Lucey: Time for Debt Write-Down

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

31 replies on “Lucey: Time for Debt Write-Down”

Where have I heard that before?

Oh, right, I’ve been saying it for years. Along with loads of other DFHs. Glad we have company, wonder if anything will actually happen?

No chance any Serious People have come around to mortgage cramdowns? No? Well, that would just help the little people; no real need to worry about them.

Finally, some pragmatic, realistic ( to back up recent comment from Colm mcCarthy sense.

This is a European economic (banking) problem caused by inadequate European political and economic institutions. And it needs a European political decision. Which we need to negotiate, hard, because our “wherewithal” problem points up a European “wherewithal” problem. ( Otherwise, what the hell is the FMI doing “helping out”?)

Can’t the ECB be persuaded through negotiation to write down the debt of the ( nationalised) Irish banks that are already due to be wound down anyway?

This would lower the threat of contagion in Europe, particularly if it comes after the second round of stress tests already mooted.

Although the benefit would be somewhat symbolic, this could constitute an argument for European politicians to give their voters while at the same time “covering” a negotiated lower interest rate on Irish bailout loans ( or cheaper longer-term funding for Irish banks.)

THEN we could put our minds to the deal with our real, strategic, “industrial” policy challenge, unemployment and emigration.


I am not supporting unilateral action but the use of this ( possibility!) in hard negotiation ( while honestly accepting our significant) share of blame for irresponsibility).

@Brian Lucey

‘We are not powerless. (….) Time to call a halt.’

Yes. Yet only political party presently in the Dail advocating similar position is Sinn Fein.

Default/Restructuring of banking system debt is not only an option – it is a necessity to ensure future of European democracy, to say nothing of Irish sovereignty. Greatest danger to Irish citizen-serfs at the mo are FG, FF, Labour, and powerful media interests manipulating the public sphere [no accident that SunTrib closed prior to this election – who counts controls etc]

Might I suggest that you send this piece to leading media outlets in Germany, France, Belgium, Spain etc – in fact all 27 members of the EU … this is primarily a European ‘Political’ issue – and where is it written in the Blueprints of the European Project that its citizens should be enslaved to its financial system?

Not an economist so hold fire but 2 points on above article from WSJ.

1) While accepting the need to write off/discount as much of bank debt as possible is the real elephant in the room the domestic deficit.

Why is €40bn required outside of banking sector for 2011 if deficit is €19bn?

2) Is there no one in the Irish media capable of dissecting this information for the masses instead of the irrelevant optics of the sideshow that was the debate last night?

@Richard Fedigan

Hard negotiation – absolutely. Yet what did FG Leader of the royal ‘we must ALL share the pain’ Kenny place on table, unrequested, in discussions with Dr. Merkel during his photo-shoot in Berlin yesterday? He placed that which is not negotiable – corporation tax – in the vernacular this is known as ‘pussy-cat diplomacy’ – and we had more than enough of that from his equally supine and deferential predecessors last December – and since 2007.

@ Brian Lucey
‘We are not powerless. (….)
Really? What can you do except menacing to default on your sovereign debt?

Here is what DMcWilliams suggested in the Indo the other week. It implies hard negotiation and a major diplomatic push by Ireland.

1. Hold a referendum to confirm that the people wish to renounce the debts of Irish banks.
2. Convert Ireland’s bank debt problem into a euroland problem.
3. Rescind the bank guarantee.
4. Close Nama.
5. Impose debt-for-equity swaps onto bank bondholders.
6. Get the ECB to accept that it is unlikely to be ever repaid the €97 billion injected into the Irish banking system.
7. In due course, convert the funds owing to the ECB into bank equity.
8. Make domestic mortgages “non-recourse” and simplify the bankruptcy laws.
9. Extend the vote to all Irish citizens no matter where they live.
10. Draw on some of the $800 billion deposited in the IFSC to help rebuild a New Ireland.

