Archive for February, 2011

Central Bank and Credit Institutions (Resolution) Bill 2011

By John McHale

Monday, February 28th, 2011

The draft legislation for a permanent special resolution regime for failing banks has been published (see here).   The proposed legislation would replace the much-criticised emergency Credit Institutions (Stablisation) Act passed in December.

From a quick reading, the legislation appears a significant improvement on what it would replace.   The Governor of the Central Bank rather than the Minister for Finance makes the decision to trigger the regime.   The new legislation has well-defined triggers (Section 8), though it appears to leave a large amount of discretion with the Governor and lacks quantitative targets.   There also appear to be reasonable provisions for creditor protection (e.g., the possibility to appeal to an independent valuer when forced transfers of assets or liabilities take place (Section 31)).  I would be interested to hear opinions on whether these protections are sufficient. 

Strangely, according to the Irish Times, the new legislation might not come into effect for domestic institutions until the end of 2012 (see here). 

The legislation will not immediately apply to domestic institutions but covers all other banks authorised in the State, foreign owned subsidiaries and banks operating in the IFSC.

Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Nationwide, EBS and Irish Life and Permanent are covered by the Credit Institutions (Stabilisation) Act which was introduced late last year.

The objective of the new legislation is to shift the Irish institutions falling under the Credit Institutions (Stabilisation) Act to being covered by the Central Bank and Credit Institutions (Resolution) Bill before the end of 2012.

Update: Some additional useful links:

Simon Carswell gives his reaction here.   Suzanne Lynch provided a good overview of special resolution regimes after the emergency bill was published in December.    As linked to many times on this site before, Peter Brierley provides an indispensible international comparison of SRRs, with a focus on the UK’s regime.   The original emergency legislation — which remains in effect until the end of 2012 — is available here.

Mortgage Arrears: December 2010

By Karl Whelan

Monday, February 28th, 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.1% in September to 5.7% in December, in line with the previous increases over the past year.

For the first time, the Bank are also publishing statistics on how many mortgages have been restructured and the nature of these restructurings. In addition to the 44,508 mortgage accounts that were in arrears for more than 90 days, there are 35,205 mortgages that have been restructured but which are classified as performing and not in arrears.

Money and Banking Statistics: January 2011

By Karl Whelan

Monday, February 28th, 2011

The Central Bank has released the Money and Banking statistics for January here.

In a helpful development, the Bank are now publishing statistics for the six banks covered by the Government guarantee (ELG) scheme. The statistics are published both on a gross assets and liabilities basis and also on a consolidated basis, which net out all intra-bank transactions. For example, the gross balance sheets show assets of €623 billion in December. However, once intra-bank transactions are netted out, the consolidated assets are €455 billion.

Unfortunately, the new Table A.4.2. for the covered banks shows a pretty grim story in relation to deposit outflows. In contrast to some reports, deposit outflows from the covered banks in January were about €18.5 billion, about the same as the rate recorded in December.

Update: A contact from the Central Bank has been in touch with me about the calculation above on deposit outflows. As noted above, the Bank are releasing monthly figures on a gross unconsolidated basis and quarterly figures on a consolidated basis. The €18.5 billion figure that I cited is, as usual, from the gross unconsolidated figures. However, I have been informed by the Central Bank that approximately 75% of the decline in deposits reported inn Table A.4.2, is due to intra-group activities in the banks concerned, so that deposit outflows from the system in January were in fact considerably smaller than in December. I’m happy to pass on this as it is useful information. Still, it suggests that the next logical step is for the Bank to release the consolidated balance sheet on a monthly basis.

Ireland Revolts for Stability

By Philip Lane

Monday, February 28th, 2011

Oliver O’Connor interprets the election results for WSJ readers here.

Donal O’Mahoney on Senior Bank Bonds

By Philip Lane

Monday, February 28th, 2011

His article in today’s IT is here.

Moving Deposits

By John McHale

Friday, February 25th, 2011

I am trying to get my head around the Anglo/Irish Nationwide “deposit sales”.   The collective wisdom of this blog might help set things straight.   (Useful reporting by Simon Carswell and Mary Carolan here and here.)

