Burning Bond Holders

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support, and indeed that we should take the further risk that the fiscal components of the bailout deal will not be withdrawn.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. 

131 replies on “Burning Bond Holders”

If the ECB are willing to continue to pump money at low rates indefinitely into AIB, BOI etc I think you have a fair point. But is there any guarantee they will continue lending money that they probably wont get back?

1 The ECB can’t lend to insolvent banks, only illiquid ones

2 In order to impose losses on bondholders (particularly senior ones) a bank must be insolvent.

Taken together these points show that the difficult position that the ECB is in.

The idea that the state can inject equity then, after doing so, impose losses on seniors is novel.

The question boils down to whether anglo is insolvent – if it is it ought not to be in receipt of ECB funding – if it is not – then ought not to be burning seniors (buy backs are different of course)

I think all Seamus Coffey’s analysis on the Irish ownership of Irish bank bonds is from this (‘Domestic’ – no IFSC)


Table a.4.1

Of the €64bn of ‘debt securities outstanding in Domestic Credit Institutions, the location of the claimants is broken down as follows:

– Irish Resident €34bn

– Euro Area €10bn

– Rest of World €21bn

The question still has to be asked that perhaps those who invest in bank bonds (regardless of whether or not they are Irish) should take the loss rather than the Irish taxpayer.

Further analysis is needed on the breakdown on that €34bn to see how many pension funds etc are included.

Without ECB support our financial system would be in total collapse as we have witnessed what I guess is the greatest run on a banking system that any country has ever seen.

Without IMF/EU support our social and economic system would be in ruins as we need to spend 50% more than our revenues on public services and social protection.

So let’s get real. Macho calls to withold a few billion from foreign bondholders and tell the IMF/EU/ECB to get stuffed are sheer fantasy.

And I do not agree that the original guarantee was a massive mistake. Au contraire, we now know that the EU/ECB would never have let us torch senior bondholders of any kind, so even Honohan is wrong here, we did not cut off some possible Resolution escape, the EU/ECB would never have allowed it.

The Sept ’08 guarantee didn’t work. But no matter what course we had taken including blanket nationalisation we would still by last November be looking at a banking system tottering on collapse and on a fiscal deficit problem of mountainous proportions. We would have been at the mercy of the EU/IMF no matter what we did.

There is a consensus now that we should try and persuade the EU/ECB to relent somewhat and let us have some burden sharing. We have a better chance of securing some concession along these lines given that the constituency of unguaranteed seniors is smaller than it would have been if it were not for the guarantee.

@John McHale

“IRISH BANKS are issuing bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank.

Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.
“What you have here is micro-quantitative easing, or money printing,” said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers. “The banks are issuing unsecured loans to themselves.” …………..

Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks.
The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.”


The 20,000 Heroin addicts in this country could not possibly do as much damage to this state and its people as The Irish Banking System. With due respect to your reasoned argument … we are no longer living in a state of reason … it is time to SHUT this DOWN, DEFAULT on this LUNACY, and bring EU/ECB on side …. NOT TO DEFAULT IS INSANE.

While it’s not a surprise that populist commentators wouldn’t bother with the hassle of establishing the facts, it’s surprising when an academic would take a strong position on the issue of haircuts, without doing so.

I have raised the issue of private Irish pension funds in the recent past and while a minority of Irish private sector workers have an occupational ans some others were persuaded by public pensioned Pensions Board staff to buy PRSAs, real funds annual returns for 3, 5 and 10 year periods are in the red.

Seamus Coffey has done good work and anyone with a public pay-as-you go system should be cautious about proposals that would hit a private sector who has no premium for having no job security.

It’s also well to remember that a free lunch is rare.

Ollie is, frankly, bullying. I have learned in my life that theres only one way to deal with bullies, and thats to stand up to them. Its never pleasant.
80% plus of voters John think we should do this. In not doing so i wonder what damage is being done to democracy and to the civil state?
What, if not in extremis, is the role of the central bank but to be the lender of last resort and to absorb losses through the creation of liquidity? ECB seems to be fetishistic about not doing this, IMHO.
As I pointed out, and to a notable lack of the usual sneer-troll fest from the usual suspects, this is both an irish and a european problem, and a large part is down to the way the european side have made/asked/forced/cajoled/magikd us into dealing with the seniors. So, we have and will taken our pain. Ne mas. Time for them to pony up. Time to call a halt. In priniciple the liquidity that the ECB and its irish branch are providing will wind down and they will not be at a loss. So, in return for this farrago, what, exactly, is the cost to the ECB? Remind me again?
ne mas.

A huge problem encountered in addressing this question is the absence of any idea of how much more money will be need to be pumped into the Irish banks. The Irish taxpayer has been deceived since the start of this crisis about the extent of the losses that the banks would engender. There has been little serious debate as to whether provoking an apocalyptic event now, such as letting Anglo or other insolvent banks go, would be worse than years of relative stagnation as we struggle to pay back the increasing liabilities taken on from the banking sector.

What is abundantly clear is that if the real concern about not burning the senior bondholders is to prevent contagion in the Eurozone then the case for burden sharing is overwhelming. If foreign banks with their HQs in other Member States might find themselves in difficulty as a result of defaults here, then it should be the governments of those countries that should bail out their banks rather than the Irish taxpayer. This is the real scandal of the present agreement.


there comes a point where a choice may have to be made between honouring different kinds of debts. A few questions:

How would re-entry to bond markets be affected if sovereign lenders had to take haircuts subsequent to payment in full for bank seniors?

Do you think we can pay both, in any and all circumstances?

If a choice has to be made, which choice do you recommend?

Bluntly, the risk of sovereign default is increased every time a bondholder gets paid. Market prices are shouting that the risk is already seen as large.

@Rob S

The question still has to be asked that perhaps those who invest in bank bonds (regardless of whether or not they are Irish) should take the loss rather than the Irish taxpayer.

It almost goes without saying that those bondholders – including pension funds – should take the loss, yes? To put the loss on the Irish taxpayer is to effect a huge and (slightly) concealed income transfer from the Irish taxpayer to a special interest group. And a hugely regressive income transfer at that. If it is necessary to keep people on small private pensions out of genuine hardship then the state can explicitly spend public money to do so, rather than quietly treating all the wealthiest pensioners in the state to a full bailout on their funds’ Irish bank holdings. (Paging VinB …) I’ve already been struck to see people who are (quite rightly) furious about Croke Park and benchmarking oppose bank senior burnings on the grounds that this will slash the private pensions of the middle class. Sauce, goose, gander.

@John McHale

I’m sure people will tell me where I’m wrong.

JTO again:

I won’t as you are certainly not wrong. I do hope that the incoming FG-led government will install you as one of their leading advisers, perhaps taking Alan Aheane’s place if FG think he is too closely associated with FF.

As for what is likely to happen, as opposed to what should happen, if the wretched Gilmore (ex-Official SF), De Rossa (ex-Official SF) and Burton (500,00 will emigrate in 2010) come to power, then anything could. However, it is looking increasingly likely that FG will be able to govern without the support of these headbangers. If that happens, forget any ideas of the new FG-led government following the path advocated by most posters on here. FG are a right-wing conservative party. They are certainly not going to uproot the pillars of capitalism or go to war with Ireland’s trading partners just because the internet mob want it. How long will it be before FG are demonised by the internet mob in the same way that FF have been demonised for the past decade? I predict a week at most.

@John McHale

(iii) and the eventual losses on NAMA

JTO again:

It is increasingly likely that NAMA will make a profit.

If the usual suspects on this site actually bothered to look at the real economy occasionally, they’d find that virtually every day now sees an announcement of a major investment/expansion. On Monday it was Fidelity, Yesterday it was PayPal and AMS. Today its Google and Amgen. Not even Morgan Kelly is advocating that these companies house their new employees in tents. All of them are going to need office space.



As ‘simpleton’ put it recently – we are beyond burning bondholders – so 2009 – and should have been done before last August ran out …. we are well past any tipping point, or inflection point, or ‘point of no return’ to put it bluntly …

On ECB – read the views of Lorenzo Bini-Smaghi … which received insufficient attention on this blog …. read it carefully ….. ‘this state of unreason’ is not confined to Ireland …. Irish citizens are being taken for complete fools …. (perhaps with some justification – it won’t be Ned_een military coup – but a citizens’ coup …. if such citizens wake up ..)


Why was the ECB much more interested in making sure that bond holders were made whole in private insolvent banks at a massive cost to European citizens in the form of ECB low interest loans used to repay them in full?
Its a rhetorical question but it is worth remembering that as far as the ESB is concerned the risk premium given to bond holders is a gift. As far a they are concerned there is no risk.
Is this John McHales definition of Capitalism?

So now that this underpricing of risk happens to blow up in bond holders faces they get protected at tax payer expense. Why?

Now the ECB are trying to force Ireland sell off their assets quickly which will no doubt result in massive losses being recognised that will have to be borne by whom?

Isnt it possible that Irish part of Seamus Coffee’s analysis are actually the IFSC Irish?

@ David O’Donnell

There are some bondholders left, but I take your point.
We are moving from burning bank bondholders to burning the ECB and sovereign debt holders.

I wonder how FG will react in 3 years time (or before) when the ECB stops lending to the banks.

I think FG are better musicians than FF, but they both play the same tunes.

As so often. CmC has encapsulated the issue cleanly and pithily.
For what its worth :
How would re-entry to bond markets be affected if sovereign lenders had to take haircuts subsequent to payment in full for bank seniors?
Badly, one assumes. A certain person who now resides in Dame Street noted in 2009 on this blog that the markets would prefer not to see the sov ability impaired so badly that they would not get paid.

Do you think we can pay both, in any and all circumstances?

If a choice has to be made, which choice do you recommend?
Women and children first, bondholders of any stripe last, university professors somewhere in the middle…


NAMA makes a ‘profit’ as a result of imposing losses on the banks, which it seems we taxpayers must make good. So not too much to cheer about there, I would have thought.

Actually, a simpler question for John McHale
Is there ANY circumstance under which you would burn/scorch/heat gently the bank boldholders ? If so, what?

