Colm McCarthy in today’s Sindo

Colm has an article in today’s Sunday Independent which is well worth reading.

91 replies on “Colm McCarthy in today’s Sindo”

It’s all very well for the IMF to talk about insolvent banks. Sure we don’t have any of them. Even Anglo is contained. Nobody is to blame, nobody could have seen it coming, nobody could see the consequences of their actions, nobody is currently in prison or even sacked. The banks are fine, BWII says so. The cheapest guarantee ever, sure it has cost us nothing. If we were to say that the banks were insolvent, would that make a mockery of so farism?

@ Hog

Nice rant! But I never said the banks were not insolvent. Just to clarify what I did say.

1. We cannot unilaterally torch bank seniors. In this not only does Colm McCarthy agree but so also does Michael Noonan. Where do you stand? With Sinn Fein/IRA?

2. The blanket has been lifted from the original guarantee and whilst providing the blanket was a technical mistake it cost us little in practical terms and now it is no longer relevant.

We have kicked the can down the road. There are many possible scenarios. At one extreme we get a bit of luck and it works out fine. At another extreme the contagion spreads. Ironically, that’s not so bad either for then an EU wide response will be needed and Ireland will be a bit player, this will probably involve a big fall in the euro.

Worst case scenario is that Ireland uniquely has a Morganesque meltdown. Let us not cross that particular bridge until we come to it.

Always nice to remind the Indo readers that a major budget imbalance exists even without the inclusion of the banking costs.

@Brian Woods II

Yup Brian, give the choice if its between Sinn Fein and Michael Noonan/Colm McCarthy I would go with SF one hundred percent of the time on these issues.

I find it hard, no impossible, to imagine that any of Sinn Fein’s economic positions could have left us in as a bad a way as the centre right economic consensus.

And just for good measure bailing out the banks’ bond holders has cost the state more money than the IRA has, I think there might be widespread agreement on who the dangerous criminals are now, and who exactly their fellow travellers are….

@ Shay Begorrah

North Korea’s GDP per capita in 2009 was €1,800; Ireland’s was €37,700. Does that make it easier for you to imagine that we could be worse off in the IRA’s socialist republic? BTW when Gerry Adams asks for bondholders to be burnt, does he mean literally?

Agree with every word.

I can understand the EZ countries being jittery about causing a cascade failure in Europe’s banks, but charging a premium on their lending to us is unjustified. We are borrowing to protect them, they shouldn’t try and turn a profit out of our efforts to prevent a Europe wide crisis.

I don’t buy this talk of the rate as an incentive for us to go back to the bond markets It stinks of fixing things on the cheap, much like we thought we could at the beginning of the crisis.

Colm, thanks for “translating” the report’s words to clearly articulate what was actually meant.

My three favorite excerpts from Colm’s Sindo piece:

1) “The notion that being kind to bank bondholders would somehow add to the attractions of government debt was peddled assiduously around Dublin over the past couple of years. This piece of bad advice has been tested at considerable cost and, unsurprisingly, it has not worked. ”

2) The essential problem is the excessive assumption by the Irish State of liability for bank losses which far exceeded the Government’s worst fears. The IMF way of saying this is: “Debt dynamics would improve if the recapitalisation requirement remains contained.” In simple English, if the State could get itself off the hook with more of the bank bondholders, its ability to service its own debt, including debt to the IMF, would be enhanced. The IMF report goes on to say: “The sovereign’s obligations will also be lower if the debt owed by banks is restructured.” The policy implication, not surprisingly, is that “where a bank has lost substantial value — and, indeed, is insolvent — the debt holders should share in the losses. Further such action is contemplated for banks that have received substantial state assistance, and would help reduce the need for fresh injections of capital by the government.”

3) “Since it is not possible to cut the exchange rate in a common currency area and not practical to leave the euro by issuing a new currency, competitiveness must be restored through the containment of domestic costs. That means reductions in payroll costs and in all other elements of non-payroll overheads.”

@BWII
“We cannot unilaterally torch bank seniors. ”
Leaving aside your appeal to greater intellects, my position is pretty clear, I think. I called for seniors to be torched before the guarantee as part of a resolution process that didn’t involve a guarantee of existing creditors. I argued against nationalisation for the implicit guarantee it would give.

At the end of September 2010 (the expiry of CIFS), I echoed Morgan Kelly’s call for unguaranteed seniors to be torched then.

In early 2009 I suspected the country would go bust and the IMF would be called in.

What more damage could have been done?

I accept it is now too late. The state has funding to 2013; a condition of that funding is that seniors are not torched. We must now suck it up.

“The blanket has been lifted from the original guarantee and whilst providing the blanket was a technical mistake it cost us little in practical terms and now it is no longer relevant.”
I can’t believe you are still trotting this one out… if the banks are not insolvent, there is nothing to worry about. If the banks are insolvent, the guarantee is a promise that cannot be kept. Now you admit the banks are insolvent, or, rather, claim that you never said they weren’t! Is this your “so far” moment?

The Europeans seem in no mood to rescue us, just keep us on life support – with frequent threat of its withdrawal – from ECB, and a bail in/punitive bailout from our EU partners. This will involve huge pain for us, with no sign that they will allow the eventual default on generous terms.

Our choices realistically then are:
Mass unemployment/emigration and default followed by punitive rescue, or hope the EU changes heart.

Default on bank debt now, hope the ECB doesn’t go nuclear.

Leave the Euro, lot of immediate pain.

P.S. From the actions of our EU partners I wonder if they want us to leave the Euro if we don’t pay the banks debts. Our establishment though insist on staying, because they believe, they really believe, that the country is certain to recover and pay off all the debts (!)?

I was talking to an acquaintance who is the investment director of a European outfit that manages over 200 billion dollars of assets and he said that Ireland with the help of Europe has to hit the bank bondholders. Sarko and Merkel have no clue when the bankwallahs say this is Lehmans V2.

It isn’t rocket science. Everybody in the business knows these people took a risk and lost money. This is capitalism.

Instead, Ireland is being crucified and it is utterly pointless and counterproductive. This view isn’t coming out of some eco yogurt co-operative in Drisheen. Ask Ciaran O’Hagan of that well known lefty outfit Societe Generale .