A few initial comments/questions:

First, I think term deposit sale (or selling the deposit book) creates a lot of confusion.   I think it is better to think of what is happening as asset sales, but where part of the price is taking on existing liabilities to depositors.   From the purchaser point of view, another perspective is that it is a purchase of assets that comes with a certain amount of pre-arranged funding (i.e. the deposits). 

Second, there seems to be a view that it is a good thing to retain the deposits in the Irish banking system.  But then there is also a view that Ireland needs to deleverage – essentially sell assets to reduce outstanding liabilities.   The ECB wants this to happen because it is afraid it will be further called on as lender of last resort if those deposits later flee.   What are your thoughts on selling the assets to (and retaining the deposits with) other Irish banks? 

Third, in terms of the total being exchanged for the deposits (mainly NAMA bonds and cash), what is the inference about how the bonds are being valued?   I’m sure someone has done these calculations.    Are the implied valuations related to the fact that the asset sales have been made to other Irish banks — one 92.8 percent State owned, the other privately owned?  

Comparing Iceland and Ireland

By John McHale

Friday, February 25th, 2011

Dan O’Brien completes his excellent two-part comparison of the Irish and Icelandic economic crises in the Business section of today’s Irish Times.   Today’s instalment is available here; last week’s here.

Update: Paul Krugman responds here.

Some conclusions (it is important to read the articles for full context):

The first conclusion is that the size of the bubbles in the two economies – rather than anything that happened when or after they burst – was the main determinant in explaining the magnitude of the two calamities.

. . .

The second stand-out fact from a comprehensive comparison between the two economies – in this case since the bursting of the bubbles – has been the role of exports in contributing to recovery. . . . [T]here has not been a significant difference in export performance between Ireland and Iceland.

This is not at all what one would have expected. While being part of the euro protected Ireland from even greater instability during the worst of the crisis, the downside of being locked in to a single currency is that devaluation is unavailable as an option to rapidly regain competitiveness and make adjustment to the shock easier to deal with.

Iceland suffered all the downside of having its own currency, but far less of the upside. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.

And the absence of an export boost from exchange rate depreciation has not been confined to Iceland alone. Another neighbour has been similarly disappointed, as the chart illustrates. Despite the weakening of sterling, British exports remain below pre-crisis levels.

No currency regime is perfect and all have positives and negatives. Although things may very well change, at this juncture the benefits for Ireland of being part of a much larger single currency have been considerably greater than the benefits to Iceland of having its own currency.

But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable.


Migration Estimates

By Brendan Walsh

Thursday, February 24th, 2011

This is an addendum to John McHale’s last post and a response to JTO’s plea for more real data on this site. Below is a consistent series (based on CSO data) for the net migration rate from 1961 to 2010.  The net flow has been expressed as a rate per 1,000 average population. The years are to end-April.
We await with great interest the results of the 2011 Census, which will give us a fix on the migration trend for the year ending April 2011 and allow the estimate for 2002 to 2010 to be updated. 
Preliminary Census results should become available by the end of the summer.

Irish Remedy for Hard Times: Leaving

By John McHale

Thursday, February 24th, 2011

The Wall Street Journal carries an extensive article on Irish emigration.

Martin Wolf: Ireland Needs Help With Its Debt

By Philip Lane

Tuesday, February 22nd, 2011

Martin Wolf writes on the Irish situation in Wednesday’s FT: article is here.

He cites an overview-type paper that I have written: “The Irish Crisis” which is available here.

Stirring it

By John McHale

Tuesday, February 22nd, 2011

The FT’s Lex proposes a grand bargain.

Andres Velasco seminar: “The Fiscal Framework: Lessons from Chile”

By Philip Lane

Tuesday, February 22nd, 2011

The Policy Institute and the Institute for International Integration Studies (IIIS) at TCD are pleased to announce that Andres Velasco (ex Minister of Finance for Chile) will give a seminar at TCD on Monday March 14 on “The Fiscal Framework: Lessons from Chile”.  As has been flagged on this blog before, Chile was able to run very sizeable surpluses in the pre-crisis period, such that it could enjoy a big fiscal swing during the crisis without threatening fiscal sustainability.  This seminar provides an opportunity to learn how Chile was able to achieve this counter-cyclical fiscal policy.