@ JtO

don’t worry, i’ve been discussing (briefly) the Google/REO transaction on the McWilliams Option thread. 😀

Initial market chatter-type reaction from the NAMA repayment of €250mm in bonds was: “Eh, thats quite a good news surprise?”. Its a first step in a very long process, but perhaps its the start of a genuinely good trend from NAMA.


I think I would be fairly comfortable taking a position that I would put the banks int0 resolution or pseudo-resolution as a means of exposing the fantasy of the unguaranteed seniors negotiating position – provided compensated new banks were ready to take the deposits.

Communication surrounding this would be absolutely key.

I would not do so without acceptance that public sector and semi-state pay rates were no longer a sacred cow – and I would bring this along and slap it on the table.

This latter bit is unavailable because the Irish public have been sold a lie that the ECB and EU ae simply being mean in not allowing bond defaults.

I would do the hardball stuff – but not if, as currently, backed up by feck-all.

@ Brian Lucey

You appear to to arguing on the basis of emotion rather than facts and weighing the downside of for example unilateral action.

You say “80% plus of voters John think we should do this.”
That is like something that would come from the Berie Ahern playbook.

As I said in a comment on your Irish Times piece, we should first establish the facts and Seamus Coffey has done so in respect of bank debt.

NTMA knows where the country exposure is on sovereign debt which it doesn’t publish; the bank exposure is a muddle.

We had an unnecessary civil war because of emotion eclipsed reason for some.

The point about women and children is that there is no choice that is without the risk of collateral damage.

@Michael H
“The point about women and children is that there is no choice that is without the risk of collateral damage.”
What, pray tell, would YOU do? . Genuinely, what would you do? Shrug and go “ah fekit, sure were stuck now”? Play nice?
Im not 100% sure Seamus has done so – its a great piece but, for example, if the banks are ponzi-ing their own bonds, thats so burnable its hydrogen.

Brian and Colm, 

You seem to be missing my main point.   So that there is no misunderstanding, all else equal I strongly believe that unguaranteed creditors in insolvent or seriously undercapitalised banks should bear losses before the taxpayer.   (Of course, this should happen in the context of a proper resolution regime, which we still do not have.)   Moreover, it should happen regardless of whether we are in a debt crisis or not.  

But all else is not equal:  Our banking system is completely dependent of the ECB for extraordinary support.   And that support does not appear to be unconditional.   Colm’s question about who to impose losses on first is beside the point.   As for whether we can get through this without an ultimate default, I think there are circumstances in which it can be done — though certainly not all circumstances.   Although projections could yet worsen, we are €21 billion through a €30 billion fiscal adjustment.  And we still have relatively high public sector pay and social welfare rates.   If we default on current projections it will be because we choose to.   The ultimate value of the contingent liability of the banking system could push us over the edge — but the losses would have to be substantially above the current recognised losses in the relevant categories that I mentioned in my post above.   So Brian, I would advocate burning bondholders in most normal circumstances.   But I would not risk blowing up the banking system to save some (possibly quite small) fraction of the outstanding un-guaranteed €15 billion. 

@John McH
“Our banking system is completely dependent of the ECB for extraordinary support. And that support does not appear to be unconditional. ”
So, you think, genuinely, that if we say “here ya go, Jean Claude, your problem now” they will cut off the ATMs? Which would be a naked act of agression, and would in and of itself doom the Euro.
Mostly John your saing “i wouldnt start from here”. But, we are where we are. And you are saying “suck it up”. Lets cut social welfare to pay back a cent more here and there of the dumbest thing an irish govt has done in decades.? SW may well be too high, but we cut it for DOMESTIC fiscal/social reasons, not to pay frank bleedin lampbards wages.
Sorry, nope. I was a citizen long before I was an economist.

I am a little surprised the attention given to the Coffee analysis in the Times.

It is information that has always been readily available and no greater insight is provided other than what is on the CB spreadsheet.

I mean has nobody really noticed the “Irish Residents” has been a substantial portion of the overall debt securities until just this minute?

Burn? I’ll tell you what burns. NOT that we sold Chelsea a bleedin’ donkey, but that the 50 million squids comes out of the Irish sick, blind, elderly and unfortunate meagres in a country where the cost of living is not coming down much.

The wrong-wing politicos don’t seem to have thought this through – their worst night mare is an ATM going off line for a day or two? It’s no excuse for their total lack of willingness to understand the problemo or deal with it.

As for the ECB – we don’t negotiate with terrorists. Pull the trigger. Default.

@B Lucey

“if we say “here ya go, Jean Claude, your problem now”

If you want to do this you have to do it in circumstances that allow the citizens of the EZ to understand that you have done all you could and have no choice. You may have intellectualised your way through all the uncertainties to conclude that there is no point in trying this, that and the other, but to outsiders it will look like the behaviour of spoiled brats.

“And we still have relatively high public sector pay and social welfare rates.”

We may have relatively high social welfare rates, but we also have a relatively high cost of living in this country. They are linked. People have to be able to pay their bills, heat their homes and feed themselves and their families – try doing that on €188 per week and tell me you think it’s too high.

@ John McHale
“And that support does not appear to be unconditional.”

Part of the problem is the uncertain nature of what is expected of the ECB. We don’t know what we can rely on.

With talk of Irish banks looking at reducing their assets, it seems that the ECB are looking to reduce their exposure. Are they forcing a firesale of Irish bank assets? Are you willing to support the ECB if they require the reduction of bank assets at the expense of the taxpayer?

Let’s face it, to date, the main benificiaries of the ECB’s liquidity support are the people withdrawing money from Irish banks.

@ grumpy
Well said. Excellent point.

Were we to do this, then we would most assuredly be examined with a fine tooth comb…look at our current PS salaries and social welfare compared to other countries…and then we renege on debt…..we’d be completely at the mercy of a highly disgruntled ECB and IMF then…..the softly softly approach they had in the first bailout would be a distant memory come bailout II

Why is it so hard to make a case to the EC/IMF that the banking and sovereign debts are unsustainable?

Esepcially given they are the ones with the more pessimistic (realistic) growth rates.

This is political economy. Some believe that bondholders take precedence over taxpayers. Others, not. Its gone beyond economic logic a long time ago except in the second order effects so nicely teased out here.

On one minor point, surely the fact that we are defaulting on ourselves makes the default more morally, reputationally and [international] politically acceptable even if it is less economically beneficial.

@John McHale

Pls read L Bini-Smaghi – linked above and as posted by P Lane – and then comment on the so-called nature, and logic, of ECB support!

@Colm McCarthy

The Mawrkets are not only shouting – They are SCREAMING a la Eduard Munch’s most famous piece that the idea of lending again to a Sovereign so polluted with banking system debt and in such a chronic state of terminal denial is Laughable.

@Rory O’Farrell

We don’t have 3 years – neither does Europe. We don’t even have 3 months …. we have a month and a bit max …. and three main political parties are discussing potholes, the leaving cert curriculum, and which of the three has the prettiest hair-do ….

@Rob S

Real Irish sovereign debt is not a bother …. nor is the deficit. Both are doable in a true and fair democratic manner.

@Greg Stokes

NAMA makes a ‘profit’ as a result of imposing losses on the banks.

JTO again:

You make a good point. I wouldn’t argue with it. Nor would I defend it.

The bottom line is that all the property-related losses in Ireland (regardless of how they are distributed between NAMA, taxpayers, banks) will probably turn out to be greatly exaggerated and the result of accounting which assumes that the Morgan Kelly outlook for Irish-owned property prices over the next decade actually proves accurate (note: I said ‘Irish-owned property prices’, not simply ‘property prices in Ireland’ – there is an important distinction).

If I recall correctly, the NAMA assumption is that Irish-owned property prices fall by 50 per cent on average from their 2007 level, then only rise by 10 per cent on average by 2020, leaving them about 45 per cent lower in 2020 than in 2007. That includes Irish-owned property in the U. Kingdom and the U. States. I believe that the proportion of the Irish-owned property portfolio that is actually abroad is 35 per cent. But, if we look a the facts, the outlook for this property portfolio over the next decade is nowhere near as bad as the anti-property lobby in Ireland claim. In particular:

looking first at abroad (which accounts for 35 per cent of the Irish-owned property portfolio):

(a) Commercial property in the UK has been recovering strongly since early 2010 and is forecast to continue recovering. Vacancy rates are plummetting.


(b) UK residential property recovered in late 2009 and most of 2010. It stalled in the final months of 2010, but a report earlier this week highlighted a growing housing shortage in the UK and forecast that UK house prices would rise by 5 per annually up to 2015.

(c) Inflation is taking off worldwide. Growing shortages (not to mention the vast amounts of lolly that has rolled off the printing pressed worldwide in recent years) indicate that this decade will be a relatively high-inflation decade. Inflation is allready 2.4% in the Eurozone and 4% in the UK. It is forecast to hit 5% in the UK in coming months.

looking next at Ireland:

(d) Both DAFT and the CSO showed that residential rates levelled off in 2010 (down just 1% in December 2010 over December 2009). They have levelled off at a level about 28% below their 2007 peak. Not 50%, not 80%, but 28%. As Morgan Kelly would be the first to claim, residential rents are the best guide to the underlying value of residential property. The latest DAFT report showed that residential rents in Dublin started to rise in 2010 and, according to Ronan Lyons commenting on that report, there were the first signs of a shortage of residential properties to rent emerging.

(e) Although commercial property is still at rock-bottom in Ireland (unlike the UK), at current prices it is exceptionally attractive as a location for business to multi-national companies. Thus, almost every day now sees a major investment/expansion announced by a multi-national company (just this week alone: Fidelity, PayPal, AMS, Google, Amgen). This is bound to impact on commercial property prices in Ireland eventually. The Google purchase of a large office block in Dublin announced today is the first sign of that.

(f) Both services exports and manufacturing exports from Ireland are growing at around 15 per cent annually. Because of the overhang, this has had little impact on commercial property prices so far (unlike in the UK). However, a continuation of high growth in these two areas must do so eventually, as the Google purchase announced today shows.