Without the banks the deficit would be manageable. Back in October Lenihan took a question from Irwin Stelzer who said that countries taking IMF bailouts with unmanageable debt dynamics enter a spiral of deflation and failure and he strongly denied this would happen with Ireland. And what do we see now?

AIB is bankrupt. Look at this for the state of things . Is it supposed to be spin?

http://www.independent.ie/national-news/disorder-at-aib-revealed-in-meeting-with-somers-2466541.html

Firstly Colm McCarthy’s article starts well and represents the glacially slow turn in establishment thinking about the source of the current crisis and the necessary remedies. It is a hopeful sign even if Colm can not help lauding the current government for their newly minted Thatcherism.

It does seem a little lax when comparing the bubble in private debt and the “bubble” in public spending not to mention the relative costs (so far) and whatever attached benefits there may have been.

@Brian Woods II

“North Korea’s GDP per capita in 2009 was €1,800; Ireland’s was €37,700.”

Its just like they said in the Road in to Serfdom, first they came for the senior bondholders, but before you know it it’s a devastating civil war, Stalinist dictatorship and prison camps.

@ Hog

“I called for seniors to be torched before the guarantee as part of a resolution process that didn’t involve a guarantee of existing creditors.”

You were calling for this even before we knew the extent of the problem!? Jayz, even now this is thought of in common sense circles as a nuclear option. Truly you appear to be left of even SF/IRA.

On my “blanket” reference you seem to be missing the point. I am saying that the particular aspect of the ’08 guarantee i.e. extending it to per-existing and to subbies no longer applies and in reality the fact that it was there for two years didn’t really impact and is not a major contributor to our current situation.

@BWII
“You were calling for this even before we knew the extent of the problem!? ”

The extent of the banking problem was clear before well before the original guarantee was introduced. Maybe not to official Ireland but it was clear.

“We have kicked the can down the road.”
“Worst case scenario is that Ireland uniquely has a Morganesque meltdown. Let us not cross that particular bridge until we come to it.”

The strategy of kicking the can down the road hoping for something, anything, to turn up has been a complete disaster. Advocating more of the same is only going to make matters worse IMO.

The situation doesn’t have to get Morganesque for Ireland to become insolvent. On the current path I think we will get there by 2014/15. If the losses on the banks are any greater we will just get there quicker.

@BWII
“You were calling for this even before we knew the extent of the problem!? ”
On the contrary, I was to the right of FG… it was clear from the collapse of Northern Rock (in 2007) that the Irish banks were going to be in serious difficulties. From early-mid 2008, it was clear that the FIRE economy in Ireland was in a state of collapse – look at the share prices of the companies involved. ‘Knowing’ the state of the problem? The DoF believed that Anglo and INBS were insolvent in the week before the guarantee and had prepared contingency plans for a disorderly collapse.

“extending it to per-existing and to subbies no longer applies and in reality the fact that it was there for two years didn’t really impact and is not a major contributor to our current situation.”
😆 You’ve got to be kidding. I suspect you are playing the part of the fool in this. The 35 bn we have already spent on Anglo and INBS… cheap as chips, dontcha know.

I agree totally that it no longer applies, presumably you’d returned to thinking of cosy labels to attempt to pigeonhole before reading that part of my post. You do yourself little credit by slinging “SF/IRA” about; still, like the reputation of the Irish establishment…

It is a hopeful sign even if Colm can not help lauding the current government for their newly minted Thatcherism.

Shay, you have important points to make, but this kind of thing does you no favours. Portraying Colm McCarthy as some kind of bogeyman (“even if Colm…”) is an unfair portrayal of a man who did not cower into his office in UCD when a government who hadn’t the balls to make the suggestions themselves came knocking.

And as for “Thatcherism”, less of the sensationalist crap. Do you think Thatcher would have left the old-age pension uncut or would allow private banks be bailed out with public funds? Be reasonable here. Ireland is not a Thatcherite country. It is a broken country with an inept government trying to fix it, but this is not some neo-liberal conspiracy.

@Seafoid
Sommers is perhaps spinning for his approach to banking crisis, which was to keep losses in the banks.

@ Hogan, D-E

In what respect did we kick the can do the road. We, uniquely, decided to up fron the bank credit losses in period 1 and then decided to bail in the taxpayer. On the question of bailing in the taxpayer v the seniors, we ll we know the asnwer to that question… and our European masters have decided that the profligate Irish are going to pay back every penny.

Now to make it worse, the esteemed Dr H and the MOF is going to devise a neat little scheme whereby more taxpayers money goes into the banks to be written off imediately when portions of the loan book are sold to Private equity hedge funds of at a 20-30% discount.

Ever other country in the world has chosen the stategy of recap & delay and pray. No but we had to follow best practise, except we forgot that it was always going to be the Irish taxpayer rather that the German taxpayer is going to take the hit.

Now what should our next cunning strategy be. We should tighten fiscal policy and eliminate the primary budget deficit over the next two years -80% by spending cuts. We should leave the euro, redeminate the govt debt into Irish pounds. Lastly we should figure out a way of imposing losses on the ECB. I note we are doing none of the above.

“Different Cans for Different Folks”

The ECB has chosen a different way to kick that old can (and a large and noisy one it is!), but it is not without consequences. Trichet has let it be known that dealing with sovereign-debt default issues should not be the central bank’s problem, it should be a problem for the European Union as a whole. And I think he is right, for what that’s worth.

http://www.safehaven.com/article/19380/kicking-the-can-down-the-road

@ hoganmahew and Brian Woods II

hoganmahew writes:

I accept it is now too late. The state has funding to 2013; a condition of that funding is that seniors are not torched. We must now suck it up.

Brian Woods II writes:

We cannot unilaterally torch bank seniors. In this not only does Colm McCarthy agree but so also does Michael Noonan.

So, whatever your conflicting interpretations of the history of the crisis, both of you agree that the toothpaste can’t be put back into the tube, that it’s no use crying over spilt milk, and that like it or not the country simply has to abide by the commitments it has entered into under the Memorandum of Understanding.

That is also my position, FWIW. I wonder whether anybody on this forum seriously disagrees with it. If so, how exactly would they propose that the (future) government should proceed to ‘renegotiate’ the Troika agreement? Can they present some kind of credible and feasible action plan or scenario? Can they explain how they would react to a refusal on the part of the ECB to provide the promised bailout funding in the event of a unilateral bank bond holder haircut on Ireland’s part? If they can come up with a persuasive alternative, I will be quite happy to change my mind.