  • Monday, March  14
  • Time: 8.30am-10am
  • Venue:  Jonathan Swift Theatre (Room 2041A), Arts Block, TCD
  • Admission: Free, All welcome
  • Queries to: policy.institute at tcd.ie

Andrés Velasco: Short Bio

Andrés Velasco was the Minister of Finance of Chile between March 2006 and March 2010. During his tenure he was recognized as Latin American Finance Minister of the Year by several international publications. His work to save Chile´s copper windfall and create a rainy-day fund was highlighted in the Financial Times, the Economist, the Wall Street Journal and Bloomberg, among many others.

Mr. Velasco is currently a Fellow at the Center for International Development at Harvard University.

He holds a Ph.D. in economics from Columbia University and was a postdoctoral fellow in political economy at Harvard University and the Massachusetts Institute of Technology (MIT). He received an B.A. in economics and philosophy and an M.A. in international relations from Yale University.

Pior to entering government, Mr. Velasco was Sumitomo-FASID Professor of Development and International Finance at Harvard University’s John F. Kennedy School of Government, an appointment he had held since 2000. Earlier he was Associate Professor of Economics and Director of the Center for Latin American and Caribbean Studies at New York University and Assistant Professor at Columbia University.

Mr. Velasco was a Research Associate of the National Bureau of Economic Research in Cambridge, Massachusetts, an International Research Fellow at the Kiel Institute for World Economics in Kiel, Germany, and the President of Expansiva, a think-tank in Santiago, Chile. He has been a consultant to the International Monetary Fund, the Inter-American Development Bank, the World Bank and ECLAC.

He was president of the Latin American and Caribbean Economic Association (LACEA) from 2005 to 2007. In February 2006 he received the Award for Excellence in Research granted by the Inter-American Development Bank.

In addition to ninety academic papers and three academic books, he has published two works of fiction in Spanish: Vox Populi (Editorial Sudamericana, 1995) and Lugares Comunes (Editorial Planeta, 2003).

Axel Weber on European Reforms

By Philip Lane

Monday, February 21st, 2011

Axel Weber highlights the dangers of debtor-friendly reforms in this FT article.

Münchau on misdiagnoses

By Kevin O’Rourke

Monday, February 21st, 2011

Wolfgang Münchau is in fine form in this morning’s FT. And this morning’s Eurointelligence provides further evidence along the same lines, with some alarming German comments about the forthcoming stress tests (or should that be “stress tests”?).

The Debt Net

By Philip Lane

Monday, February 21st, 2011

The FT has a long article on the pros and cons of bailing in of senior bondholders here.

More Black Holes? The Curious Case of the Missing €700 Million

By Karl Whelan

Sunday, February 20th, 2011

The basis for the debates about fiscal policy in the election has been the Four Year Plan agreed with the EU and the IMF. This plan outlined measures that cumulated to have a €15 billion effect on the level of the deficit by 2014.

It is widely believed that the timing of the adjustment in this plan involved €6 billion in adjustment in 2011 and €9 billion in further adjustments over 2012-2014. In fact, this is not the case. The widely-cited €6 billion figure in relation to the current year’s budget includes €700 million in temporary measures due to once-off asset sales.

Thus, looking at page 19 of the Four Year Plan, we see that the adjustments planned for future years are €3.6 billion in 2012 and €3.1 billion in 2013 and 2014. This adds up to €9.8 billion. (I’m guessing there is some rounding going on here so that additional adjustments over €9 billion don’t appear to add up to the €700 million in once-off measures for 2011.)

Coming back to the election campaign, Fine Gael say their figures are from the Department of Finance, so they are presumably using the Four Year Plan figures. And they are aiming for the same 2.8% deficit that Fianna Fail are. This means that will also need to make €9.8 billion in adjustments. However, going to the back of Fine Gael’s budget document, one finds €6.444 in spending adjustments and €2.441 billion in tax measures, for a combined €8.9 billion.

So, on the face of it, Fine Gael’s proposed adjustment is about €900 million too low to achieve their targeted budget deficit, even if one accepts the Department of Finance growth rates. If this figure is added to FG’s tax measures, you would get €3.3 billion in additional taxes over 2012-2014, just €300 million lower than in the Four Year Plan. (I’d also note that €750 million of FG’s spending savings are actually due to transferring water provision to private firms that will collect these funds in water charges—these are spending savings that will feel like tax increases.)