(g) A global food shortage is developing. Global food prices are soaring. This is bound to impact on the price of agricultural land in Ireland and the UK eventually. Indeed, it is allready doing so in the UK (where a considerable chunk of Irish-owned land is now actually located).

Taking all these factors into account, there is every likelihood that the NAMA projections for Irish-owned property prices in 2020 (not just in 2010 and 2011) will prove gross under-estimates. It wouldn’t be the first time that economists got it totally wrong about a long-term prediction. If that happens, NAMA will make a huge profit. If so, it will certainly be possible to argue in 2020 that the losses imposed on the banks by NAMA at the start of the decade were far too large and mainly the product of the anti-property mob frenzy that gripped Ireland at that particular time. That is what I will post here in 2020, if I am still around.

@Rob S

It’s the EC element of the EC/IMF that won’t accept that the debts are sustainable, because its a political faction responding to political rather than economic incentives (i.e. keep behind the curve for as long as possible and only react when there’s been a disaster to use for cover).

The government should have told the EU no thanks and negotiated directly with the IMF when it was shut out of the bond markets. Then we wouldn’t be disussing whether or not to haircut the bank bondholders as the IMF would have made the government do it by now.

Daivid OD

“the leaving cert curriculum”

Its just a “review”. All civil servants will still have to have studied “our national language” rather than oh I don’t know, say economics or Mandarin or physics in order to be employed. Prolly the same for admission to domestic Universities – and don’t think for one moment those extra points are under threat.

Might not be of quite such short term relevance but IMHO a background part of the Irish susidy / protected sector pickle.

rolling back..you seem very concerned that if we elect Eamonn G (and you suggest that he was in Official Sinn Fein – i thought you were a republican? how would that be bad) then the markets would not look nicely at us. Yet, when we had as minister for social welfare a man who served time for IRA bombings, the markets didnt seem to care…


Could I suggest you set up a hedge fund to raise funds to bid for Irish property assets. Clearly you think there is irrational pricing and hedge funds are excellent for exploiting that. You would be assisting the national balance sheet.

You used to be able to do the regulatory bit inabout 3 hours in Ireland, might take a little bit longer now, but not too much.

yes burn them,..simples.com ….what the gov did & new gov still intend to do goes like this,..guy backs a horse to win with paddy power,..horse comes in last but paddy power pays out to the guy anyway,..madness

@ Brian Lucey


I would wait until early 2013 when we would have 2 years of the IMF program and given the international outlook it will be clearer what is sustainable from then.

If we make the effort on reform the IMF will be on our side but we haven’t really tried up to now on structural change.

Less than 3 months after the EU-IMF deal, big ultimatums now would likely prompt a very negative reaction.

The new Dutch government is more intransigent than the Germans. It doesn’t want to cut the bailout deal interest.

Iceland has got a better deal on the Icesave debt but they still are being forced to pay €4bn with interest.

Small countries haven’t too many options and we less than most; we are more dependent on FDI than any other developed country

Life hasn’t changed for the leading lawyers, accountants and medics and who ends up paying their cartel fees?

Every vested interest is looking at what others should do and what worried Danny McCoy of Ibec today was wage agreements and the minimum wage.

The protected private sector is well…a protected area.

IBEC has set out how a new government should tackle the unemployment crisis in its Jobs Manifesto for Election 2011 The manifesto proposes that in the first 100 days the incoming government should:

Empower a senior minister to drive the jobs agenda across government;
Get credit flowing to business by introducing a loan guarantee scheme for SMEs;
Reform the welfare system to incentivise work;
Review the system of regulated wage agreements and maintain the national minimum wage at €7.65;
Introduce a property tax to fund local authority services thus enabling a reduction in commercial rates; amend legislation relating to unsustainable commercial rents;
Enhance Ireland’s attractiveness as a location for inward investment and reiterate a commitment to the corporate tax rate; and
Commence an audit of all planned infrastructure projects and prioritising those that may be funded through PPPs or other non-Exchequer sources.

Great discussion. A pity it is not being conducted in front of a wider audience. Our main political parties have chosen to deny any such debate to the public, at least until the election is over. All the people get are Ballymagash politicians roaring like bulls whenever the debt consensus is challenged. As for the media…


I would argue that house prices divided the average annual wage give a better indication of the fair value of residential property than looking at rents alone as it gives an indication of ability of people to pay. This ratio has averaged 3-3.5x in the US and UK since WWII and hovered around 4.0x in Ireland from the mid-80s to mid-90s before peaking at more than 11x in 2006 and falling to about 7x today on my numbers. On the Nama numbers you outline above (-50%;+10% to house prices), using the 4.0x multiple on average earnings, it would imply 3% annual inflation from 2010 average wage levels to hit NAMA’s house price valuations. That’s 50% higher than the ECB inflation target. Using a 2% inflation rate would imply a 4.4x multiple – not unreasonable, but I’d say the the NAMA assumptions are not at all conservative.

On farmland values, my understanding is that Irish average farmland prices are in the region of €10k per acre vs £5k in the UK so the driver to valuations appears to be something beyond teh prcie of wheat.


Could you explain the following? For the life of me, I can’t get a grasp of this at all:

You write:

“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.”

What are the grounds, beliefs, evidence, rationale for your belief that the great Cuckoo Anglo bank in our midst that is devouring our economy, is one of that ‘small set of banks’. Perhaps you mean its one of those ‘too big to fail’ banks, so must be saved for that reason; on the contrary, its too big to save. In fact, let’s here it from Ollie Wren, Ajai Chopra why senior bondholders of Cuckoo Anglo should be saved? We havn’t heard this argument coming from them.

So where does this argument come from then? Well, it originated in Ireland amongst the stockbroking clan who saw investor loss on the cards. It originated in FF for 2 reasons; one, it was the FF croney developer bank close to its heart; two, FF foolishly believed the lies from within the bank that had Brian Lenihan’s arithmetic challenged as he turned the figure losses from €3bn to €35bn (still climbing).

So we have this false propaganda that Anglo must be saved because its systemic, where the contrary is the case.

These are the facts. Anglo should have long since been sent the way of Amagerbanken http://www.cityam.com/news-and-analysis/danish-banks-play-down-amagerbanken-exposure in Denmark ; nationalised on the Swedish model early nineties, speedily shut it down, transfer out its assets,
burn bondholders. Clean quickly its mess. Its contagion has been allowed to grow, so it threatens the whole Irish economy.

This business of moral hazard gambling on Irish citizens being able to foot the bill, or, if kept on life support for long enough, toxic assets might show sign of life, makes us the clowns of Europe.

Not closing banks, not burning bondholders, is our tragic mistake that has brought in the IMF and it makes a disorganised, rampant default with serious asset stripping loss to the Irish economy, far more inevitable and worse than it could have been.


Apparently as it stands now, compulsory Irish is enforced only by the NUI’s admission requirements. (And the civil service’s? Not sure about that.) I’m told are no compulsory Leaving Cert subjects, in fact. Of course this is something that neither FG nor the compulsory-Irish supporters want to draw attention to just now.

Might not be of quite such short term relevance but IMHO a background part of the Irish susidy / protected sector pickle.

Sure. For example, the NUI’s long-standing preference for Irish speakers probably accounts for a good part of the somewhat disappointing research performance of the Irish universities. (It’s not that they’re failing to match Stanford: it’s that they’re apparently failing to match, say, Sheffield in making good on their proximity to the UK’s handful of real Stanford-level research powerhouses.)

Should losses of EU financial institutions be borne by the countries where the they are listed, where the operations suffered the losses, where they employ most people or where they did most business? The answer arrived at is different in each case, but the most justifiable answer is not obvious.

Merkel and Sarkozy are engaged in a smoke and mirrors routine, populism that’s politically challenging to counter but which has still drawn domestic criticism upon them.

Meanwhile, China and Japan engage in pervasive currency manipulation and Britain and the USA are inflating away their debts, but Ireland is subject to the most unsuitable monetary policy imaginable, in fact monetary policy has been inappropriate for economic conditions for around nine of the eleven years we’ve been in the euro and only partly appropriate for the other two. This isn’t nationalist hokum, it’s the opinion of Krugman, Eichengreen, Stiglitz and so on — in fact this opinion is near universal among disinterested commentators.

Talk of the periphery versus the core is misguided. The core must and will always be most prominent in the thinking of the ECB simply because of scale. What’s needed is a horizontally defined EU-wide coalition, rather than a vertically-defined fracture in the Union. If a just case can be made, then we should not be afraid to reach out to opposition elements or private bodies in EU countries where governments are pursuing short-term and opportunistic policies, exactly as Angela Merkel has done for the last two elections with Enda Kenny.

What the country needs domestically is a national unity government to develop every option without regard for market reactions which are not the concern of the Irish government. It should act prudently but its plans should be broad, flexible and encompass all options radical and conservative.

At a minimum, the government should be planning for every contingency and bringing every option as close to completion as possible short of enaction. A broad array of legislative alternatives should be developed, including proposals for clawback taxation targetted at developers and bankers, firebreak legislation distinguishing between different classes of creditors, taxation changes including corporation tax changes to be employed as a quid pro quo, withdrawal from the eurozone, credit settlements of all sorts, currency controls, price controls, wage controls and so on. Bureaucratic and administrative preparations to support these options, including perparatory work for introducing a new currency, should be pursued openly and without prejudice to ongoing negotiations or to other members of the EU, and the widest array of expert assistance brought in to expedite matters.

Orthodoxy at the present time is imposing a poverty of imagination and historical perspective; consideration of Roosevelt’s management of the wartime economy in the USA is instructive, when industrial production rose 300% in three years during which each of the last three options was in effect. In contrast, laissez faire economics during WWI and the US Civil war resulted in rampant inflation and profiteering. The radical steps mentioned are never taught or considered today in closed-minded deference to theory and in defiance of concrete facts of economic history. Iceland and Malaysia provide modern precedents.

Such measures, damaging in the normal run of events, are temporarily justifiable in emergency circumstances as preventing the economy from becoming locked semi-permanently in a sub-optimal configuration — a depression, with all the dead losses of unemployment, negative equity and emigration.