I think it’s ultimately a question of opting between the 100% certainty of default now, as opposed to the almost 100% certainty of default at some later stage. The burden lies on those who propose the first option to demonstrate that it would be better than the latter.

@tull
“In what respect did we kick the can do the road.”
Why, by guaranteeing the banks rather than recognising their insolvency and writing some resolution mechanism. By continuing to operate Anglo on the basis that it would come good. By not immediately closing down INBS. The consequences of doing it then may have been too awful to contemplate, but the consequences of not doing it were, apparently, not contemplated at all.

“the esteemed Dr H and the MOF is going to devise a neat little scheme whereby more taxpayers money goes into the banks to be written off imediately when portions of the loan book are sold to Private equity hedge funds of at a 20-30% discount.”
This is the logical consequence of trying to save a banking system that is insolvent. Would better prices have been achieved by doing this two years ago is the question you should be asking. Has the two year paralysis gained us anything at all?

“We should tighten fiscal policy and eliminate the primary budget deficit over the next two years -80% by spending cuts. We should leave the euro, redeminate the govt debt into Irish pounds.”
Again, we should have tackled the deficit in 2008/9, instead government spending increased. I don’t see a benefit to leaving the euro – redenominating debt would be a default, so simply defaulting on it would be enough. Introducing a dual currency might be an option, but I believe we need to retain the euro for external trade.

Hogan,
Closure and Resolution is all fine and dandy but it would have neccessitated front loading losses onto the taxpayer in the absensce of any agreement from “our partners” on bailing in seniors. Actually correct that our “allies” are agreed on bailing in seniors. the answer was and remains no.

No better prices would not have been achieved in the teeth of the Lehmans crisis. I was at a conference in NY last week. The usual suspects from the Squid down are salivating at the prospect of buying undevalued distressed assets from our local bureaucrats. Its a giant game of poker and our esteeded leaders are playing with their cards face up.

Further, I would predict that we will default on some of oour sovereign debt obligations and leave the euro before long.

@Carolus Galviensis
“I think it’s ultimately a question of opting between the 100% certainty of default now, as opposed to the almost 100% certainty of default at some later stage. The burden lies on those who propose the first option to demonstrate that it would be better than the latter.”

Defaulting later means we will have lost:
Our pension fund.
Private sector bank seniors to default on. Will be defaulting on the ECB, so much less of a moral case.
Semi-states.
Several more years in stagnation.
Reputational costs of sovereign default.
All remaining dignity. Credibility long gone.

@Kenneth
The present government, like the banks, is toxic and should have been cut loose long ago. They are making us a global laughing stock.

@Tull
They couldn’t negotiate their way out of a brown paper bag. And that includes the MoF mandarins.

@ceteris
They are where they are, they must have thought it was an envelope…

@tull
“No better prices would not have been achieved in the teeth of the Lehmans crisis.”
For sure then, but it would have taken six months to a year to get organised. There was a bounce in asset prices in mid-2009. It might have been possible to get some away then, though this is admittedly gross hindsight. Even a Securum-like bad bank from the wreckage would have been possible.

Instead we had two dead institutions continuing to tout for business. The chances of them writing it at a profit? They’re another two years older and we’re way deeper in debt.

“Further, I would predict that we will default on some of oour sovereign debt obligations and leave the euro before long.”
I agree with you on the former and disagree on the latter. We will only be able to do this in the arms of the muscle from Brussels. I don’t think we can afford to leave the euro “before long”, I think it would be a relatively slow process (hence why I see a floating scrip being introduced). Not least of our worries would be the total lack of foreign exchange.

I presume in your departure scenario you see forced conversion of deposits?

How long is your “long”?

“That is also my position, FWIW. I wonder whether anybody on this forum seriously disagrees with it. ”
Nope, horse has long since bolted. So…we are now where we are.
Q: why after two years is a severly criticisable bank resulution mechanisim now coming out….the prez thinks its worth a look at, the ECB and IMF are not best pleased. Someone tell me that this is because despite all the wittering on about it being in process it actually wasnt, and that it was only when the bailout actually got legs that it begun to be drafted. Otherwise we find that the parl draftsmans office has been exposed as (yet another) state agency not fit for purpose.
Its enormously frustrating to be in one of the state agencies that do actually do their job, competing internationally and leaning down to see this shoddy state in all senses.

@Hogan
‘I presume in your departure scenario you see forced conversion of deposits?’

The ultimate decimation of property rights – constitutional?

@Brian Lucey
‘Otherwise we find that the parl draftsmans office has been exposed as (yet another) state agency not fit for purpose.’

They were reading the new law that Mr Chevaz got through parliament last week that enables him to rule by diktat and decided that they may as well be hung for a sheep etc.

@ Carolus Galviensis

Bargaining is all about bluffing and taking risks. The government could just say to the EU that they are ‘cutting the banks loose at a certain date, and that’s that. We can either do it orderly or disorderly, but its going to happen’.

Its a risk. But not doing it is also a risk. I’d rather we play to win.

@Hogie,

the euro will face its moment of crisis early in the new year in the Iberian peninsula. It is not obvious that the Germans (& the French) can come up with a credible plan to save it. Neither is it obvious that even if they do come up with a credible plan, it will be acceptable to the periphery. That is where the euro stands or falls.

Act 2 in the drama comes in 2014 when it becomes obvious that the Plan A will not work in the case of Greece, probably Ireland, maybe Spain & Portugal and possibly Belgium. This is probably the time of maximum danger.

Obviously, if/when we leave the euro all assets & liabilities will be conveted to IEP-including any sovereign debt (possibly with a haircut).
I guess that is why there has been huge deposit flight from the two banks. The problem is that it seems to have gone into Danske/RBS/RABo Ireland-IOW it has not gone offshore.

Poster on another forum suggests that government had bank resolution legislation ready. Then just copied and pasted a few amendments after deal done with troika. Possibly FF/PD/GP wanted psychologically to be seen to be in charge, after having been humiliatingly forced, against all their efforts, to conduct bank resolution. So they rushed out this legislation. Cue SMASH! Oops! We did it again. Oh well, they have no reputation for competence to lose anyway. Language on Anglo/Nationwide probably reflects original draft rather than attempted stroke. Civil service needs huge reform.