During the campaign, Brian Lenihan has raised the issue of FG treating the current temporary asset sale measures as though they are permanent. However, this appears to be another case of glasshouses and stones. The Fianna Fail manifesto now claims that 2011 will see €5.9 billion in permanent deficit-reducing measures and only €110 in once-off other measures. And the FF manifesto now promises a figure for tax increases over 2012-2014 that is €650 million less than in the four year plan.

All of this raises a few questions: Have €600 million in once-off revenue raising measures been abandoned? If so, what are the permanent revenue raising measures that have been put in place to make up for them? If there are still €700 million in temporary measures in place, as Brian Lenihan seems to believe, then why are these not accounted for in Fine Gael’s plans or, indeed, those of his own party?

Update: From comment exchanges with FG officials below, I now see that I had missed that FG’s €8.8 billion omitted €1.2 billion in adjustments that occur in future years as a consequence of decisions taken in the 2011 budget. This additional €1.2 billion splits equally between spending cuts and tax increases. I don’t much like the way FG have presented the figures or calculated the tax\spend mix. Still, I’m going to score this one for FG and against Brian Lenihan.

Dodgy banking assets and the viability of the IMF/EU deal

By Kevin O’Rourke

Sunday, February 20th, 2011

Colm McCarthy’s latest offering in the Sunday Independent is available here. Like its predecessors, it is a must-read.

Irish Society of New Economists Conference

By Liam Delaney

Saturday, February 19th, 2011

This year’s conference is organised by UCD PhD students Alan Fernihough, Mark McGovern, Svetlana Batrakova and Rob Gillanders and will take place in UCD on Thursday 18th and Friday 19th August. Deadline for abstracts is May 30th. There will be keynotes by Professors Morgan Kelly (UCD) and Peter Neary (Oxford). Further details are available on the website (www.isne2011.com), or from the organisers. Last year’s session in TCD featured 28 sessions with over 100 speakers from 66 departments in 20 countries. There is no registration charge and unfortunately no funds for assistance with travel and accommodation.

Fuzzy Banking Maths

By John McHale

Friday, February 18th, 2011

In an otherwise interesting opinion piece in the Irish Times, Elaine Byrne takes a lurch into banking matters in the closing paragraphs.

The elephant in the room is default. It was reported on Wednesday that since the last week of January, Irish banks have issued €18.35 billion worth of government-guaranteed debt.

This suggests that the banks may effectively be issuing sovereign paper with the approval of the Government, the Central Bank and the ECB. In other words, the banks have effectively increased Ireland’s public debt by about 11.5 per cent of GDP in the last few weeks.

Since they are unlikely to be able to repay this debt any time soon, a future government will have to. To appreciate just how extraordinary this is, €18.35 billion of government-guaranteed debt is more than half the entire tax revenue for 2010 at €31 billion.

This kind of arithmetic – certainly not limited to Elaine – is unnecessarily raising fears and adding to confusion.

The central question is how the actual and contingent liabilities of the Irish State are affected by these auto-bond issues.  As I noted yesterday, the State is now effectively on the hook for the losses of the banking system, which amounts to saying the liabilities of the system are explicitly or implicitly guaranteed.  When funds (liabilities) leave the system they have to be replaced.   The main source of replacement is now the ECB/CBI.   Thankfully the ECB appears willing to provide the funds, but requires a government guarantee because of a shortage of eligible collateral.   When it comes down to it, the auto-issue of bonds is just a way of providing the guarantee while staying within the ECB’s rules.  One form of guaranteed liability is being replaced by another and the effective liability of the State has really not changed.   Things are bad enough without double-counting arithmetic. 

The Economist on Ireland

By Philip Lane

Thursday, February 17th, 2011

This week’s issue carries  a long article on Ireland (here) and an editorial (here).

Burning Bond Holders

By John McHale

Thursday, February 17th, 2011

The dominant view on this site seems to be that the new government should play hardball with regard to senior bondholders.   While I sympathise with the fury over the inequity of bailing out private creditors, I have reluctantly come to a different conclusion.    In the interests of debate, I give below a stripped-down overview of my reasoning.    I’m sure people will tell me where I’m wrong.

