Resilience

@John

FYI – I’m getting an error with the link to the schematic – page not found.

“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.

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:

http://www.finfacts.ie/irishfinancenews/article_1021132.shtml

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.

When you start citing Larry Summers, you know all is lost.

“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.

@John

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).

@JMcH

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.

@John McHale:
“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)?

bjg

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.

Cormac,

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

Now thats a post!

Well said

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?

Cormac

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

@Cormac Lucey
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.

@Cormac Lucey

‘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 …

Cormac,

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.

@ 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.’

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.

@ Sporthog

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.

@ Eamon
@ Carolus

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.

@John

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.

@ hoganmahew

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.

@ Grouser
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.

Cormac,

Radical solution. Why did you only get 10,000 votes in the 2002 Senate elections?

Tip of the Hat to Cormac Lucey!!!

If any other competent people out there could offer similar in detail plans?

10/10

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!!!

@Cormac Lucey

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.

@ Seafoid
Very brave of you!

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 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).

@ Cormac

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.

From thepropertypin.com:
http://www.scribd.com/doc/19951170/Brian-Lenihans-diary-Sep-08-to-Mar-09

“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.”

Pathalogical.

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.
http://www.rte.ie/news/
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.”
http://www.rte.ie/
And I used to think the Pravda nickname was harsh…

From politics.ie
“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?”

“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.”
http://debates.oireachtas.ie/dail/2010/09/30/00068.asp

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.”

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.

@ seafóid

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

Cormac,

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.

@ Richard Stone

Yes. Residential prices could eventually drop 90% from peak. But I’m currently guesstimating 75%-80%. But my guesstimates are trending downwards.

@ Tull

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.

Ouch!

@ hoganmahew
@ anonym
@ 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
http://en.wikipedia.org/wiki/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.
http://www.oecd-ilibrary.org/economics/monetary-policy-market-excesses-and-financial-turmoil_244200148201

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:
http://www.irishtimes.com/newspaper/opinion/2009/0815/1224252584157.html

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.

@ igsy01
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.

@ Michael

“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.

@ Carolus
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.

Cormac,

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.

@Cormac Lucey

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.)

@Cormac Lucey

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…
YES
YES
YES
YES….
A la guerre comme la guerre!!

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.

@MH
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!!

@Brian Lucey
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.

@ 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.

@Joseph Ryan 10:10

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.
… Surely these documents are not credible unless there are continuing pay rises occurring in the public sector?

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:

Pension costs for public servants will continue to rise over the coming years due to the rise in Public Service employment in the 1970’s. … [A]n increase of 13% to over €3 billion is in prospect by 2014.

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.

@Carolous
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.

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.

@ joseph ryan

PS workers are still receiving annual increments on their salaries. Pay cuts and pension levies are being eaten into by these.

@ 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.

@seafoid
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…

@Paul Quigley:
“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.

bjg

The Bank of Spain showed that the Irish central bank foolishly believed it was impotent

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:

There seems to be a perception that the Central Bank can exercise some legal authority in restricting credit. It has no such authority. Any restriction would be inconsistent with European Union practice. Besides, it would be unworkable as demand would probably be met by overseas lenders.

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.

@ John McHale

Terminology:
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?

@John Cash

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.