Poster on another forum suggests that government had bank resolution legislation ready. Then just copied and pasted a few amendments after deal done with troika. Possibly FF/PD/GP wanted psychologically to be seen to be in charge, after having been humiliatingly forced, against all their efforts, to conduct bank resolution. So they rushed out this legislation. Cue SMASH! Oops! We did it again. Oh well, they have no reputation for competence to lose anyway. Language on Anglo/Nationwide probably reflects original draft rather than attempted stroke. Civil service needs huge reform.

So far no-one has offered an estimate of how much we might hope to shave off the stock of government debt by being ‘less kind’ to bank bondholders.
Surely we need to know what we would gain by pursuing this strategy?

@ P L Malone

a good question

Hypothetical answer
PRO haircut- government debt reduced by e.g. 30 billion euros

CONTRA haircut –
– risk of domino effect with German etc banks collapsing now, rather than in a year’s time
– hence Armageddon now

plus

– risk of withdrawal of bailout funding by ECB
– hence Armageddon now

No sane politician will play this card.

@Kevin O’Rourke/ NoGuru
re Quote from article as quoted by NoGURU

“That means reductions in payroll costs and in all other elements of non-payroll overheads.”

Most observers would agree.
But is it worthy of the author to make that statement without going on to spell out the detail. My understanding is that ‘The McCarthy Report re cuts was based on not commenting on pay rates.
But the issue has moved on.
I believe that the author has now thrown the gauntlet to himself to spell out the detail of how he would achieve “reductions in payroll costs”.

@P L Malone

Real question is how much banking system debt does the Irish state need to ‘park’ ‘somewhere else’ such that the remaining ‘debt dynamics’ (to use the recent euphemism) become reasonably sustainable, while not pauperising the serfs. Specifics on ‘park/somewhere else’ remain open (for a little while). Then this figure is deemed ‘serf-nuclear’ by new administration in further discussion with EC/ECB/IMF troika, and the Spanish, and the Goths.

Off the point but Gene Kerrigan made a very good point in the Sindo today.

Noel Dempsey is set to retire on a pension of €130,000 – if he stood for re-election and won his salary would be €100,000.

What sort of perverse incentive structure is this?

Good article. He seems angry.
This has now become a very tangled web indeed.
Can I just ask this:
the IMF seem to be highly practical favouring growth slightly over austerity.
The EU are politically driven and would likely prefer more austerity.
What happens when the two of them disagree – i.e. when the Europeans tell Mr. Chopra they don’t like the way he does business? Can they impose their own governance on the fund?

Re: The bank resolution legislation.
Reading the the thread on politicalworld.org has made me wonder if this wasn’t a deliberate stroke after all. What are the government up to? As usual 90% of the truth is under the water. Lot of evidence of looting by our establishment in recent weeks. Are they at it again?

@Eureka
I think you are misreading the IMF’s position. They too, I suspect, would like to see more cutting, just not so much in the capital budget. They can do the consumption sums that the rest of us can do. Ireland as a whole is consuming imports way beyond its capacity to earn them. While the BOP deficit may be narrowing, it is doing so as much from increased exports as from reduced consumption. We need a good few years of strong BOP surplus…

See here for the IMF press release on approval of the bailout funds: http://www.imf.org/external/pubs/ft/survey/so/2010/CAR121610A.htm

@ Oliver Vandt

Sovereign bondholders want us to shave bank bondholders as much as necessary. Doing anything less means we are not serious about protecting them.

OK. Let’s assume you are right (and that there is no great overlap between the two bondholder categories).

Does it not follow from this that if the government reneges on the bank guarantees it will be able to access the additional sovereign debt it requires (approx 2 billion euros/month) at an interest rate of less than the rate demanded under the MoU (say a reasonable 4%)?

Indeed wouldn’t those sovereign bank holders have made that point to the Irish negotiators at the time? Wouldn’t they have INSISTED that if the Irish Government wants cheap (or cheaper) credit it simply had to ditch the banks? Indeed if the sovereign bondholders were so smart, Ireland wouldn’t have had to genuflect to the Troika at all.

At any rate, how come those sovereign bondholders aren’t screaming to high heavens that Ireland should abandon the banks? They weren’t screaming before the SHTF and they aren’t screaming now. So you must be second-guessing.

[Thanks for the link BTW — fascinating stuff.]

@Oliver
“Lot of evidence of looting by our establishment in recent weeks.”
I’ll give you tree guesses…

@ hoganmahew

[The IMF] too, I suspect, would like to see more cutting …

You can omit the ‘I suspect’. It’s clear enough from the full-text report (though not from the press release):

From page 22 of the IMF report:

The planned consolidation over 2011–14, laid out in the authorities’ National Recovery Plan, is broadly appropriate. However, staff expects GDP growth outcomes to be weaker than those currently foreseen by the authorities and hence the deficit ratio to fall more slowly than envisaged under the plan. Reflecting this reality, the European Commission recently extended by one year the deadline for meeting the Stability and Growth Pact deficit threshold of 3 percent of GDP to 2015. This helps defer the authorities’ obligations to the Stability and Growth Pact. However, under staff’s current projections, achieving the new target is likely to need further measures in the medium term.

[italics mine]

Likely to need further measures in the medium term = Ireland is screwed if it doesn’t impose swingeing, additional budget cuts and/or raise taxation even more.

@Niall

re: Noel Dempsey is set to retire on a pension of €130,000 – if he stood for re-election and won his salary would be €100,000.

What sort of perverse incentive structure is this?

Wittingly or not it seems like the “Golden Boot” rather than the “Golden Handshake”. But better not dwell on the handshake analysis!

@CG
Read McCarthy’s article.

I am coming to the depressing conclusion that the government really believed its own spin about healthy economic growth for the next few years and signed up to the bail-in/out on this basis.

@Hoganmahew
This is like an Irish version of “Downfall”.

@ Oliver Vandt

Apologies for banging on, but your argument about favouring the sovereign bondholders over bank bondholders has a certain attraction.

Let me try to explain why I think it won’t work.

Debtor X (Ireland) has two creditors – Creditor A (good guy – sovereign bondholders) and Creditor B (bad guy – bank bondholders).

He owes Creditor A approximately 90 billion euros.
He owes Creditor B approximately (say) 50 billion euros.

He has repayment problems and so he tells Creditor A that he will dump Creditor B and start paying back in full the interest (and possibly the principal) on the debt he owes Creditor A.