Cutting to the essentials, the State is now effectively on the hook for: (i) bank losses beyond their capital; (ii) any losses on capital the State itself has injected; and (iii) and the eventual losses on NAMA.    The ECB/CBI will provide the necessary liquidity/funding to meet all ongoing obligations to creditors.   In return, they require a shrinking of bank liabilities (to reduce their exposure) and an eschewal of loss imposition on senior bondholders given concerns over balance sheet contagion and eurozone precedents.   (Arthur Beesley reports on eye-opening estimates by Seamus Coffey on the ownership of the Irish bank bonds.)

There is a growing chorus that Ireland should insist on imposing losses on (at least) unguaranteed seniors.   This comes down to gambling the ECB won’t significantly pull the liquidity/funding support, and indeed that we should take the further risk that the fiscal components of the bailout deal will not be withdrawn.

I think most of us agree that the original blanket guarantee was a shocking mistake, and also that in ordinary circumstances losses should be imposed – Danish style – on unguaranteed bank creditors.

I think the difference in views comes down to how we see the obligations of the ECB.   If we think the ECB is simply doing its job with its liquidity/funding support, then demands to protect bondholders do seem indefensible.    (By the way, the dictatorial language used by Commissioner Rehn earlier in the week barring such loss imposition was both undiplomatic and, I thought, extremely unhelpful.)  But  if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone, then proportional additional conditions do not seem unwarranted.   I think people should take a close look at what the ECB/CBI are giving, as well as what they are demanding.  From where I sit, the ECB’s willingness to act as long-term lender of last resort does qualify as extraordinary support. 

Funding the State: Prize Bonds

By Philip Lane

Wednesday, February 16th, 2011

In the FT, Peter Orszag argues that savings lotteries can boost the US savings rate.  His article cites various examples (especially the UK) but he may want to consult the Irish prize bonds site also (here).

Tackling Unemployment

By Frank Barry

Wednesday, February 16th, 2011

The twin problems of unemployment and the public deficit make it imperative to search for low-cost schemes that can help to stimulate employment creation. “Marginal employment subsidies” were much discussed in the international literature in the early 1980s and might have a role to play today.  

A specific and fairly modest proposal to start with would be to abolish employers’ PRSI contributions for new jobs; i.e. for any increase in a firm’s employment over and above the level recorded at a specific date in the past, e.g. X/X/2010. (The importance of choosing a date in the past is that it would prevent firms gaming the policy by shedding jobs in advance of its introduction). This avoids the extensive deadweight losses associated with e.g. a cut in employers’ payroll costs. There would still be some deadweight loss in tax revenues resulting from jobs that would have been created anyway, but it seems unlikely that there is much new employment creation at present. The proposal would amount to a wage subsidy of over 10% for new jobs. (If it looked like it was starting to have an effect, it could be extended by taking into account some of the resultant savings in social welfare).

Care would need to be taken to prevent firms closing down and establishing under a new name to exploit the scheme, but I assume this could be surmounted.  

Many of the existing schemes in place today (details here) might be thought similar to the present proposal. Most are targeted however at particular groups of disadvantaged workers, which make them less likely to succeed, and, as far as I recall, some displacement effects were found. The present proposal avoids these.

The proposed scheme might be gradually wound down as follows: the implicit subsidy to be reduced by Y% for each 50,000 jobs recorded in the economy over and above the level prevailing at X/X/2010.  

If the economy were solely cost-constrained, the proposal would raise employment through both the output and substitution effects. The substitution effect will still apply if the economy is purely demand-constrained, and by getting people back to work will have beneficial demand effects. 

Examples of the literature from the 1980s include:

Chiarella, C., and A. Steinherr (1982), “Marginal employment subsidies: an effective policy to generate employment”, Commission of the European Communities, Paris, Commission of the European Communities Economic Papers No. 9, November.  

Layard, R., and S. Nickell (1980) “The case for subsidizing extra jobs”, Economic Journal, Vol. 90 pp.51-73.  

Oswald, A. J. (1984) “Three Theorems on Inflation Taxes and Marginal Employment Subsidies”, Economic Journal, 94, 375.  

Whitley, J. D. and R. A. Wilson (1983) “The Macroeconomic Merits of a Marginal Employment Subsidy”, Economic Journal, 93, 1983.  

See also:
Snower, D. (1994), “Converting unemployment benefits into employment subsidies”, American Economic Review, Vol. 84 pp.65-70.

The Fine Gael “Black Hole”?