“Why is €40bn required outside of banking sector for 2011 if deficit is €19bn?”
Debt repayments. There’s um big heap short-term and some longer term sovereign debt that comes due in 2011. Some more in 2012 and onwards too…

@Brian Lucey,

At the heel of the hunt, all you’re proposing Ireland to bring to the table is a threat to burn the remaining bondholders unilaterally. I have been at pains on other threads to emphasise that Ireland must, and can, bring far, far more to the table than that. For example, a demonstrable commitment to reform democratic governance and to undertake meaningful structural reforms of the non-tradable, sheltered sectors would be primarily in our own interests, but it would go a long way to encourage core EZ politicians to persuade their voters that, in addition to major fiscal retrenchment, Ireland was taking serious steps to get its house in order – and that it would be in their long term interests to bear a share of the burden of resolving Ireland’s banking debacle.

It would, of course, upset many cossetted, vested interests in Ireland, but this focus on bondholder-burning as the only barganing chip allows then to deflect attention from the deadweight costs they impose, to use (as grumpy has put it) all other citizens as ‘human shields’ and to redouble their resolve to resist reforms.

@Paul Hunt

Agreed. Aside from threatening to burn bondholders, we must also undertake (and demonstrate by actions) to burn the outdated local practices and sacred idols that caused the bubble.

Aside from political reform which (some) people are belatedly starting to define, we need an independent, transparent enquiry to establish exactly how and why the bubble and subsequent crisis arose and to apply “moral hazard” to those responsible.

@Dominique Jean-Raymond
Its a harp, not the seal of a bank, on my passport…
@Paul Hunt
agreed : thats implied, I guess, in my suggestion to keep sticking to the fiscal knitting and all thats required for that.

@Brian L,

Understood – and I accept you were excessively constrained in a short op-ed. I just worry that pieces like this might be seized on to give added currency and support to the ugly sentiments expressed by the Sindo.

And in your response to D J-R you may run the risk of provoking the response: “And the harp is the symbol of your country because it is run by pulling strings”. 🙂

There are two questions:
1. “Should the Irish taxpayer alone pay off the private debts of the banks?” The answer is clearly – no.
To expand Brian’s final paragraph: poor regulation in Ireland allowed reckless and irresponsible lending by our banks – but poor regulation by the ECB, Bundesbank, etc, allowed European banks to lend recklessly to Irish banks.
2. “Can the Irish taxpayer pay off those bank debts?” Again the answer is a clear – no.
The Finance ministry and others throw around their projected, over-optimistic GDP/GNP growth figures like confetti at a wedding. With domestic demand crippled by the austerity package and the potential for exports hamstrung by China’s undervalued currency that growth just will not happen – especially in GNP. The sovereign debt will rise to an impossible % of the domestic economy.
The quicker and cleaner the restructuring of our unsustainable debt, the better for all.

Nice to see mention of QE.

@ Brian L,

One of the fears of printing money is run away inflation. I think that markets don’t know how to price in QE. Isn’t it possible that a cleverly constructed QE programme would cause the euro to strengthen as markets finally see a workable solution (i.e no imported inflation). A money for nothing scenario?

@Paul Hunt

“bring to the table a commitment to reform, democratic governance……undertake meaningful structural reforms” etc.

Regrettably, Paul ( we seem to agree on a lot), I feel Dominique is closer to the truth in terms of what we have to bring to the table/negotiate with.

As with the Sindo debate (no non-Irish person would know what it is, much less read it), the way Ireland is “run” is a matter of sublime indifference to Europeans and indeed, the wider world. ( Let me assure you that the taxpayer-voters whose approval the political leaders need before they instruct their negotiators in “Europe” have NEVER HEARD of FF, FG, (Irish) Labour, Kenny, Gilmore, Cowen, Bertie or even De Valera. Michael Collins….. at a stretch ‘cos there was a movie with Julia Roberts, wasn’t it?