Creditor A says ‘phew’.
In that case, you win the argument.

However, there is a difference between Debtor X and Ireland. Ireland wants both to dump Creditor B and to borrow an additional 2 billion euros per month from Creditor A so that she can keep the show on the road.

Therein lies the rub. Creditor A considers that dumping Creditor B might mean that Debtor X is just fobbing it off. Creditor A wasn’t born yesterday. Creditor A is aware that even if Ireland had no banking problem, she would still have massive debt — debt that might, some fine day, also need ‘restructuring’.

First they come for the bank bondholders …. etc.

@ OV

As McCarthy says that argument has been tested in real world conditions and failed. Debate over.

Actually, it looks as though both sides of the argument might fail, so the debate is not over. McCarthy rightly points out that being tough on bank bondholders isn’t enough and calls for even more stringent austerity measures.

Otherwise all the government would have to do would be to renege on the banks and those state bondholders would come flooding back in again to lend us the daily cash we need at bund rates + 0.5%.

But they’re being very shy indeed. So McCarthy’s sound reasoning is: bank haircut + double helping of McAusterity, big time, whopping. That’s fair enough. But what politician will be willing to push it through?

The volk are still hot and bothered about the mini-reduction in the minimum wage. Candidates who try to argue in favour of further cuts will risk destruction at the polls.

@Carolus
re: Candidates who try to argue in favour of further cuts will risk destruction at the polls.
Disagree.
The party proposing most significant cuts to top level PS pay, as distinct from cuts to minimum wage is surging in the polls.
The other parties are just to slow to get the message of where to apply the cuts or just don’t want their own salaries (never wages ) affected.

Very little noise in the media about the Presidents decision to convene the council of state to examine the constitutionality of the credit institutions bill.

I found it very sinister that this was not on the top of the RTE news when announced .
Could we have a thread on this subject withen the Irish economics blog !

@ Joseph Ryan,

I mean cuts at all levels – maternity allowances, children’s benefits, school fees, civil servant pensions, pharmaceuticals, plus extension of pensionable age, etc. + residence tax etc.

I can’t imagine any party that highlights such proposals in their manifestos would be successful.

@Enda H

Firstly Colm McCarthy is a blogger here and by all accounts a clever, disciplined and accomplished man and convivial company to boot. No insult intended, not that my opinion would matter.

“… this kind of thing does you no favours. Portraying Colm McCarthy as some kind of bogeyman (”even if Colm…”) is an unfair portrayal of a man who did not cower into his office in UCD when a government who hadn’t the balls to make the suggestions themselves came knocking.”

The Irish establishment just does not have it in it to kick the Irish establishment. This excessive collegiality is not restricted to CMcC and it is remarkable how the grandees from all political traditions, transcending civil war politics, have stood by the government even as they drove us off a cliff.

Ruling class solidarity perhaps.

“And as for “Thatcherism”, less of the sensationalist crap. Do you think Thatcher would have left the old-age pension uncut or would allow private banks be bailed out with public funds? Be reasonable here. Ireland is not a Thatcherite country. It is a broken country with an inept government trying to fix it, but this is not some neo-liberal conspiracy.”

I may have misspoken. Fianna Fail do not share the ideology of Margaret Thatcher, in fact it’s arguable that they have any guiding ideology – which is no bad thing at all. They go where the wind blows and Thatcherite “reforms” were something that they left the PDs to unsuccessfully promote.

However might it be reasonable to say that when the disaster unfolded and the government/DoF commissioned Mr McCarthy to look at potential solutions they knew that privatization, the reduction of social welfare and cuts in public services were the potential solutions they were going to get?

It does sound like a Thatcherite agenda, a little bit, doesn’t it, even if no one dares mentions monetarism any more?

There is no need to invoke a neo-liberal conspiracy either, it is more a failure of nerve, not just here but across Europe. We have been faced with a crisis in capitalism, diagnosed it as a problem with social democracy and chosen our new political direction accordingly.

@Keith
It is a bit sinister alright but at this stage it’s a bit like living in Gotham City. I think Lenny was forced into this. But I could be really wrong

Strangely, my main reaction wasn’t about how much trouble Ireland is in ….that’s hardly news….but rather how the article read as if it had been written by Michael H.

@ Brian Lucey

wrt your response to:
““That is also my position, FWIW. I wonder whether anybody on this forum seriously disagrees with it. ”

Being:

“Nope, horse has long since bolted. So…we are now where we are.”

Carolus asked basically, for alternatives.

Are you coming round to the view that the lack of willingness in Ireland to credibly threaten to run a budget surplus (patriotic sacrifice on the part of the Crokies involved there) undermines the potential negotiating strategy and therefore the country just does what Morgan Kelly suggested – rely on the kindness (or not) of strangers?

@Keith Cunneen – “Very little noise in the media about the Presidents decision to convene the council of state to examine the constitutionality of the credit institutions bill.”

Because it’s just window dressing?

“Nope, horse has long since bolted. So…we are now where we are.”
So what? I still have a Honda Civic, Mitsubishi and Subaru outside.

Re the bubble in public spending, the IT in a review of Education last week had this Croke Park gem: “But when the Department threatened to sack surplus lecturing staff in the institutes of technology, the union waved the white flag. Members were balloted on the “temporary suspension” of industrial action and the TUI came back to the table.”

Surplus staff in Education, HSE and the broader Public Service, what to do with them?
Solution: get all the vested interested together in GAA land, and make sure the surplus isn’t reduced!

Public service reform – don’t you love it.

A couple of days ago I included in a post some of the IMF forecasts (e.g. gross government debt) expressed in Euros. I find this more tangible than the same information expressed as % of GDP. I’ve now created a spreadsheet which shows the derivation of this data, which can be found here . The numbers are slightly different to the previous ones. The page numbers in the spreadsheet refer to the pages in the IMF report. It is an OpenOffice Calc document and can be downloaded.

These numbers show why, as CMcC says in the article, debt servicing will be “at the absolute limits of sustainability”. It is also useful to be able to put the amounts that could be saved via a bank default into perspective. Note also that Ireland will still be borrowing approx €9bn a year in 2015, even though there will be a primary surplus, if the targets are met. Added to this will be the need to rollover existing debt and perhaps the need to start reducing the overall debt level to start trying to meet the 60% SGP target. So there will still be a need for large scale borrowing from the markets (or the ESM) even with a primary surplus.