By Karl Whelan

Wednesday, February 16th, 2011

I was accused yesterday in the comments of being biased against Fine Gael and for Labour. However, today I’m going to have to wave the yellow card at Labour for their role in the ongoing rumble about fiscal plans, specifically the supposed €5 billion “black hole” (e.g. here and here) in Fine Gael’s budgetary plans.

The issue relates to the following statement on page 29 of European Commission’s report on Ireland:

If the consolidation to reduce the deficit to 3% of GDP needed to be achieved by 2014, this would risk choking the recovery and further weakening the banking sector, possibly resulting in additional budgetary costs. The necessary additional budgetary effort in 2011-14 would amount to around €4 ½ to €5 bn, according to the Commission services forecast.

Fine Gael’s plans use what they call “the Department of Finance’s forecasts”, which presumably means the growth projections in the four-year plan (though it would be nice if they said that and produced a table being explicit about how their growth assumptions and other spending and tax promises translate into deficit ratios.) Based on this, they project reaching a deficit of 2.8% in 2014, just like the Four Year Plan.

Since FG are promising to deliver a deficit below 3% in 2014, does the Commission’s statement mean there is a €5 billion “black hole” in FG’s plans? Well, no. The additional adjustments that the Commission believe would be necessary to reach the 3% target stem from the Commission’s lower forecasts for the growth rate of nominal GDP. The Commission projects an average growth rate of 3.1% for nominal GDP over 2011-2014, compared with 3.9% in the Four Year Plan (and 3.85% in Labour’s projections.)

This means lower GDP and higher deficits in 2014 than are projected by the government and FG. However, FG are explicit that they will not introduce additional cuts to meet the 3% target in 2014:

We will review the pace and timeframe of the fiscal adjustment with the EU and IMF on an annual basis to take into account developments in the real economy. Should growth rates disappoint, we will continue with the same level of fiscal adjustment, but will avail of the extra year to reduce the deficit to under 3% of GDP offered by the EU-IMF Programme of Support.

Of course, it’s questionable whether the 3% target can be achieved by 2015 either and the IMF, freed from the strictures of having to pretend the Stability and Growth Pact matters, forecast that it won’t be.

Anyway, the black hole business is unfair to FG and the truth is that the differences between the overall stance of fiscal policy being proposed by FG and Labour are fairly small. FG planning to implement €9 billion in adjustments over the next three years, while Labour are planning to implement €7 billion. One can debate whether a slightly slower pace of adjustment is a better idea but the fact remains that policy will be severely contractionary whichever party gets its way.

When looking for black holes in the Fine Gael plan, one would be better off focusing on whether the promised efficiency improvements can really generate the predicting savings on the spending side.

Unintended consequences, academic edition

By Kevin O’Rourke

Wednesday, February 16th, 2011

Colm Harmon has a nice little piece on some (possibly) unintended consequences of current government higher education policy here.

Gormley On the Guarantee: The McWilliams Option

By Karl Whelan

Wednesday, February 16th, 2011

John Gormley on tonight’s Vincent Browne show:

Gormley: We had already discussed it for about a week on and off, we had discussed this. Some people, and I took the view too, that maybe nationalisation was the way forward. You have to remember the context.

Vincent Browne: You didn’t think that you as leader of the party that was in coalition government with Fianna Fail, you didn’t think that maybe you should get out of bed and go in to the Department of Finance where these discussions were going on.

Gormley: No because we had already discussed it Vincent. That’s the whole point

Vincent Browne: You went back to bed?

Gormley: Well, of course. I said “What is the option?” I remember speaking to Brian Lenihan and said “What option are we going for?” In fact, I can tell you what the exact words I used were “Are we going for the David McWilliams option?” That’s what I said on that particular evening. And he said yes. And as far as I was concerned that was the best option as I understood it at that time.

Vincent Browne: Because David McWilliams told you.

Gormley: Well, he is a person that I think a lot of people have respect for and we had discussed it. When I had mentioned nationalisation, he said “no, that’s not a good option at all.”

Vincent Browne: How come there was a bill presented to Brian Lenihan and Brian Cowen that night? There was a bill already drafted for the nationalisation of Anglo Irish Bank. How come that happened if nationalisation wasn’t on the table over the previous weeks or months?

Gormley: Well, that’s an interesting point because it’s the one that I have gone for myself, so I suppose the Department of Finance had just put that one in, just in case we didn’t decide for the guarantee.