Constitutional rationales for all extraordinary legislative steps should be given consideration, with particular emphasis on precedents dating from ‘the emergency’. Any number of precedents, not normally applicable but relating to the most profound consitutional principles that apply in an emergency and dating back to Magna Carta, become relevant in the current circumstances and the Supreme Court can be relied upon to be sympathetic to any reasonable arguments couched in such terms.

In parallel with these developments, measures to restore the centrality of the Dáil in the political life of the country should be taken to ensure transparency in the legislative process and in government appointments, both for the country’s own welfare and as a demonstration of good faith. There’s no reason for preliminary legislation in this field not to be passed within 90 days of the new government taking office.

European constitutional proposals should be developed that are fair and that offer the prospect of permanence. Every effort should be made to draft proposals that, far from trying to permit the country to evade its obligations, enable it to shoulder the severe burden without adding the unjust penalties resultant from the criminal policies of a government that, with the knowledge and encouragement of the ECB and numerous politicians here and abroad, readily believed the lies of sectional private interests and lied itself to carry out a programme for which it had no mandate. The prospects of these proposals becoming fact is not more important than the formulation of arguments that are universalist and just, including simple amendments to the laws governing the ECB mandate to permit it to value employment equally with capital.

The outgoing government was paralysed at every turn by fears of leaks and constitutional reverses to its legislation — by the prospect of political embarrassments, in other words — and was hamstrung by opacity resulting from it’s indefensible record in creating the crisis.

The new government should explore so many options, but so tentatively individually, as to render these concerns irrelevant. Damn the markets. So long as the governent can create confidence in this economy in specific foreign and domestic investors within a reasonable timeframe, it needn’t concern itself with the international interests of the markets at large.

…when industrial production rose 300% in three years during which each of the last three options was in effect (meaning currency controls, price controls and wage controls)…


It is an absolute certainty that the socalled haircuts that NAMA applied to the Bank loans was way over the top so that they would be made to look good down the road. This is normal practice for the Irish Public Sector. As far as I know they knocked off an additional 20% from the values if the paperwork was anyway deficient. In the case of fully performing loans from Banks where the customer was not in trouble but still had to go into NAMA because of other loans outstanding they applied 20% discounts even though they were not merited. This is all needed to give the fonctonaires/cronies Rolls Royce pensions.


Perhaps the answer to this senior bond conundrum is to be found here. Typical would be legislation hat allows 100% repayment where a holder makes his application in spoken Irish, everybody else gets a 50% haircut.

Irish children are indoctrinated with the concept that there is nothing wrong with the establishment decreeing that certain activities and people are to be favoured and artificially protected by the state – even if it does not benefit most of them and really irritates many. The remarkable tolerance in Irish society for certain groups getting cushy deals is unlikely to be unconnected with this.

If a certain subject is compulsory then the ambitious student is forced to spend time studying it, rather than something they might be keener on.

The Irish gov’t has to accept some responsibility for stuffing the regulatory agencies, Dept of Finance and Central Bank with the usual products of cronyism, nepotism and incompetence.

Or if one prefers to lay it all on the lack of competence of the gov’t for over ruling all of the above.

We cannot in good conscience walk away scot free, as voters we knew what we were voting for. It takes one to know one and we have an unerring instinct for that which has been displayed at every election for the past 80 years.

Normally governments put a floor of 33% under bank bonds in return for 100% of the equity. That looks reasonable to me and should look reasonable to the ECB, IMF, Merkel, Sarkozy, Berlusocni et al.


“Taking all these factors into account, there is every likelihood that the NAMA projections for Irish-owned property prices in 2020 (not just in 2010 and 2011) will prove gross under-estimates. It wouldn’t be the first time that economists got it totally wrong about a long-term prediction. If that happens, NAMA will make a huge profit. If so, it will certainly be possible to argue in 2020 that the losses imposed on the banks by NAMA at the start of the decade were far too large and mainly the product of the anti-property mob frenzy that gripped Ireland at that particular time. That is what I will post here in 2020, if I am still around.”

“It is an absolute certainty that the socalled haircuts that NAMA applied to the Bank loans was way over the top so that they would be made to look good down the road.”

These considerations are to a certain extent immaterial.

The market lost faith in the solvency of BOI, AIB, & Anglo. Deposits fled and they were unable to refinance privatively – nobody can doubt this

Therefore, without government support they would have folded (that is so even if the ECB had been willing to provide them with liquidity support as they would have run out of eligible collateral).

Therefore, in the absence of government support the equity in these banks is worth ZERO, nothing, zip.

The point is this – irrespective of what these assets turn out to be worth – NAMA is paying for what they are worth now (on a specified date/save LTEV if applicable).

The question is what is the market value of these loans – and I think most people would agree that the banks would have ALOT of difficulty shifting these assets at prices above the NAMA prices.

A bank has to remain balance sheet solvent, not just in the long run when/if prices rebound, but at all times so as to allow it to hold deposits

Also, the fact they could shift some UK loans at above NAMA prices, as of today is irrelevant, the question is whether they could have on the date specified for NAMA valuation. Otherwise they would be able to flog UK assets that have increased in value at above NAMA prices and continue to sell Irish assets at the NAMA price. I think nama wine lake shows that on balance they have got the better end of this.

In any event it makes little difference at this stage as we are passing assets from arm of the state to another.

I’m wondering is this reluctance of many to consider the default option a result cultural or perhaps religious differences.

I’ve recently come across the opinion that many in this country view bankruptcy as immoral. That is, it is somehow morally or ethically wrong to declare bankruptcy. I have to say I never imagined that people actually saw bankruptcy in this way. Embarrassing yes, damaging to reputations yes, but immoral? It’s a weird way of looking at a financial status. I don’t know if its some kind of christian/catholic teaching or not.

So upon hearing this, I started rethinking the attitude of many in the political, financial and economic establishment towards the banks or state defaulting on their loans. Could it be that they are motivated by unstated opinions towards the state of bankruptcy itself, rather than the effects of it. To they view it as somehow wrong, or degrading, for a state to simply say that it cannot meet its debts as they arise?

I’d like to know what people’s attitudes towards bankrupty really are? Does anyone here view it as immoral or the like? Do you think such attitudes affect—or indeed effect—government policy?

@Maths guy

I suppose some people associate bankruptcy with situations where people hide the extent of their assets and or liabilities. They rack up debts they know there is a genuine likelihood they won’t be able to repay but don’t tell the lender their true situation. I suppose this type of situation arises when small scale trading is done on credit and trust where any form of constant due diligence beyond evaluating the honesty of the other person would impose transactions costs that could imply the transaction was uneconomic

@ Brian Lucey’s Twitter Account

is the personalised treatment of John McHale’s opinion really necessary?

A slightly different question: If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing
if you choose not to pay them back? I assume you consider stealing immoral.

No OMF, morality does not come into it. But you are right to raise the matter for it appears to me that the arsonists, who make up the majority on this blog, imply that the rationalists (like John) are wimps succumbing to some naive and outdated Judaeo-Christian guilt complex.

Not at all, read John’s piece again. It is pure calculus, what is likely to produce the best utilitarian outcome for Ireland? I sense no wimpish moral misgivings whatsoever.

@Eoin Squared
Personalised? JmH doesnt think we should. 80% of people think we should. And I ask people to contribute their views. Simples?

Thanks Eoin. I took a look. I am embarrassed to say my first ever exposure to Twitter. I have no problem with the personalisation. But a gross misrepresention of my position? Yes

I must be doing a very bad job explaining myself.

Yes that is the problem. I still dont know where you would stand. You seem equivocal. If I misrepresent you, apologies. But communication is two way. so, if you can clarify, again, for slow learners…

Is not the EU already in such a stew about the Euro’s future (witness the mess over the replacement head of ECB) that Ireland’s situation is on the table to be discussed. I know the timetable is tight with meetings in March (maybe Mr Cowan can yet save the day by shafting them) but it is not in any Euro, or sterling, country’s interest to see Ireland implode through not paying it’s debt.

As usual with the EU there will be a fudge, then a review, then a fudge and the T & C’s of our ‘bailout’ will be changed.

@ John

With respect:

“If we default on current projections it will be because we choose to.”

Who is this ‘we’ of which you speak?


“A slightly different question: If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing
if you choose not to pay them back? I assume you consider stealing immoral.”

Similar. ‘We’ – this ‘we’ anyway – did not agree for the state to take on private debt, and was never consulted on same. This ‘we’ along with 70% or more (including non-voters) never voted FF. Any person 20 years or younger, who is now expected to pay, had no hand or part in this.

As matter of interest. Does the logic of your metaphor mean that should BoI, AIB etc., recover and become profitable again that they would owe the state for what has been put into them by the state? How would this be achieved?

If I borrow some money, and I am sufficiently solvent at that time to make the repayments, then so-be-it. However, we have run into a very nasty financial bog, and the math is agin us: We cannot pay b/c we do not have.

Citizens need have to have some legal means – with a modest cost, to backout of their debt contracts – that’s it! I appreciate that lenders will be a tad pissed off, but people cannot pay what they do not have: That’s it. The math trumps.

However, we seem to be engaged in some sort of ideological hand wringing about the morality of debt, or whatever. Its useless. Stop it! Please concentrate on the real issue. Our inability to repay and how that predicament is processed to a socially acceptable, equitable solution. It stinks, but that’s it.

Now someone may correct me about this. I understand that senior personnel in our domestic banks misled (or deceived) ministers, who in turn misled our parliament. Anyone see a really big problem here? I do. A very big one. Try that sort of stunt in front of a judge and you might get to be a guest of the State so you could contemplate your future.

We need two separate, legally straightforward debt resolution processes: for personal debts and for mortgage debts. Absent these the debt predicament remains. I realise that these may be most unpalatable options, but these are most unusual times.


@Brian, I think you are pulling my leg. You know that I have long advocated imposing losses on unguaranteed bondholders of insolvent banks, and have called for the necessary resolution regime to make this possible. I have puzzled over why this did not happen on many occasions on this site. We still can’t be sure why a resolution regime was not in place for September. But I think we know why loss imposition is not happening now — as you said in your IT piece, there is a quid pro quo with the ECB. Given this reality, my point today is that it would be a very risky gamble to break this bargain. I accept that you think differently. But, in all fairness, I don’t think you can pretend you don’t understand what I am arguing.