Ireland had it’s party and now it time to pay the bill! Time to grow up!

No way European banks and pension funds have to pay the bill, basically this is money from the North Western aka German and Dutch taxpayers who had to pay for most of the bloody Irish infrastructure already and that same time enabling Ireland to lower their corporate tax en luring away jobs and taxes from the same people who fed them while boasting their
” paddy economic model”. Yeah right!!! at the expensive of others!!!!!!

The Irish State gave a guarantee and that’s it! This isn’t Disney World!

Off course Ireland can pay and loans can be extended if nescessary to like 2040 as Iceland did, but no haircuts!

If the Irish are not prepared to fulfill their obligations then in worst case maybe some restructuring but only in exchange for the corporate tax rate!

A Dutch taxpayer

For our Dutch visitor. (apologies for my bad dutch grammar)

___________________

Natuurlijk veel Ierse belastingbetalers voelen precies hetzelfde over de “feest” dat Ierland gevierd. Zij hebben ook het gevoel dat ze niet verantwoordelijk zijn voor de rekeningen en schulden van de Ierse banken, maar ze betalen al. Velen woonden normaale levens door de hele “feest”, veel mensen sproken over de problemen die zouden kunnen gebeuren als gevolg van het “feest”. Niemand luisterde. Niet in Ierland en niet buiten.

Ook, meeste Ierse geloven dat zij verantwoordelijk zijn voor de Ierse nationale schulden. Maar vele experts – in Ierland en buiten – nu geloven dat de combinatie van hoge staatsschuld en gegarandeerd bankschulden zal onmogelijk zijn om terug te betalen. Dit maakt niemand blij. De vraag die we allemaal vragen is dit: “Wat kunnen we nu doen?”

Hoewel sommige Ierse mensen zeggen dat “buitenlanders” nu problemen veroorzaken voor Ierland, de meeste mensen begrijpen dat de problemen waren zelfgemaakt. Echter, zelfs als ze zelfgemaakt waren, niet iedereen in Ierland is verantwoordelijk, niet iedereen in Ierland is schuldig. Zijn Nederlandse pensioen beleggers “schuldig” omdat hun pensioenfonds geld gaven aan de Ierse banken? Zijn Ierse belastingbetalers of Ierse kinderen ‘schuldig’? Sommige zijn, ja. Velen of meesten niet. Het geld is nog steeds verdwenen. Wat kunnen wij nu doen?

Op belastingen. Ik begrijp dat Nederland geen vermogenswinstbelasting heeft, en heeft een zeer bijzondere regeling voor belastingen op “royalties” (Ik ken niet het woord in het nederlands). Ierland heeft zijn eigen fiscale regeling. Hetzelfde geldt voor Nederland. Volgens mij is dat een goede plan.

Ten slotte, vandaag moet Ierland veel dingen veranderen – zeker meer dan Nederland. We hebben vrienden nodig en we willen geen nieuwe vijanden maken. We hebben al problemen genoeg.

@cloggy

The bank guarantee was a very serious mistake on the part of the Irish government but we will not let our children’s children to end up paying for it.

The blame has to go where it belongs – on the international banking system. The losses will have to be shared out between all the parties who took such irresponsible gambles.

On the corporate tax rate that will have to change, it is clearly not a fair thing and it will have to go hand with agreements on tax havens and international accounting standards so that there is a gradual equalization of how easy it is for corporate entities to evade tax Europe wide. Like for instance Dutch shell companies with foreign bank accounts in the Antilles.

Lets go back to 2009, courtesy of http://themoderatevoice.com/31053/the-netherlands-surprised-miffed-by-obamas-tax-haven-slur/

‘However, the Treasury Department released a fact sheet that said “nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands and Ireland.’

It is probably worth detailing what the IMF say in its report: “Debt dynamics would improve if the recapitalization requirement remains
contained. Staff estimates suggest that it is unlikely that bank capitalization needs will exceed €35 billion. If that amount is needed, the
authorities would use their own resources of up to €17.5 billion and €17.5 billion would be added to sovereign debt. In this conservative baseline scenario, the debt ratio would peak at 125 percent of GDP in 2013. If the needs are lower, as is currently anticipated, less financing under the overall program will be required. In this case, the government can use its liquid assets to cover the budgetary financing needs, also reducing the debt. In a scenario where capitalization needs are €25 billion, debt would
peak at 119 percent of GDP in 2013, and if only the initial €10 billion is required, debt would peak at 109 percent of GDP”

@hugh
@shay

Hugh, close to perfect Dutch! I should be the one to apologize for the clumsy early morning English…

Well most Continentals esp the Dutch have a soft spot for the Irish so I reckon it will be okay but Ireland can not continue it’s aggressive tax policy as that would be perverse towards ao German, Swedish and Dutch taxpayers who will be asked to share the burden ( haircuts from banks and pension funds and maybe even ECB bonds at the end of the day will be at the expense of these taxpayers).

As for Dutch taxes, it’s just 25.5% and off course their are still tax loops and special arrangements but nothing close to the Irish rate. The tax loops are aggressively attacked by the way.

True about the former Dutch Antilles. We are trying to get rid of these bastards but The Netherlands have no say in their tax policy and they defend it like mad.

fyi>>>Dutch Antilles seized to exist from 1-10-10. The Kingdom of The Netherlands comprises 4 (equal!!) countries. The Netherlands, Aruba, Sint Maarten and Curacao with all their own (tax)policies.

I’m pretty frustrated reading articles like the one written by Mr McC – no offence to him in particular. I think, this pattern of offering analysis and commentary of the “we’re screwed” type seems pretty common among our public intellectual class.

Is self-inflicted powerlessness a mindset infecting our entire policy community, policymakers, etc?

There’s no forward looking suggestion on _what we do now_ (e.g. in the few months before all this bank debt goes on the Irish sovereign balance sheet). Do those of us with mobile human capital just plan to emigrate?

A few weeks ago, Mr McCarthy in the SINDO, and on this forum, argued that this deal was the only deal that was offered and that any threat to utilize the “nuclear option” was unwise, etc. Has he changed his mind since then that this deal basically bankrupts the Irish sovereign.