The McWilliams Option might sound like a Robert Ludlum thriller. Unfortunately, this wasn’t fiction. This is a senior cabinet minister’s description of how the most important economic policy decision in the history of the state was made.

Fir Tree Capital Opportunity Master Fund LP v. Anglo Irish Bank Corp.

By Philip Lane

Tuesday, February 15th, 2011

NAMA Wine Lake reports on this case.

Debate Questions

By Karl Whelan

Tuesday, February 15th, 2011

I found last night’s debate a bit depressing. Many people had suspected that the five-way debate would prove to be an unsatisfactory format for useful discussion. In the event, it was worse than I had expected. In particular, the combination of poorly phrased questions from the audience (two of the first three questions were essentially “what are you going to do about emigration?”) and ad hoc and unevenly distributed follow-ups from Pat Kenny, served the audience at home fairly poorly.

There’s two more debates to go, albeit one of them as Gwaelge (as they say in RTE). How about we open a thread for Irish Economy blog participants to suggest questions that could be used in the remaining debates?

Here’s a few starters for ten:

1. Fine Gael are planning to reduce public sector employment by 30,000 and Labour by 18,000. Can this be achieved without breaking the Croke Park agreement ruling out involuntary redundancies or without affecting front-line services? (The core administrative civil service only has about 30,000 employees).

2. The European Commission says that it expects Ireland to be borrowing in the bond market again in the second half of next year. Should Ireland look for a bigger lending package from the EU and IMF to delay this return to the bond market or, if you accept this timeline, how do you plan to raise these funds?

3. It appears that the EU authorities want the Irish banks to repay the almost €100 billion they have borrowed from the ECB and the €50 billion that they have borrowed from the Irish Central Bank and to do this soon. How do you plan to deal with these requests?

FG Banking Policies

By Karl Whelan

Tuesday, February 15th, 2011

Fintan O’Toole has a piece in today’s Irish Times that criticises Fine Gael for various flip-flops and changes of position on banking issues. You can read it yourself and decide if these points are important or whether Fintan is over-egging it a bit.

I’m reluctant to get into political argument on this point. However, I would note that Fintan seems to have missed the biggest change in Fine Gael position. While Fine Gael are currently placing a lot of emphasis on haircutting senior bank bondholders, as recently as October this was not their position at all. Here’s a link to a Bloomberg piece quoting Michael Noonan as follows

Fine Gael, Ireland’s biggest opposition party, said Oct. 8 that it would also repay Anglo Irish senior bondholders in full. In September, the party had demanded that Finance Minister Lenihan negotiate with bondholders.

The party doesn’t want to “risk the reputation of the country” as a re-payer of its debt, said Fine Gael finance spokesman Michael Noonan.

Bloomberg also have a more detailed story on this interview which, unfortunately, is not on the web. However, here are some excerpts:

Anglo Irish Senior Bondholders Should Be Repaid, Opposition Says

2010-10-08 12:06:09.402 GMT

By Joe Brennan

Oct. 8 (Bloomberg) — Anglo Irish Bank Corp. senior bondholders would be repaid in full by an Irish government led by Fine Gael, the countrys biggest opposition party, finance spokesman Michael Noonan said.

Last month, the Dublin-based party demanded Finance Minister Brian Lenihan sought negotiations on all Anglo Irish bonds, including 4 billion euros ($5.5 billion) which lost the government guarantee on Sept. 30. Noonan said yesterday that circumstances had changed.

“The advice I got was you might get half a billion euros out of it on a negotiation”, Noonan, 67, said in an interview in the parliament in Dublin. “Now, I don’t think we should risk the reputation of the country for the sake of a half billion.”

and

Lenihan said yesterday the government wouldnt impose losses on senior bondholders via new laws.

“It was an option two years ago when there was very serious amounts, about 17 billion, of senior bonds there that wasn’t under guarantee”, Noonan said. “ The debate is effectively over now.”

One can, of course, argue that circumstances have changed again since October. But the general point that Fine Gael have been inconsistent on banking policy seems a fair charge.

Lucey: Time for Debt Write-Down

By Karl Whelan

Tuesday, February 15th, 2011

Brian Lucey writes in today’s Irish Times “Time to persuade Europe debt write-down is needed”