We have a 177billion lifeline from the ECB and their local offshoot. Consequently, they have a major problem. But causing them further problems by burning bondholders at this juncture would not appear to be very clever strategy. They are bound to react and clearly this will be to our detriment.
The bank stress tests in March will include liquidity as a component and even a 12% core capital will not allow our banks to pass the test with a reliance on 7 day to 3 months money to fund them day to day.
We need a strategy to ensure continuance of this facility in the medium term and I would not share John McHale’s view that they will fund this long term as lender of last resort.
It will clearly take some time for bank balance sheets to be reduced to a level consistent with the new situation and lobbing hand grenades at your lender of last resort would appear to be foolish.


Thanks for the comments. It is an unfortunate fact that “we” have to do certain things collectively through our government. Many of us — even a large majority — might disagree with a particular decision in a representative democracy, but it is still our collective decision if made according to constitutional means. A good reminder that it is important to put the right representatives in place in the first place.

As to getting part of any potential upside in AIB and BOI, isn’t that exactly where we are given the State has injected funds by taking capital stakes in those banks.


@ BrianWoods 11

John, lets be candid, you’ve promoted a kid gloves approach to Anglo and bank bondholders for quite some time, in fact since the beginning of this crisis. This approach has failed and is the cause of our IMF/EU bailout.

All of your predictions in lieu of this approach to bondholders have hitherto been proved wrong.

You’ve been a favorite of RTE who’ve frequently asked you to pundit on Primetime.

You’ve sailed close to the wind of FF and Brian Lenihan and the weltanschuung they’ve tried to promote of the morality of burning citizens to save bondholders.

For example, I recall you not 2 weeks before the arrival of the IMF assuring everyone on RTE that FF’s budget plans would be sufficient to avoid the arrival of the IMF.

Contrary to a rationalist approach along Judaeo-Christian lines mentioned by BrianWoods above, your approach is analytically false and not based on mathematics or any form of calculus, if it contained any form of formal calculus it would clearly show the inevitability of the arrival of the IMF and coming default.

Its deferential approach to bondholders is immoral and filled with the smoke and mirrors of moral hazard, blind to the defence of citizens against the falsehood and pretence and lies and failure of the banks to write down losses and their subsequent blank cheque piling on of same losses to Irish citizens.

Saving the bondholders of Anglo is not based on Harvard economics, its making our country a laughing stock and has reduced us to ignorant third world standing as we are viewed from outside Ireland.

For fun, have a 2min gander at Celente here http://www.bankpoll.net/ on the video tab.

We need to reduce our debt burden. We need to stop pumping money into failed banks paid for by austerity measures that only guarantee our economic destruction.

Would RTE please include some balance amongst its tv pundit economists who are misleading Irish people. I’ve yet to hear Irish economists debate our economic state in a formal way such as the recent 5 way election debate. Lets have a number of Irish economists including economists from abroad such as Stiglitz, Krugman, Hudson debate with their peers in Ireland issues around our debt crisis.

As recently as yesterday we got this critique of censorship within RTE:


Today, I listened to Gormley being interviewed on RTE, he referred to the ‘McWilliams guarantee’ though the interviewer referred to the fact this was denied by DmcW, not before the interviewer denigrated DmcW with the term, ‘pop economist’.

There again Brian Woods above kindles inflamatory debate with the term, arsonist for I guess, truly reasoned analytic arguments from a conservative like myself.

But fair dues to you, John, you seem sincere, if, I believe, misguided in your approach:

“then proportional additional conditions do not seem unwarranted” arguments you make don’t stand up to analysis as you don’t define same and they are therefore nebulous. Your piece above is fraught with a lot of such nebulousness. So its difficult to comment on such innuendo.

What is needed is clear thinking and clarity of purpose.

@John McHale

Firstly, I don’t think that Colm McCarthy’s response missed your point. Even assuming for the sake of argument that we do have a debt of honour to the ECB to cover all the seniors’ bank losses, if we end up in sovereign default then all of the people to whom we owe debts are going to end up with a haircut, the ECB included. Defaulting on a moral obligation to the ECB now may be less irresponsible than risking a worse default on the ECB, and everyone else, down the road. Reckless trading is not a responsible reaction to looming insolvency.

Of course, whether the gamble is reckless or not does depend partly on one’s assessment of what the odds of success are. On the other hand, the fact that the ECB and other creditors are urging us to go double or nothing does not necessarily mean that we should, partly because those creditors have what I suppose one would call agency problems.

@ brian lucey

we should lower our corporation tax to one percent. that would be one in the eye for all of them

so, just to be clear about this, the nebulous paragraph is:

“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. ”

1. ” if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone” ……could you define exactly what you mean by this. Is there a contractual agreement that explains this? How does it matter how we see the ECB? Are there EU/IMF bailout terms we should know about, that havn’t hitherto been published re protection of senior bondholder?

2. ” Please state the precise demands of the EU/IMF (EFSF portion of) bailout giving sources/paragraphs and docs that demand protection for senior bondholders?

Then we might see better what you are referring to:)

@Colm Brazel

I will try to make this my last comment as I don’t want to monopolize the thread.

I think you are being quite unfair. I have not advocated a kid gloves approach to Anglo (creditors). I hate to draw attention to things I wrote in the past, but I very explicitly argued for arrangements to ensure loss imposition at a time where it was actually feasible. Please take a look at this piece from last April.

I probably should not have muddied the waters with my earlier comment about immorality. Brian Woods is right that my analysis in the post is purely pragmatic — no morality included. My judgement is that it would be a very risky move to act unilaterally, and that we should also at least appreciate what the ECB is providing before taking the gamble. I absolutely respect your right to hold a different view and am willing to weigh what you say.

I don’t see why you have to get personal. I make no claims to always getting it right; these are complicated and fast-moving events and none of us has a monopoly on wisdom. It is important that there are diverse views — RTE has no shortage of opinions calling for a hardline with bondholders — and let people make up their own minds.

The ECB is not willing to be the lender of last resort to the banks in the long-term; that is why they are insisting that our banks be downsized through selling a substantial proportion of their loan assets within the next 2 years, in the hope that they will get some of their money back, and deposit to loan ratios will then be at a level which will allow the banks to access the bond markets again.

But it is extremely unlikely that the markets will be willing to lend to the banks at the end of 2 years, even after such downsizing, because they expect that Ireland’s debt to GDP ratio will be well over 100% by 2014, and so we may not be able to honour any guarantee given on new bonds issued.

The insistence by European authorities that existing senior bondholders cannot, under any circumstances, be burned, has set up an expectation of zero risk to such bondholders, and if they perceive any risk they are not willing to lend except at exorbitant rates. This means that the taxpayers of every country in the euro area are on the hook to guarantee all senior holders of bonds issued by their banks.

In the long run this is not an acceptable position, and Angela Merkel was right to propose that, at least for bonds issued after 2013, there should be some form of burden sharing by bondholders. Even the IMF agrees about this and the need to decouple sovereign borrowing risks from banking risks. They propose that the Euro countries must take responsibility for bank borrowing in the Euro zone, by enlarging the European Stability Fund and using it to provide a “resolution mechanism” which can “preserve financial stability, while ultimately allowing losses to be borne by creditors rather than by taxpayers”.

What form could such a “resolution mechanism” take? One possibility would be for the European Stability Fund to provide insurance for up to, say, 80% of the value of bonds issued by euro area banks, charging the banks a small premium, say 0.5%, for this service. If a bank defaulted, the bondholder would bear the first 20% of the loss, and the Stability Fund would bear the rest. Banks would not be obliged to participate in this insurance scheme, and the market would determine the price of bonds issued by insured and non-insured banks. The governments of the individual countries would be expected to contribute to the Stability Funds to cover any losses not covered by the premium charged to the banks, but the governments would not themselves be required to bail-out any bank covered by the scheme.

This, of course, would not solve Ireland’s immediate problem, and we would still be lumbered with most of the bank debt that we have already taken on. However, if such a system were in place by the time our EU/IMF
bail-out expires in 2014, we would at least be freed from the requirement to provide a guarantee to the Irish-owned banks (if there are any left by then!), and so would have some hope of accessing the markets for our sovereign debt.

In the short run all we can do is to minimise our liabilities by negotiating with the ECB to allow us to buy back debt (either bank or sovereign) at a discount from anyone willing to sell. In the long run, we have to persuade our partners in Europe that a euro-wide insurance scheme for bank bonds is necessary.

David Buttimer

@Colm B,

I didn’t see you last comment so will break my no-more-comments pledge.

Central banks typically provide liquidity support for short periods based on good collateral. The ECB/CBI are providing ongoing funding support based in some cases on questionable collateral, including unfortunately the Government IOUs. I think it is fair to say that what is now being provided is extraordinary funding support.

You are right that the quid pro quo is not in the formal agreement. There is no way the ECB is going to make a formal commitment to provide ongoing funding to any bank. But I think most observers believe that the ECB is demanding that losses are not imposed on seniors and the deleveraging of the banks as the price for the extraordinary support.


There would also have to be a written paper of questions on Peig.

If a certain subject is compulsory then the ambitious student is forced to spend time studying it, rather than something they might be keener on.

It’s more the (former, I think) block to non-Irish-speaking staff appointments I was thinking of. This must have prevented NUI science departments from flourishing as it seems Sheffield does, by giving lectureships to bright and well-connected young PhDs down from Cambridge, UCL etc. (Everyone talks about having first-class STEM research universities, but we need to aspire to having second-class institutions – at least by the ARWU measure – first.) Of course, the old arrangement benefited Our Own – a pretty direct connection between compulsory Irish and protected sectors.

@Colm Brazel

“1. ” if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone” ……could you define exactly what you mean by this. Is there a contractual agreement that explains this? How does it matter how we see the ECB? Are there EU/IMF bailout terms we should know about, that havn’t hitherto been published re protection of senior bondholder?”

