the fact that retired civil servants can live until a ripe old age.However that is not the point nor does it account for the lack of reduction in State expenditure.
The way I see it is that when a civil servant retires and is not replaced, the net reduction in State payroll and pension cost should be equivalent to 50% of that retirees income. There is a recruitment embargo, is there not?
In addition I am aware of temporary workers whose contracts, in a rash of economic stupidity, have not been renewed, though I admit these people worked mostly in local government.
Why, therefore are we not seeing a reduction in the 2011 estimates?
Why is the estimate for the Taoiseachs dept to increase by 22%?
Eduaction by €400million ?
My point is that there must be continuing pay rises for existing employees factored into the estimates. Perhaps people are still getting incremental point increases.??
If so, would it not have been equitable over two years ago to restrict increments to scales less than €40000?
Or to remove the top three increments from all public service scales in excess of €40,000?
I see in todays papers that Ministers are holding fast to their super earnings.
Currently Sinn Fein are the only party who are promising to stop this.
The other party caps, both FG and Labour are more cockade than cap.
Unless the other parties come close to matching Sinn Fein on this issue, I know who I will vote for.
@ Brian Lucey
On the bookkeeping issue, you are correct. However, there is a very pertinent issue here.
Across the public service, adding pension years as a perk has been a common practice and nobody worried about costs.
The Comptroller and Auditor General said last Sept that the accrued liability for Irish public pensions was €129bn. A year before it was €108bn.
Why not include this in teh national accounts?
At ministerial and senior judiciary level, the cost of funding 1 addition year’s pension entitlement costs 62% of salary net of employee contributions.
The deficits in the university pension funds taken over directly by the State, party reflect investment returns but also the adding of pension years without providing for the cost in annual budgets.
The C&AG said last Sept that additional years have become a feature of pension awards in universities.
By way of example, in UCD 78% of staff retiring between October 2007 and September 2008 had years added to their service for pension purposes. These 42 employees had an average of 4.2 years added to their pensionable service and their average salary on retirement was €74,434.
Similar provisions apply in other universities – – Trinity College stated that since 1972, on the basis of custom and practice, the award of added years has become a legitimate de facto entitlement and pension scheme members were advised that they had been granted added years.
In UCC, academic staff appointed prior to 8 July 1986 are eligible by statute for seven professional added years at age 60. The years are accrued in the first ten years so that in the 11th year a member of the academic staff has gained a right to seven added years at age 60. Where such academics retire at age 65 they are entitled to a maximum of ten added years as with the normal application.
The C&AG said in Galway all staff in the grade of administrative officer and above are awarded added years on retirement provided they meet specified conditions. Eligibility is assessed by the Pensions and Investment Officer. The decision to award added years is not sent to the Governing Authority for further approval. The current Pensions and Investment Officer does not have a copy of the specific delegation decision giving authority to award added years.
NUIG stated that although the wording of the relevant statute indicates that added years are at the discretion of the Governing Authority, this discretion has always been exercised in line with the provisions of the statute and staff are annually advised of their projected added year’s entitlement (impacting their decisions regarding overall pension planning).
In the private sector, for the minority with pension coverage, real annual returns for 3, 5 and 10 year periods are in the red and returns are likely to remain very low for many years ahead.
The concept of legitimate de facto entitlement is an interesting one in a system with limited accountability and where the buck stops nowhere.
The argument is that this has been going on a long time and now like the ‘bank hour,’ everybody expects, it excpt of course the plonkers in the private sector.
Irish pension law is a total mess. There are so many other areas in Irish life where the law has to be strengthened – eg subcontractors of bust builders. And what has the legal profession focused on over the last 10 years? Tribunals.
“This will lhave to be a radical change by the ECB to tolerate inflation in order to keep the union together or many countries will choose to take off the straightjacket.”
This weekend’s FT had some numbers on the US bond market. A 3% increase in yields would lead to a USD 4.7tn fall in bond values. Any idea what the loss would be in the EZ with a similar jump in yield?
Total bank losses are probably nowhere near the loss that a big rise in inflation would imply.
@ joseph ryan
PS workers are still receiving annual increments on their salaries. Pay cuts and pension levies are being eaten into by these.
“3% increase in yields would lead to a USD 4.7tn fall in bond values. Any idea what the loss would be in the EZ with a similar jump in yield? ”
I don’t know the answer, but it is the reason why I think low interest rates are the problem and not the solution. The ultra-low rates after 9/11 and the Bush borrowing splurge (mirrored by borrowing splurges in many other economies) had the result of locking in low rates – rising rates = an asset price crash, keeping rates low = speculation, particularly on commodities (as an ‘inflation’ hedge).
And this is what happened.
And, hey, look! It is happening again, this time in government debt and commodities rather than the indebted private sector.
And still few wonder why Japan is stuck. It is stuck because it is boxed in. It cannot do anything other than default (debt writedown/inflation (through printing)/interest . This is the logic of excessive borrowing.
It is ironic that the monetarists are in the process of destroying money…
@ jack o shea
Sterling has fallen more than 20% on a trade weighted basis since 2007.
Please give us some facts on the resultant exports ‘miracle.’
Short term currency movements are not generally the main determinant of export trends.
You say” “Germany joined the EU and euro for one reason, it was a significantly undervalued currency which allowed the German export machine to power ahead.”
Germany was a founding member of what became the EU; I suppose they gave us €40bn in aid as part of the grand design.
Germany’s export strength was not built on a weak currency; as for the yen, check out the price adjusted impact on Japanese exports relative to the US in a period of deflation.
Agree totally. Low interest rates are a disaster. Proper risk pricing goes out the window. And who really benefits ?