What matters ( to the world out here) is how Ireland impinges on this world. Or not.

Right now, we impinge on “Europe” as a (real) threat to its banks. And “Europe”, particularly Germany, knows ( quietly) that so much sh** could hit the fan if it doesn’t solve its banking liquidity and solvency problems that the currency Germany swapped its world class Dmark for could REALLY be threatened.

That’s whats driving the political and institution change agenda. And that’s what puts Ireland in a potentially viable negotiating position. (Precious little else, I’m afraid).

This is VERY delicate as the other people “out here” watching this are the CEOs of the MNCs whose investment produces the exports ( to EZ markets!) that almost exclusively drives Ireland’s growth. And therefore, our ability to pay our debts.

Frankly, what system produces the canny negotiators capable of doing business with the real decision makers outside Ireland is secondary to whether the negotiators get it “right”.

As Felix Rohatyn said here a week or so ago ” That’s up to Ireland”. ( At this stage, very little else is still “up to Ireland”.)

From the article:

“He felt there was a degree of sympathy for the Irish, and the German taxpayer would understand if the Irish, having made a genuine effort, required the European partners to take some of the burden”

There is a consensus in Ireland about this. Whether through genuine clarity of economic judgement by some or naked self-interest by others, the domestic view is that if A is the pickle Ireland is in, B is the “genuine effort” and C is a financially viable state – then we can tell that if we try B it just won’t work.Therefore, because we are so clever (imagine how this looks from abroad) what we need is a sort of B* in John McH’s nomenclature.

B* is where the econo-political structures and power distribution in Ireland stay more or less the same, everything in the country remains more expensive that elsewhere in Europe, a decent % of debt is written down by the rest of Europe particularly, and we can mosey on as before but without getting carried away with property investment.

Now it may indeed be right that the best analysis of the economy is to be had by subscribing to Paul Krugman’s view that deficit spending is a good thing during a recession. Therefore it is the duty of some of the world’s best paid politicians, electricity workers, public sector contracted professions, university librarians etc to resist “hardship” at all costs. However this is a partial caricature of even Krugman’s position. He is aware there are limits, that it is the poorest in society that you get the biggest effect from wrt deficit spending and his basic forecast for Ireland in the Euro was that it would need have years of grinding deflation.

Brian’s article begins with “Time to persuade Europe…”. You therefore need to start to think about how Hans and Angela in particular are likely to react right now to the idea that so humbled are the Irish by the experience of going bust that they have worked out that Northern Europe has no choice but to write off money they owe it and by the way there is a good reason why almost everyone in Ireland earns more than Germans – its because it has to be that way!

It is easy to write articles like this for an Irish audience – it is what people in Ireland want and there is a ready market for it. It might though be more useful though to start drafting speeches of soundbites for Northern European politicians to use on “Hans”.

This bit…:

“…consider a unilateral decision; and I would favour that if we begin movement towards that using the powers of the Minister for Finance, the ECB will not cut off emergency liquidity. To do so would expose it as a neocolonial power”.

…seems a bit too embracing of the step B* approach to me. There is no case to be made for failing to resolve or “hollow out” the banks as BL suggests to expose the senior bondholders and have he market get real about the worth particularly of unguaranteed bonds. Seems to me though that it isn’t just the ECB that matters here.

I think proponents of “unilateral action” should make clear to the public the risks of a requirement to go into surplus straight away. Obligations of the ECB are obligations of its shareholders, and they might veto continuing funding if Ireland looks as if it is electing to not bother giving step B a go. Similarly, it isn’t just the ECB. The deficit is to be financed by a credit line that is subject to a MoU.

Ireland has got away with quite a lot during its membership of the EU by being small enough that it didn’t matter. It is in the spotlight now though and hardball negotiations that bring to the table little more that a threat to embarrass the ECB while keeping fingers crossed about continuing emergency liquidity doesn’t look like it will fly. Time for Ireland to make some proper reforms, then turn up at the table with something concrete that demonstrates the country has done the necessary and still needs further assistance.