Well, I would guess he means that the ECB is doing more than it is required to do as a lender of last resort. Specifically, it is my understanding that not only is the ECB not required to lend to insolvent banks, but it is precluded from doing so.

Also, the ECB is now providing a substantial portion of the funding for Irish banks on a de facto long term basis. So, even if our banks were solvent this type of long term financing is at very least arguably beyond the role of a central bank.

@ Colm Brazel

At times the tone of this blog is less than parliamentary but the use of the word “weltanschuung” plumbs new depths

@ Prof Lucey

“you seem very concerned that if we elect Eamonn G (and you suggest that he was in Official Sinn Fein – i thought you were a republican? how would that be bad) Discuss”

You make an understandable mistake in regarding republicanism as synonymous with leftist nihilism but think GOP in the USA to appreciate your error.

The bailout deal and the ECB prohibition on hitting bondholders are two separate agreements. The bailout deal is with the IMF and EU Commission, is silent on the senior bondholder issue, and is only in liasion with the ECB. This may seem pedantic but in the context of EU negotiations it is not. Starting down the road of discussions with the ECB on the bondholders should not put the IMF/EFSF/EFSM funding in jeopardy, as that issue forms no part of the conditionality iunder which the funding is given (at least in published documents).

There is currently €15bn in unguaranteed senior debt. Over 80% of this matures before the end of 2012, so waiting until 2013 is not an option before starting negotiations. If this is given a 66% haircut, then the country saves €10bn. This is less than 5% of the overall debt burden in the 2014 timeframe. (Hitting the €6bn sub debt is already part of the bailout). So in reality hitting the unguaranteed senior debt won’t change much. However the issue at this point is political rather than economic. The blind support of corporate welfare by the ECB at the expense of taxpayers is politically toxic, and makes a mockery of the democratic process in the EU as a whole. This should be of concern to all EU leaders.

The ECB will not countenance any default on seniors, but is quite willing to shift the burden from national taxpayers to EU-wide taxpayers, as per recent speeches. It is here that I think the elements of a deal can be found and developed. Instead of hitting the bondholders, a deal will be reached whereby ultimately some of the debt will be written off, and paid for by EU taxpayers as a whole. This will necessarily include the 95% of the debt mountain that is government guaranteed, and not just the 5% unguaranteed. Whether this is through EFSF/ESM, recapping the ECB, or some other mechanism is second-order issue. The amount that Ireland would have saved by hitting the bondholders will be incorporated into the calculations of the EU-wide debt writeoff mechanism. Ireland gets its “virtual bondholder haircuts”, the ECB gets to protect the bondholders, the EU Commission gets to oversee a greatly expanded SGP surveillance and enforcement mechanism and the EU governments get to finally draw a line under the whole issue – everyone’s a winner (except for the EU taxpayer). At best I would imagine this writeoff would bring the debt mountain down to 90% or 100% of GDP, from a peak of 125% or 130% or so.

This deal will have to be done before mid 2012, or so, when Ireland is due to return to the markets. At that point exposure to the banks will have to be unconditionally known and limited, with a mechanism to offload any further bank losses to this EU-wide mechanism. The last stress tests were a joke, so nobody will pay too much attention to the next ones. The only way Ireland can return to the markets is if this uncertainty is removed, and the only way this can happen if it is clear who will pay the bill, and not by hoping that the bill won’t be too high.

Many Europeans would be delighted to have an excuse to bail-out of the bail-out.”No cash in the ATMs” is not a metaphor ,it is a very probable outcome of any unilateral measure by the Irish government

@john mc hale.

I think I going to have have bonfire at my place next week. How about taking what is left in the pension reserve and throwing it on the fire. That is the economic equivalent of what you are suggesting.

I dont who you but I suggest you take a few basic lessons in Economics.

If FG get in on their and don’t have the b**** to face the bondholders this country is technically bankrupt. That’s all i have to say


I agree with you. Unilateral bailing in of senior bond holders to boost bank capital could lead to contagion across the EZ and the withdrawal of long term wholesale funding. Now which banking system is a) the most exposed to the over indebted peripheral and central European economies. b) over reliant on wholesale funding and c) undercapitalised relative to gloabl peers?

@ John McHale:

Re: “But I think most observers believe that the ECB is demanding that losses are not imposed on seniors and the deleveraging of the banks as the price for the extraordinary support.”

That’s too nebulous for me.

I would like to see the legal documentation that spells this out specifically for the reason that I believe such assumptions are unfounded.

But if not, I would like to see the evidence for this assumption so that I can challenge that position.

@Christy, re “ECB not required to lend to insolvent banks, but it is precluded from doing so” Agree with you. This makes the matter even more curious and worthy of investigation. The question then becomes, to what extent can EFSF money be spent on the recapitalisation of insolvent banks or indeed on the securitisation of senior bondholder debt.

Perhaps this is the reason the EU/IMF bailout has conditionality regarding the capitalisation of Irish banks coming from the Irish NPRF in the first instance rather than from EFSF.

For my likeness there is too much vague understanding here. For sure though, the comments to this blog put away the gullible notion that somehow a gun is being put to Irish citizens by the EU/IMF, that senior bondholders of Irish debt held by German banks must be paid down 100% on the dollar as a condition of the EFRF/IMF funding.

But once again, show me the evidence for this, if it exists.

So we don’t have to deal in assumptions or vague conjecture or specious prescriptions based on incorrect and false premises. Incorrect assumptions about the solvency of Irish banks have cost us dearly. This was followed by incorrect assumptions about the extent of losses within the banks.

Simply, its my understanding senior bondholders need to take a hit as they have in other nations facing similar crises.

There is no argument cuckoo Anglo should be allowed to threaten the Irish economy in the way it has. Debt restructuring is urgently required to save our economy. Paying senior bondholders 100% is recklessness of an incompetent and irresponsible and immoral kind that is mind boggling.

Many thanks to John and all for another brilliant thread. Perhaps it’s the sauce, but there is a wealth of carefully argued , critical and constructive ideas here. Very empowering for the citizens.

@ Adrian Kelleher:

‘The new government should explore so many options, but so tentatively individually, as to render these concerns irrelevant. Damn the markets. So long as the governent can create confidence in this economy in specific foreign and domestic investors within a reasonable timeframe, it needn’t concern itself with the international interests of the markets at large’

+1 , but I think we have some ways to go before people see the light on that. Re-orienting a society is a very tough slog.


[The thread is inhibited by not being able to reply to individual individual posts.]

re: “But I think most observers believe that the ECB is demanding that losses are not imposed on seniors and the deleveraging of the banks as the price for the extraordinary support”

Have to say, Brian Lenihan I’ve just heard clear this up on Primetime shortly ago. Debating with Noonan and Burton, he said pressure last September came from Europe against burning of bondholders for fear of contagion.

OK, fine, this is the way I see it. We had a weak government and a weak Department of Finance outfoxed by Europe.

That was the time we should have walked. We didn’t and we were sold a pup! But we can’t pay for the bailout, so this is their mistake as well as ours.

We need burden sharing on senior debt. If we don’t get this from Europe, we’re living in cloud cuckoo land simply because the debt cannot be paid back.

And cloud Anglo cuckoo land will inevitably mean deflation and a spiral downward into default anyway with even worse news for Irish citizens.

Given the state of our economy with ridiculous growth projections of 3% and projections for job cuts in the tens of thousands and further austerity measures its possible its already too late. That tinkering with a couple of points less on interest coupons for revolving door bailouts is the least of our economic woes.

Brilliant idea from McWilliams on Primetime. We ahould hold a referendum to confirm that the democratic will is not to pay our debts. The democrats in the EU will listen to that and teh slate will be wiped clean. Hey, it worked before, didn’t we get huge concessions after the rejection of Nice and Lisbon?

As McWilliams explains it so lucidly there are only three possible candidates to pay for our mess (1) Irish taxpayers (2) European taxpayers or (3) the ECB. Bit of a no brainer, get the ECB to pay and nobody suffers.

@Adrian Kelleher

Patricia the Irish Sovereign_in_Exile extends an invitation to you to discuss possible contributions to her Economic-War Cabinet.


Framing your argument in terms of power rather than law or justice, you council against issuing threats by (er…) issuing threats.

The impact on the eurozone generally is ignored and it seems your story ends with the country starving for want of basic commodities, as if Ireland (and presumably Spain and Portugal) would then slide beneath the waves of the Atlantic never to be seen again.

The problem with this is that it’s not realistic at all. Productive capacity exists within the economy. Just like everywhere else, goods are produced that people abroad actually want and are willing to pay for.

In an emergency, the government could generate liquidity via a fire sale of NAMA properties, including the large number of foreign properties — enough to get through the rough patch and launch a new currency. Similar crises have been endured in the past, for example in 1976, without the sky falling on top of us, only in that instance there wasnt a €100Bn incentive to pick the crisis option.

I’m sure you’re aware that de Gaulle’s relations with the USA were not always smooth. Nixon was exactly the kind of american least fond of de Gaulle, and in many ways the feeling was mutual. Still, shortly after Nixon’s election, the two had a prolonged conference. Nixon consulted at length with him and, something he was very rarely inclined to do, enquired of his opinions regarding the contemporary situation and the options open to the USA in Vietnam and elsewhere. They had there differences, you see, but in the end de Gaulle was a titan of the 20th century (as was Nixon himself in an odd way — his rapprochement with China was the pivotal moment of the entire cold war) and Nixon respected him, something he’d hardly have done if de Gaulle hadn’t been a tough and singleminded leader with a clear vision of his nation’s interests.

de Gaulle came to power in circumstances that were hardly peaceful, that weren’t even constitutional in fact, and indeed left the country without a president for a brief period in 1968. Nonetheless, the economy of France didn’t collapse on either occasion. It’s those things foreigners want and are willing to pay for once again — those export markets offered France every encouragement to keep going. Also, at no point did de Gaulle panic at what might occur.