Notwithstanding the moral arguments (e.g. buyers of Irish government bonds getting screwed (eventually) while AIB/Anglo/BOI bondholders walk away scot free thanks to a sovereign “guarantee” that they didn’t enjoy when they lent the money), no one had made a fact-based case why sovereign default has lower costs than letting AIB/BOI/Anglo go and just honouring the 100K in protection for despositors (or, more likely, foisting them onto some shared solution involving our European “partners”).

The exporting to recovery thesis runs into some trouble :

http://www.guardian.co.uk/business/2010/dec/20/debt-crisis-threatens-us-cities

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery. “Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told the CBS 60 Minutes programme on Sunday night.

@ cloggy

What if the Netherlands had (for deep historical reasons) no industrial revolution and needed to develop ? Would you try to do something with the tax system to attract MNCs ?

Thanks for commenting
Zalig Kerstfeast

@Paul

not sure if the industrial revolution is still a valid excuse and there is never an excuse for tax piracy.

Ireland can do with a little less of this with it’s young vibrant and well-educated people and avoid pissing off other countries. Ireland is no the longer the cute innocent cub and the others will come back at you sooner or later.

There are plenty countries who skipped the IR, like S-Korea or Taiwan or even China…they (re)invented themselves instead of being depended on FDI

@ cloggy

Those Asian countries certainly did not skip the industrial revolution. They simply skipped the earlier phases of the process, because they entered it many years later. ‘Forget the steam engines, let’s go straight to the electric blast furnaces’. Most developed their enterprises in a protectionist, dirigiste, regime, but FDI also payed a part, especiailly in Taiwan, I think.

Take a look around Ireland for yourself. It’s a popular, and pretty destination. That’s because much of the landscape is still agricultural. We don’t have post-industrial wastelands, because we didn’t have the industry. 200K total employed in manufacturing even today.

We do have lots of young, vibrant well educated people. What we lack is the enterprises to employ them. That’s what he MNCs are supposed to provide. Or so we were led to believe.

It’s not, with respect, a question of being innocent, or even cute (although that’s a matter of opinion). It’s more a question of having been on the receiving, powerless, end of the colonisation process over many centuries. Unlike the Netherlands and other European powers.

What was ‘economic development’ to Britain was ‘economic exploitation’ to us. What is ‘tax piracy’ to you is is ‘development tool’ to us. That’s politics.

@cloggy

I think that you do not understand the money flows for a bailout. Germany and the Netherlands are making, not losing, money. Here is an excerpt from an interview with the head of the EFSF to a German newspaper on the Greek bailout, correcting a common misunderstanding held by German taxpayers.

BILD: The more countries take advantage of the rescue, the greater the cost to the other states. Is Germany the paymaster of the euro crisis ?

REGLING: Paymaster is wrong. It’s all about guarantees, not really flowing money. No one takes away something the German taxpayer. On the contrary. With its contribution to the rescue fund Germany will most probably make win. Alone from Greece that would be up to € 600 million per year because the Greeks have to pay a kind of interest rate to the bailout loans.

@Bryan G
The Dutch and German taxpayers are only making money if we repay all the loans. How sure are you that we will or can? Otherwise their taxpayer loses too, while the only ones made whole are a subset of bank creditors. It’s a funny deal all around.

@remnant

“no one had made a fact-based case why sovereign default has lower costs than letting AIB/BOI/Anglo go and just honouring the 100K in protection for despositors”

Just grow up. It is so typical of a non-economist to ask for numbers about a topic as complex as comparing the costs of two policy choices.

Irish economics is much more about the crucial theory side of contemporary issues and ensuring that ones thesis has the support of the four pillars of anecdote, common sense and fatalism.

@Brian Woods II

Brian your real name is not Willie O’Dea by any chance? Why does North Korea a gulag state with a psychotic despot spring to mind when you try to explain your theories about the state if Ireland? Which I find very entertaining, I might add. The banking guarantee did not cost us much? Never has anyone put such a cheap price on the loss of their countries sovereignty. I assume that if you are not Willie you are at least “Irish”.

BTW our friends in Europe, the ones that insisted we vote twice, are afraid that we might be pulling a fast one by diluting the security on their loans made to irish banks/state. They want to make sure that if things go seriously wrong and the state must default that our CB cannot get ahead of them in the queue! Says a lot about their confidence in their own policies, does it not?

That stance is not inconsistent with charging interest rates of 5.83% or insisting that Ireland be forbidden from sharing losses with senior bondholders. Loss sharing equated to …. a no loan from us scenario. That is of course, until it suits them to do the very opposite. Neither, is their stance, inconsistent with stripping recalcitrant states of voting powers and eventually forcing us into some sort of two tier EZ along with our fellow Piigs who cannot pay off “bailouts” from seriously deflated and shrunk states. If you shrink the banks you shrink the economy, we needed to cut the banks loose from the state guarantees not shrink the state to fit the size of the insolvent banking system.

Don’t forget when all of this is over, AIB and BoI will be in state control still trying to operate under a failed loss making business model and gimped by state control. Where is the Canadian and Chinese banks that should be in this state expanding our banking system and offering loans to viable Irish businesses? How many delegations have gone to achieve this objective? We are too busy or NAMA is too busy working with failed developers each and every one of whom did not understand what they were doing. In their cases insolvency must = bankruptcy an the corpulent failed business men must be allowed to fail. It is an affront for it to be otherwise and the Irish people will never row in behind this dystopian plan. I do not agree with the view that property prices would have fallen more only for NAMA . They needed to, and still need to fall more, In any event, property cannot be sold, full stop. So, this theoretical floor under the market is an illusion. I printed a map of Ireland the other day and it was as if some artist had spent an hour splattered it with red ink, guess what the size of the droplets corresponded to? The size of the ghost estates. I laugh when I hear about NAMA and it’s “business plans” they may as well try and hold back the tide with a pitch fork. The original business plans were not very good were they? At the height of the boom,they could not sell them so can someone explain to me who they are going to sell them to in an economy with no lending, 450,000 unemployed state revenues shrunk to 31bn and emigration sky rocketing? Don’t worry they are coming up with new NAMA business plans? Give us all a break! Put them out to permanent pasture.

At the beginning of 2010 I predicted the IMF would be here much sooner than anyone imagined. My prediction for next year is that we will be maneuvering for bailout II before the year is at a close. God, I only meant to write 2 or 3 lines.