What I was saying earlier incorporates all you’ve said, virtually as a prerequisite for negotiating. It’s NOT a negotiating position in and of itself.

To be VERY blunt: ” You Irish have been taking EU money since 1973, voted “against Europe” TWICE, NEVER became net contributors, lived high on the hog during your “Tiger” paid yourselves more than short time working Germans, who were buying exports from US companies paying very low tax in Ireland, and now we’re bailing you out”. How you organise yourselves politically and economically is no longer of any concern to us. We just don’t want to end up like you!”

—- Irish banks borrowed foolishly from European institutions. European institutions lent bullishly to Irish banks. The solution to date has been for the Irish taxpayer take on all of the adjustment. —-

Bingo, and if there is a definition for blatantly UNJUST than that!

@Richard Fedigan
The problem for the Europeans (at least for the 6 countries of the Rome treaty) is to decide whether it is worse letting Ireland sink or trying to save it.
The cost of letting Ireland sink is economic. Obviously the bank bond holders will be burnt and a good part of the sovereign debt will never be paid back. Europe has survived much worst financial and economic shocks and, thanks to Ireland small size, will survive that one.
The political shock will be much worse. The IMF, the ECB and Olli Rehn will look like absolute fools who have been taken for a ride by politicians who pretended that their signature on a document was binding for their compatriots. But the real cost is that it will probably be the last nail on the coffin on the dreams of Schuman and Adenauer and of many Europeans of my generation.
I think that those costs are so high that the rest of Europe will close their eyes ,hold their noses and accept a lot of abuse in order to save your skin. But at a minimum they will need a credible plan explaining how you can restore your economy .Staying in the Euro means an internal devaluation ,lower cost, which means lower wages ,( a lower minimum wage, lower civil servant salaries and pensions ,lower price for professional services ),higher taxes . I have not seen any of that in your political parties programs. It also means a clear description of what you intend to sell us ,some kind of an Industrial policy .
I think that the hope that American multinationals ,thanks to your lower corporate tax, will do the heavy lifting for you as they did in the Celtic Tiger years is now unrealistic .You will need a few more companies like Ryanair instead and years of hard work.


I agree with you that we need to cut government spending. Croke Pork, as you’ve previously labeled it, should be replaced with Benchmarking III: Mid-Eurozone Yardstick. Social welfare and pensions can’t be excluded from cuts. Taxes (excl corporation tax) should also be brought into line with other EZ states.

One thing that bugs me is the lack of focus on reducing the cost of living /doing business. This is the one area that can somewhat mitigate the cuts. The cost of living is something we can control, but seem to do nothing about. Probably a case of not taking on vested interests.

Making such corrections improves our chances in seeking clemency. Hopefully the IMF will force this issue. However we do need to try to force some negotiation. Perhaps we need to Club PIIGS and/or put snr bank bonds on the burner. I don’t think we’ll receive any favours; I think we’ll have to force them.

Some folk seem to think Ireland’s goal is to successfully reenter the bond markets within 3 years. Personally I think the goal has to be getting the national debt below 60% of GNP.

@Georg Baumann
“Bingo, and if there is a definition for blatantly UNJUST than that!”

Unlike Iceland, the problem is we did it to ourselves. Or to be more precise our government did it to us (the ECB only facilitated).

@Dominique Jean-Raymond

You’re probably aware that it was a comment of yours last year (on CT) that prompted my first intervention essentially agreeing with what you’re saying now.

We pursued an underlying US MNC policy since TK Whitaker ( and based on no, and later low) corporate taxation that could not have been sustainable forever. Indeed, we and “Europe” may never fully know the full extent of transfer pricing and other tax haven practices that propped up this mirage

We overlaid this good but ultimately unsustainable policy with the cheap credit-fuelled “selling the island to each other” economy and never developed real world class “Irish” companies on any scale, RyanAir apart.