Your threats underline the need for the government to pursue a broad range of options and to prepare for all contingencies. Still it would be foolish and narrowminded not to negotiate in good faith towards a solution, leading ultimately to amendments to the EU constitution as desired by France and Germany and as desperately needed by Ireland. The ECB would manage affairs equitably if its hands weren’t tied by laws that are as unwise and inflexible for France as they are for Ireland. My own preference would be for a treaty that both deepened the powers of the European parliament and defined them more definitely in terms of subsidiarity.

Ireland does the EU no favours by lurching drunkenly onwards like a punchdrunk boxer simply because it can see no other way, however. Events like Deauville, which you’ll remember saw Merkel and Sarkozy enjoying a convivial chat with Dimitry Medvedev even as they undermined Ireland’s financial independence in the teeth of advice from Jean Claude Trichet and without consultation with the political leadership of either this country or of the EU, will ruin the EU if they continue, a fact that’s been pointed out far beyond Ireland’s shores. The current policy trajectory will moreover ruin this country, without any shred of exaggeration, with consequences abroad that are hard to calculate.

Europe is engaged in a merry-go-round of fantasy in the ostensible interests of calming the markets. The ECB lies, the commission lies, the government of Ireland lies and so on, and everybody who is paying attention knows it which is precisely why the ‘bailout’ of Ireland has damaged rather than enhanced Portugal’s and Spain’s access to credit markets. I don’t believe Clemenceau or de Gaulle would participate in such a party, nor do I believe they’d get caught up in the fantasy that a little market trouble would spell doom for this country. I believe that, if handed the keys to Leinster House, they would simply negotiate firmly but fairly, while discussing the options and risks in a straightforward and frank manner.

Grammar correction above: …they had *their* differences…

@Paul Quigley, David O’Donnell

The saddest thing is our own government is encouraging us to believe in the doomsday scenario in order to scare us into accepting the certain but basically ruinous track they’ve chosen. Certain, that is, until something like the hard right party of Morgan Kelly’s fears comes along anyway.

The country’s wealth lies first and foremost in it’s people — this isn’t poetry, it’s a fact of economics. We can make things people need and want, and a lot of options remain to us.

The argument used to be that we can’t burn the seniors because they rank pari passu with depositors. The recent proposal to remove all or most of the deposits from Anglo and INBS with corresponding assets (in what form not clear?) will, hopefully, enable at least negotiations to be opened with the remaining creditors, mainly bondholders, on the possibility of significant burden-sharing. Easier to see how this may be doable in Anglo and INBS, (which are in wind-down mode and which ultimately will no longer need to maintain regulatory capital) than in AIB or BOI which are continuing banks. But I guess that the ultimate outcome may depend on agreement from EU/ECB and will of course also be influenced by US legal developments in re the USD denominated subordinated bonds. After that we can get back to dealing with the real issue of cutting the annual structural deficit of Eur18bn.

@tull mcadoo

Assume you are referring to ‘Angela in Wunderland’- Germany’s new Wirtschaftswunder.’ … but the recent Economist piece failed to note this aspect on … er … Bank Exposure and .. er UnCapitalised Landesbanken – which has been more than noticed on this blog. Methinks Herr A. Weber made a cute move ….


@Adrian Kelleher
I think you misinterpreted what I wrote. I was not explaining what the rest of Europe should do but merely forecasting what they would do.

@Dominique Jean-Raymond

Your assessment of the consequences is nonetheless wildly inaccurate — it is scaremongering and easily disproven by reference to any number of concrete examples.

The stability and growth pact is and always was stupid and unworkable, and it made no contribution towards averting the current crisis. Current reform proposals are just further efforts to tie governments hands in yet more dead regulation and will result in mechanismns no more capable of response to unforeseen consequences. The depression teaches us that there is a time for reflationary policy, but the ECB is legally barred from doing this.

See Ch 5 of Nixon and Kissinger by Robert Dalek for an account of the Feb 1969 de Gaulle-Nixon conference, by the way. Also of interest is de Gaulle’s exclusion from the Casablanca conference in 1943, where his position was undermined by the USA, which did everything in its power to unseat him as leader of the Free French, and where the UK was of no assistance.

Casablanca left France with a burning desire never again to be at the mercy of allies. By the accession of the UK and Ireland to the EC in 1973, the situation was inverted 180 degrees. UK admission was accepted only on desperation terms, particulary with regard to fisheries, with lasting impacts on that nation’s relations with the EU. So you see what goes around comes around when it comes to high-handed politics, and the satisfaction of ‘victory’ is often brief.

I still did not make myself understood. I believe that the mood of continental taxpayers is such that they would oblige their government to retaliate ,hard. Everybody should try to keep his cool , talk and not do anything rash.

@Dominique Jean-Raymond


What everybody in Europe knows:

1) Lax bank regulation in Ireland contributed to bringing an economic disaster down on the continent.

What the government has failed to make clear (for obvious reasons in the case of 2.):

2) The German banks were no less enthusiastic than the Irish ones in lobbying the government for changes to regulation.

3) The particular severity of the disaster here is precisely because rather than in spite of euro membership. It’s reasonable to expect the country to do everything in its power to save the EZ. It’s not reasonable to punish the country and at the same time expect it to do everything in its power to save the EZ.

4) The Irish government was not fiscally irresponsible prior to 2008. They were delusional, not delinquent.

A very interesting discussion took place on the Pat Kenny show on the Bank Guarantee (9/2/11).


At 47 minutes Jan O’Sullivan tries to explain why nationalisation would not have involved the State taking on the liabilities of the banks. It makes very interesting listening.

At 56 minutes Maurice Quinlivan of Sinn Fein admits (in contrast to Gerry Adams) that Sinn Fein supported the guarantee. Sinn Fein changed its mind a couple of weeks later, but their objection was NOT to the principle of the State guaranteeing the liabilities of the banks but related to the treatment of the mortgage holders and the premiums the banks should pay.

The link below gives Sinn Fein’s policy at the time:


@ John McHale

Leave your economist hat off for a while and get in your car and drive through the towns of Ireland and see what a mess the country is in. Peoples lives are being destroyed,literally. How you can advocate sticking this mess out tells me your an academic who does,nt live in the real world. Brian Lucey is spot on when he states he was a citizen long before he became an economist. It really sums everything up.

@ david burke


It is the deep disconnect that concerns me, a phenomenon common amongst Europe’s technocrats.

@David and Georg

My concern is for us not to pursue policies that make things worse. We can disagree on what needs to be done, but surely we can agree on that. I stipulate that things are bad, but it is quite possible to make them much worse with ill-thought through yet emotionally satisfying responses. Your statements about “economist” vs. “citizen” are — and I don’t like using words of this sort — ridiculous.

@ Bryan G

re “Starting down the road of discussions with the ECB on the bondholders should not put the IMF/EFSF/EFSM funding in jeopardy, as that issue forms no part of the conditionality under which the funding is given (at least in published documents).”

Thanks for your focus there establishing what’s in the documents. See thread later above on Brian Lenihan contribution to Primetime, where he stated the contingency of EU/IMF bailout on protection of senior bondholders. There is a possibility then, given no mention of protection of senior bondholders in the documents, that he is lying. Lets assume he wasn’t lying. What’s not contractually written down as part of the documentation should be assumed by Irish negotiators as non existent.

What you suggest “The ECB will not countenance any default on seniors, but is quite willing to shift the burden from national taxpayers to EU-wide taxpayers, as per recent speeches. It is here that I think the elements of a deal can be found and developed.”

I think you are misunderstanding of the nature of proposed solutions so far. Solutions thus far have looked to the future on a development of a Basil 111 capital reserve requirement for banks and a future banking levy pooled to defend against banking failures such as Anglo, but havn’t stated any euro wide tax to absorb losses of the peripherals, correct me if I’m wrong there? Politically, that would be very difficult. Furthermore, the €700bn quantitive easing (probably much greater than that ) exercise by the US with much of that poured into the American banks, was opposed by the ECB. Its very much not on the cards politically such QE would be acceptable to German taxpayers. But a solution must be found as the chaos continues.

The only solution thus far for the G20 and ECB is to kick the can down the road hoping that governments can be persuaded to keep the system in place at the expense of austerity and scaremongering re the consequences if they don’t.

Adrian Kelleher above writes of the need for preparatory work and experts involved to examine leaving the EZ. This is work that should be prepared and form the basis for negotiation with EZ and Irish citizens and would strengthen the hand of negotiators. Disagree on AK’s call for a unity government, our situation is bad enough but would be far worse if we had no democratic opposition to the status quo.

Too many posts from me on this, for which apologies, so this is my last post on this.

@david burke
The only way out is to lower the interest rates on the sovereign debt and spread the repayments on twenty or thirty years .Even then ,Ireland will not be able to refinance its debt on the markets for a long, long time and will need new financing from Europe and the IMF. This will be very hard to swallow for the European public opinion, so this probably not the best moment to start a shouting war. Whose fault it is will be a nice problem for historians to discuss, but menaces are very dangerous at this point. I think Mr McHale position is a lot more compassionate than yours because the Irish people are sure to lose in any open conflict.

@Dominique Jean-Raymond

‘… the Irish people are sure to lose in any open conflict.’

May I have some empirics with that please?

@John McHale

Pls don’t encourage the trolls … Have you read Lorenzo’s Magnum Opus yet? Re ‘stocks and flows’, where u have some expertise, Capital Flows on the Finance Ministers’ agenda this weekend ….

Now – where did all those dodgy capital flows into Irish banks come from ? Might be VichyLand ….. relevant link posted on Economist thread …

John Mchales view.
A slightly different question: If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing
if you choose not to pay them back? I assume you consider stealing immoral.”
John later admits he should’nt have made the comment.
I for one am glad he did.

I had thought his lack of back bone was down to some kind of attempt self preservation. I now see thanks to a clever insight from OMF that his point of view is as a result of some kind of weird Ceausescu like fanaticism about bankruptcy being immoral.
John, thanks for letting your guard down and putting your opinions in a context where they actually make some sense.