@Hugh Sheehy

According to Labour the profit margin on a €22.5bn tranche is about €5bn over the lifetime of the loan, so it is a nice profit if we pay it back. The IMF loans and the post-2013 ESM will be senior to all other debt. The current EFSF/EFSM is at the same level as other sovereign debt, so there is some chance that not all of it will be paid back. However I would guess it will first be the unguaranteed bank debt, then the guaranteed bank debt if it comes to that, that will take hits before the bailout money itself. If Ireland does run into trouble paying back the bailout money then the loans will likely be restructured with extended payment terms, and the EU governments will need to pay back the original lender and wait a bit before getting their money back, and may make less profit or perhaps some loss. However this is a far cry from the seemingly common belief held by many Northern Europeans that their taxpayer money is currently being transferred to Ireland.

Hello @cloggy.

This isn’t Disney World!

Indeed it is not. In the Disneyland model, as you know, there is one group of people, the ticket-holders, which is entitled to a risk-free, child-friendly, magical experience, while all other parties are obliged to act as the grown-ups, enduring whatever it takes in order to deliver the magical experience. The strange thing is that you yourself appear to be suggesting that this should be EuroDisney, with
the bondholders as the childlike guests. And this is a very strange thing indeed. When a private investment goes bad in the Netherlands, and the equityholders have been wiped out, do you believe that the Dutch taxpayer should come running to make sure that the bondholders get all of their money back? Would you find it convincing if I argued that the Dutch taxpayer should come running because the bondholders owe money to widows and orphans, while the Dutch people will continue to rejoice in having an unwanted shopping centre, disused office block
or empty housing estate on their soil? Or is it only foreign taxpayers who are morally obliged to compensate Dutch adults who make bad investments?

No way European banks and pension funds have to pay the bill, basically this is money from the North Western aka German and Dutch taxpayers who had to pay for most of the bloody Irish infrastructure already and that same time enabling Ireland to lower their corporate tax en luring away jobs and taxes from the same people who fed them while boasting their ”paddy economic model”. Yeah right!!! at the expensive of others!!!!!!

Thank you, in all sincerity, for the Dutch contribution to the European structural funds which this country received. Although of course we have no legal obligation to do anything further in return for this money, as it was a grant, this country does indeed owe the Netherlands, and the other historic net contributors to the EEC/EC/EU, a real and significant moral obligation. However, if you think this means that the EU core has the moral right to demand from Ireland, uniquely among the EU member states, a public subsidy for bondholders in failed private investments, amounting to many thousand of Euro for every citizen, to be paid at at time and in a manner determined by the EU – including a 5%+ interest rate! – then you are quite mistaken. Likewise, it was both annoying and foolish for Irish politicians, bureaucrats and so on to prattle about the Irish economic model, but foolish prattle is not actually a crime or even a civil offence. It is certainly not a crime that carries a penalty of several thousand Euros to fall on the heads of every man, woman and child in Ireland, many of whom have never made public statements about the Irish economic model in their lives.

@ Joseph

well I pay a hell of a lot more than Bono:)

@Anonym @Paul

I have to be German about this>>>the Irish government, representing hopefully, the Irish People (who re-elected FF again and again with the likes of Charlie, Bertie and the two Mary’s) gave a guarantee as a country to investors in Irish Banks. As a country does a thing like that, one might hope, this is written in stone!!
You can not honestly be blamed for investing AFTER the guarantee!! These investors made a risk-assessment based on this guarantee not assuming that a country can withdraw from a guarantee. And these people are no criminals. They just went for a pretty good state-guaranteed profit-margin as they should! I would have done it!

The Irish People only can blame their government representing ALL Irish in this..the argument that people had no say in this is ridiculous. They had a say though their government.

And Ireland can repay. Income per head of population is still well above most the rest of EU, except Luxembourg and Cloggyland. I don’t see how you can say to the Germans you can’t repay while Irish income is still substantial above German income per head populares and the tax intake is still lower than in most other countries…

Not a nice message unfortunately…

@cloggy

Let’s start with the €25 billion in unguaranteed senior bank debt. Are you all right with the holders of that debt receiving the haircut which is their due?

The Irish People only can blame their government representing ALL Irish in this..the argument that people had no say in this is ridiculous. They had a say though their government.

I’ve never said anything of the sort.

@Bryan G
Whether it’s profitable or not depends on how you view it. If you take the risk free Bund rate and compare the payments against a loan at the bailout rate, maybe it shows an excess return. If you take Ireland’s current rate and compare the payments against a loan at the bailout rate, they’re subsidising us. Either way we’re spending it on high public sector pay and high social welfare rates rather than on any effective stimulation of the economy. If it wasn’t Ireland I say that seems mad.

@cloggy
Again, there are many aspects to the issue. Most people accept that people who loaned money under a sovereign guarantee are different from those who loaned money to the banks prior to the guarantee. A sovereign guarantee is not a small thing. However, at the moment the Irish people are having to pay both guaranteed and unguaranteed, which seems wrong.

As for Ireland’s high income, some of it is real, some of it is borrowed money, and another part of it is not really Irish income. Apart from the borrowing, which is a big chunk of Irish “income”, you have to look at Irish GNP rather than GDP. GDP is not a representative number for the Irish economy. While the two numbers are the same for most countries, there’s a big difference in Ireland.

There are few nice messages in Ireland now.

@Hugh Sheehy

I think the main motivation for the 3% margin over cost of funding is punishment, rather than profit. The EU Commission’s Balance of Payments (BoP) scheme does not charge any margin, but is only available to countries that do not use the Euro. Unlike what Cowen said this scheme has nothing to do with ‘humanitarian aid’ but is for countries with economic problems and comes with economic policy conditions not unlike our own bailout. When the EFSM & EFSF were put in place Germany and possibly other countries insisted on the margin to make it unattractive to use. I am sure that not every meeting in Frankfurt and Berlin ends with someone pounding the table and shouting ‘Hibernia delenda est’. It just seems that way sometimes!

I agree that spending the money on a bloated and inefficient public sector makes no sense – a 1% annual reduction in public sector staff through attrition over 3 years in the face of a massive gap between revenue and expenditure is insane.

I have absolutely no problem with haircuts for lenders to Irish banks prior to the state guarantee… although this is also a faux pas because of the Irish government’s weak control over financial regulators but hell you have to start somewhere:)

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