As you know, I also believe both these phenomena, by ( temporarily) creating full employment in Ireland, robbed at least one Irish generation of the skills and experience they might have picked up elsewhere to create and sustain the sort of economy we need in Ireland to sustain those who might want the option of staying in Ireland for life, or at least coming back to a worthwhile economy.

I’m afraid that, even with the “relief” that a successful “Europeanisation” negotiationl might provide (and I’m optimistic it will happen, not that we deserve it), we have not even begun the massive “re-invention” of Irish society required for us to survive and thrive in future.

Anyone who can would perhaps be better off getting out for quite a while!

@ Richard Fedigan

‘…..we have not even begun the massive “re-invention” of Irish society required for us to survive and thrive in future.
Anyone who can would perhaps be better off getting out for quite a while!’

+1 but there are many ways to ‘leave’, mon ami. Wasn’t it Joyce (one of our best exports) who talked about ‘silence, exile and cunning’ ? The current debacle was absolutely predictable, because we hadn’t solved, or even addressed, fundamental problems of governance.

‘Ireland’s small population already exposes her to many acute diseconomies of scale. She has futher exacerbated the problem by devising a highly fragmented decision making system. It is exceedingly difficult for strategic thinking to emerge from the administrative stucture.

The organisational fragmentation, which has flourished with the growth of government, reflects as well as reinforces intellectual fragmentation, with a consequent dearth of strategic thinking.

The rapid growth in the size of the civil service since 1970, and the proliferation of institutions in the semi state sector, not least in the knowledge industry, run up without any sense of overall direction, have now congealed into a ‘disorganised overcomplexity’ of formidably obstructive vested interests that impedes effective decision making’.

Joe Lee Ireland 1012-85, p 635, pub 1989, (referring here to work done by Louden Ryan in the 70s). Forty (40) years ago.

@Ahura Mazda

“One thing that bugs me is the lack of focus on reducing the cost of living /doing business.”

Here we suffer from two self inflicted wounds – through NAMA we are relying as a state on the increase of property values. If rents and property values remain low our national debt increases, if property values and rents “recover” we can not support them with new, more heavily taxed, salaries or compete in terms of cost with European neighbours with more realistically priced commercial rents.

Secondly we are dependent on people remaining able to repay their mortgages as along with NAMA making us property speculators we are now invested, financially and politically, with supporting banks with hugely overvalued mortgage books.

We can not reduce take home pay as we need people to be able to continue to prop up the overvalued property sector and functionally insolvent banking system which we need to reduce take home pay to support.

Joseph Heller would applaud.

The Irish state has managed to construct an elaborate financial instrument whereby losses are guaranteed regardless of market conditions. Inverse genius.

@Paul Quigley

Thanks for the Joe Lee Quote ( Smart Boy(s) Wanted!)

Would it be possible to agree on the following two points with the emphasis on the second, urgent ACTION point that has to be done anyway and regardless of who is elected:

1.) Whoever forms the next administration in Ireland will have to initiate, manage and deliver a complete transformation of Irish economic, political and social institutions.

By and large, very few people outside Ireland give a stuff about this except insofar as it impinges upon them ( see 2.) below), so the Irish government and people should just get on with it ( about .001% of the world’s population can read about on line if they like in Ireland’s most popular newspaper, the Irish Independent) and don’t bother the rest of the world about it until it’s finished. NO communication about Ireland’s “IMAGE”. We’ll form our own opinion.

2.) What the new administration, elected by the Irish people, can best do, and will have to do, to affect how Ireland impinges on the world is primarily linked to its relationship with the institutions that are bailing us out ( EU, ECB and the IMF) and the political leaders of “Europe” who are, themselves, constrained by the dodgy state of their banks and the discontent of their voter-taxpayers who have not yet been told that Europe is in decine.