Speculators. If you didn’t load up on no recourse loans for bank debts, speculative land developments, casinos in Tipp, while siphoning a goodly portio of the loans off to Switzerland, then you are as big a mug as I am. The monkeys really were the smartest guys in the room…
@ Michael Hennigan
‘The concept of legitimate de facto entitlement is an interesting one in a system with limited accountability and where the buck stops nowhere.
The argument is that this has been going on a long time and now like the ‘bank hour,’ everybody expects, it except of course the plonkers in the private sector’
Your constant and evidenced criticism of the standards of economic governance In Ireland is a welcome reality check. Long life to you and your website.
It does no harm, however, to recognise that de facto entitlements come in all sorts of guises. The history of state building is the history of a struggle to defend the general interest again the vested interests which take root in every institution. It is human nature to favour family and friends.
Academic staff got extra pension rights which the scheme clearly could not carry. Hence the need for a state bailout. We may enquire why that there was so little resistance to that bailout from those who are supposed to defend the general interest. Or so little media focus on the deal.
We might usefully go on to ask what other extra rights and entitlements were being handed out in the universities, and what was the institutional climate in which the distribution of pension ‘extras’ came to be regarded as ‘reasonable in all of the circumstances’.
We could note that salaries and pensions are not the only thing which institutions bestow. Their leaders also hand out lucrative contracts for goods and services. I would not apply the term ‘private sector plonker’ to those who those who get that business. Nor would I apply it those who succeed in having themselves appointed to boards of same institutions.
Perks of public service are best regarded as a mirror of the perks which are enjoyed at management level in the private sector. It’s all patronage, and as the saying goes ‘ It’s coming off a broad back’.
We need look not further than banker’s bonuses to see what sort of ‘success’ and ‘productivity’ were, and are, rewarded in the private sector. The same processes are at work in the PS, where the ‘gatekeepers’ divide up the spoils of office. Keep the head down is the rule.
Of course none of this is uniquely Irish, but we have a good dose of the disorder. It’s hard to see how we can go forward economically until we address it.
“The history of state building is the history of a struggle to defend the general interest again the vested interests which take root in every institution.”
That might explain why we have such a ghastly little excuse for a state. The electoral system is designed to send defenders of local interests to parliament; the government is accessible to and influenced by other “vested” interests; nobody (at least nobody with power) has any interest in defending the general interest.
And until it is possible to elect people to perform that task, to defend the general state-wide interest, the job won’t be done.
Our state is not the worst, but we sure need a makeover.
Cue Joe Lee. Ireland 1912-85. The business. Maybe we can persuade him to enter for X-factor.
I don’t think that’s the whole story though. Here’s that quotation from Central Bank governor Maurice O’Connell‘s Dáil statement which you pointed out:
But again, what was wrong with letting foreign banks make all the bad loans and deal with the consequences? That might not been enough to contain inflation, which is what O’Connell was talking about at that point, but it would have protected the country from the other “dangers inherent in high rates of credit growth and any relaxation of lending standards” which he goes on to mention. I think there’s an elephant in the room here, the same one which can be glimpsed in Freefall.
You had me till
€3b tax increases, €15b spending
I would say 9 and 9.
Michael Collins (Former member of the commission on Taxation) outlined there is at least 11 billions in Tax breaks. Add to that that the new justifiable taxes in Property and carbon and I recon you could get 9 billion in increased tax.
@ John McHale
In control systems a “negative feedback loop” is one where a change in a variable is reduced by a resulting action (mathematically negative).
A “positive feedback loop” is one where a change in a variable is reinforced by a resulting action (mathematically positive).
Negative feedback loops are generally stable; positive feedback loops are inherently unstable.
It is understandable that the word “negative” is used in an economic downturn because of the very unpleasant consequences arising from the downturn. However, the loop is a positive feedback loop. When the upturn comes the consequences will not be regarded as negative, but the loop will still be the same.
Maybe in general description words like stable / unstable should be used in regard to feedback loops and words like positive / negative, beneficial / harmful, good / bad for consequences / outcomes in the particular phase of the cycle.
The highly-charged word “vicious” to me is inappropriate while “virtuous” is also inappropriate but less charged.
Positive feedback loops are widespread in nature and human affairs, extending from natural childbirth, rows at football matches, nuclear bombs and of course bouts of “irrational exuberance” followed by depression, in economic activity.
Most people will agree that pressing the accelerator when the car speed rises and taking the foot completely off the pedal when the speed drops is not a good strategy for maintaining a steady speed – the link is immediately obvious.
With complex economic systems it is too difficult to make the connection: people apparently are now saving too much / not spending enough.
As some people have money either because of saving, good fortune, large prices for land and property in the boom times or whatever, is it not possible for economists (“behavioural”?) to devise imaginative schemes of corrective measures to utilise this resource?
I suggest they and the private sector take the initiative utilising the advertising industry to deliver the message: spend according to your means and get the domestic economy moving.
Me? In the new year I plan a micro stimulus of house refurbishment.
I have limited knowledge of the banking world but it appears beset by positive feedback loops. One would think that stability of the system should be the main concern of the ECB: why did it not use additional measures for banks in the periphery countries other than leaving them with the blanket interest rate designed for the core countries?
Do the following figures suggest anything?
UK unemployment assistance = roughly £70 weekly = circa €350 monthly.
German long-term unemployment benefit (Hartz IV) = €359 monthly.
Irish jobseeker’s allowance = €196 weekly = circa €840 monthly.
In my opinion, it’s not just judges, politicians and medical consultants who are grossly overpaid in Ireland compared to other countries.
You are of course correct. I was focusing on the impact of the affected variable and not on the sign of the affect. I should just have stuck with vicious cycles, though I take your point about that also being value laden.