Brian Lucey has defined both the objective and the method in his simple phrase which contains the key action words “persuade” ( “Europe” and Europe!), “write-down”, and “needed”.

Colm McCarthy even went as far as summarising, in three points, what “Europe” and Europe needs to be persuaded to do under the second agreed point:

1.) Quickly and credibly ( this time!) stress test European banks
2.) Distribute/write down the losses
3.) Recapitalise the banks

In order to do this, “Europe” will have to re-design the Eurosystem with effective and credible bank supervision while avoiding moral hazard.

Ireland will be busy, quietly and efficiently transforming all its institutions as in the first of the above agreed points and will therefore not be bothering the rest of the world about that.

Meanwhile, as part of agreed point 2.), the “Persuasion”, Ireland’s crack negotating team will be telling “Europe” and Europe that it needs to do what it knows it needs to do anyway. And that the only alternative is for Ireland to default, with the attendant threat to European banks, bondholders, politicians and the future of “Europe” and Europe…… i.e. in particular, that the political leaders may have to come clean and inform their voter-taxpayers that there’s nothing they can do about Europe’s decline and “Europe’s” disintegration ( with its Euro).

Simple, really. So a big thanks to Brial and Colm.

Forgot to add. After we’ve done all that, I think we’ll be astonished at the ingratitude of both “Europe” and Europe!

The debate suffers from the commonly held misconception that the problems Europe has with an Irish bank default are somehow based on the *amount* of money Irish banks owe European ones.

That idea has been firmly cemented in place by people repeating the Basel BIS figures for Irish bank debts to other countries.

Those figures have virtually nothing to do with the Irish state-guaranteed/owned banks – instead, they represent the obligations of the entire banking sector in Ireland, including the many IFSC-based subsidiaries of foreign banks, whose liabilities are irrelevant to the Irish taxpayer.

If people wish to use figures that are appropriate to the state-guaranteed Irish banks, they would do far better to use the figures for the liabilities of Irish domestic credit institutions, available in aggregate time-series from the Central Bank.

There you will find that Irish domestic bank securities held in the eurozone amount to only €10 billion – with Irish investors (banks!) holding €30 billion, and the rest of the world holding €20 billion. €10 billion is not an amount that will cause any strain for eurozone banks even in the event of 100% default.

So when people claim we should threaten the eurozone with unilateral default on bank debts to Europe in order to be allowed to partially default on the same debts with eurozone agreement, they are exposing a deep ignorance of the real position and the real eurozone concerns over ‘contagion’ from an Irish default.

The concern is not that if Ireland does not pay back the €10 billion it will leave an enormous hole in the eurozone banking system, because clearly it won’t. The concern is that if the eurozone is seen to *agree* an Irish default, the markets will assume, quite reasonably, that if Ireland can do it, so can everyone else. The result of that will be that the markets withdraw rapidly from bank debt all over Europe, collapsing bank after bank, and landing Europe’s taxpayers with a bill of titanic proportions.

A unilateral default by Ireland which is *disapproved* of by the rest of Europe, will, on the contrary, have far smaller contagion effects for the rest of Europe, because the markets will not have as much reason to assume other European countries will follow suit.

What people are suggesting, then, is that Ireland attempts to bargain for a very bad outcome for Europe by threatening them with a less bad one.

@Joe O’Brien.

Your clarification is useful. However, I, at least, in advocating a threat of default ( and therefore some measurable) contagion) in negotiation as part of “Europeanisation” of a solution to a European problem have not based my arguments on the size, but rather the nature of the problem.

Indeed, that is “moral” strength of the negotiating position while confronting “Europe” with the possible ( leveraged) effect of the problem if “Europe does NOT deal with it.

I have never been under the illusion that Irish “threats” would either be meaningful or sizeable enough to convince “Europe” to do something it doesn’t have to do anyway!

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