There is a scenario evolving in the EC which will make the incoming governments negotiating position even weaker. The European Commission is going to bring forward its long delayed proposal on a EU wide Corporate tax Regime. This will be on the table when the special Euro summit is held on March 11. Enda Kenny will be 2 days in office when he has to face Sarkozy, Merkel etc. He will be alonein this meeting defending Ireland’s objection to corporate tax harmonisation. The outcome is an inevitable trade off by our Euro partners agreeing some sop to the Irish on debt repayment in return for Ireland signing up to the so called competitiveness package including corporate tax harmonisation. Enda is going to need balls of steel to stand up to the pressure he will face on 11 March. Any concessions here will ensure that any recovery in the Irish economy is postponed sine die.

@Albert J

Non-story. It is called a VETO ………. and UK, Denmark, Sweden, Poland and more than a few in EZ (nameless for the mo – tactics u know), including our good selves, are on side.

Move on …

@Dominique Jean-Raymond

Your pathetic posturing is belied by the facts. From your monumental arrogance, one might think that you were living in some economic superpower. Au contraire, you are living in France. Ponder the following:

(1) Since 1986, France’s average annual real GDP growth rate has been 1.1%, Ireland’s 5.9%. That includes the recent recession. It now looks as if in Q4 2010 Ireland moved ahead of France again for the first time since Q4 2007 (having been ahead of France continuously between 1986 and Q4 2007). France’s GDP figure for Q4 2010 was published this week. It amounted to 1.5% real GDP growth between Q4 2009 and Q4 2010. Ireland’s Q4 2010 figure hasn’t been published yet. But, between Q4 2009 and Q3 2010, it came to 1.6%. So, taking Q4 2009 as the starting-point, the Irish economy grew more in the first 3 quarters of 2010 than France’s did in the whole 4 quarters of 2010.

(2) The Ireland CSO this morning released figures for the number of days lost in strikes in Ireland in Q4 2010. It came to 27. That is 27, not 27 hundred, or 27 thousand, or 27 million, but 27. The corresponding figure for France in Q4 2010 was 46 MILLION. That is why Google, Intel, Fidelity, Hewlett-Packard and numerous others are announcing expansions in Ireland and not in France.

(3) France’s budget deficit in 2011 is forecast to be 7.7%. France hasn’t had a budget surplus since the 1970s. Ireland has had 15 to 20 since then. If you care to check the respective national debt clocks for Ireland and France, you will find that France’s is higher.



“2) The German banks were no less enthusiastic than the Irish ones in lobbying the government for changes to regulation.”

This “Devil made me do it” excuse is not really tenable. I’ve heard it on these boards as well, when people claimed that Merrill gave bad advice to the government about the bank guarantee.

I’m afraid advice is given and lobbying is made to governments all the time. The government still has free will, and, in making decisions, is considered responsible for them, regardless of the advice it was given or the lobbying made. The bad regulation of Irish banks was the responsibility of the Irish government. The bank guarantee was the responsibility of the Irish government. (I say Irish government and not Irish people – I don’t know enough of the situation to decide whether they can be held responsible for their government.)

‘… the Irish people are sure to lose in any open conflict.’ Do you really think Ireland holds enough cards where the Irish people might win? You, and others like you, seem to think that the French, Germans, and ECB are complete incompetents and that the plucky Irish only need to say, “Boo” to get their way. If you suppose that *someone* will lose, I think it’s a fair assumption that the Irish will do the lion’s share of it. Maybe the other Europeans will lose some, but it will not compare.

I know I should take David O’Donnell’s advice and not take the bait. But I find Eamonn’s comment so exasperating, I can’t help myself.

As I see it, I hold a view that any decent decent person would hold — if you can pay your debts with reasonable sacrifice, then not to do so is a moral failing. (I neglected to put in the word reaonable in the passage quoted with such glee by Eamonn, but I took it as understood.) I think reasonable people would come to this view whether their ethical approach is Kantian, Aristotlean, utilitarian, religiously based, moral intuition, or whatever.

There are, of course, different types of wrong in the world, and Ceausescu-style impoverishment to repay debts is an even bigger wrong in my view. I suppose partly as a result of my training in economics, I lean towards what Amartya Sen calls a deontological-senitive consequentialism: trade-offs have to be made, but that does not mean that rights and wrongs cannot be recognised. Now our debts may turn out to be so large that the balance shifts, but I am amazed how quickly some people are willing to revert to the default of default.

For people to jump up and down because I somehow let it “slip” that moral considerations might matter says more about them than it does about me.

Definitely last comment!


While your point about government susceptibility to lobbyists’ pressures is basically correct, the fact is that the country is being held responsible politically for the debts Irish banks accrued abroad, simply because they were Irish banks, and for the debts of HypoRE, WestLB etc in the IFSC simply because they were based here. This inconsistent treatment is aggravating EU public opinion against the country as if HypoRE, WestLB and so on had no responsibility.

The legality of the guarantee has never been tested in the supreme court, btw; as the banks were the beneficiaries, and as they systematically lied to the government throughout the period from 2006 to the completion of the NAMA acquisistions, its legality is debatable.

My personal position is that an EU-wide coalition be formed rather than a block of peripheral countries in opposition to the core, and I would furthermore endorse making substantive concessions in return for substantive progress — on the laws governing the ECB, on governance within the EU and on domestic governance, including taxation.

The notion of ‘open conflict’ derives from Dominique Jean-Raymond’s false dichotomy, not anything I wrote. The choice is not between ‘conflict’ and the status quo, it is between an array of options and the most attractive option will depend on the deal being offered. Regardless, whether or not losses abroad somehow match up to Irish losses is immaterial; inflicting losses abroad is not an objective. What matters is securing a just solution that safeguards the welfare of the nation.

Nonetheless, when someone talks always of ‘conflict’, warns of the consequences to you of ‘conflict’ and tells you you’ve no other option, after a while you get the impression he’s simply reluctant to discuss alternatives. That in turn suggests he is insecure about the turn that discussion might take.

The scaremongering about the consequences that might arise from any reasonable negotiating position is unfounded. It is not within the power of either Sarkozy or Merkel to deliver on the doomsday scenario, either domestically or within the EU framework. It is simply not reasonable to offer possible, non-specific aid or renegotiation down the line for the irrevocable conversion of several tens of billions of private obligations into national debt and alterations to the the domestic tax code, while clinging to a Hooverian model of central banking denounced by all impartial observers, e.g. Eichengreen, Stiglitz, Krugman and so on.

“It is not within the power of either Sarkozy or Merkel to deliver on the doomsday scenario.” If you think about it, then you are saying they are incompetent – they have put the money of their taxpayers’ at risk and at the pleasure of a third country (Ireland), without having the power to stop inevitable losses. I can see why the Irish may think that government officials are incompetent – they have the example of their own, after all – but by and large both French and German government officials have shown, over time, they know how to manipulate well the system for their benefit and, while many other epithets can be thrown at them, loose with their own taxpayers’ money to the advantage of another country is not one of them.


Nobody’s suggesting doing anything with French and German government money. Any monies lent to the Irish state are a responsibility it cannot ignore. The loans it’s suggested the Irish government (maybe) not pay are the loans it never took out in the first place — loans taken by Irish banks — that are not owed to any government.

I notice your argument is tangential, with another sideswipe at ‘the Irish’ thrown in for good measure. Now if you’d care to address any of the direct arguments, or to flesh out the doomsday scenario to make it more plausible, I’d be happy to engage.

I will make this one my last comment on this too so.

I am not getting any joy out of this, nor am I jumping up and down but I think your arguments are hampered by a warped morality. And I think if we keep socialising all these debts in servile fearfulness our european partners are of course going to use it to their advantage.

“Now our debts may turn out to be so large that the balance shifts, but I am amazed how quickly some people are willing to revert to the default of default.

For people to jump up and down because I somehow let it “slip” that moral considerations might matter says more about them than it does about me.”

John My opinion is that we have long since past the point where the balance shifts. I know there still many losses which have not yet been market to market or are off balance sheet but that does not mean they are not very real.

When you take account of the sovereign debt the bank debt, all the off balance sheet stuff and the realisation of losses as a result of selling the banks assets by order of the ECB etc. etc. what amount do you think the country is on the hook for? and what is it as a % of GNP
If you can answer that question with honesty and come up with a number less than 120% of GNP then you have a leg to stand on.

I saw a figures from Nama Wine lake recently that was just shocking.

I have been asking on this site if economists would be prepared to make a punt on such a figure but to no avail.

@ John McCale

“If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing
if you choose not to pay them back? I assume you consider stealing immoral.”

I Love your work btw John but I think you have hit on a point here. The Irish Citizenry did not borrow all the money (only what was required to run the country which over time could have been worked out) The remainder and indeed the lions share which has pushed us over the edge was borrowed privately by Bankers to lend onto their mates. The only stealing or theft going on here has been commited by a govt (with a seriously doubful mandate) in transferring this debt onto the said citizen taxpayer. If we were to create a heirarchy of immorality (which is probably worthwhile in this situation) where would the citizen taxpayer sit if they decided to default relative to say Politicians, Bankers, Developers and a few other vested interest groups?

What happened to the insurance on the possibility of bond default? If we “burned” bondholders, would the large German and Swiss insurance companies have to pay?

Similarly, every developer had to but performance insurance. Now that they can’t finish estates, why doesn’t the State collect on the insurance?

@Henry Barth
Probably – if they could afford it – nobody speaks of the “derivatives death star” any more since Greg departed this site – but it was the CDS and the impossibility for AIG to pay the likes of Goldman Sachs and Merrill Lych etc which forced the US into the massive bailout of AIG. The result was that GS was paid $12.5 bn and ML something similar – otherwise they would have been wiped out. Now they are back paying themselves astronomical bonuses as nothing had happened. Of course the CDS were insurance on the probability of default on the crap CDOs based on subprime which GS themselves were selling as triple A rated investment products to their clients. Maybe they fear another AIG on this side of the pond.


“A slightly different question: If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing
if you choose not to pay them back? I assume you consider stealing immoral.”

John, I can’t count the number of times in a chequered career when I have had to countenance other measures and act accordingly – I have been on the receiving end also – bird in the hand etc. It is all a matter of degree of brazening things out and hoping/working for a compromise. People and businesses have owed each other money from time immemorial and reached settlements. Unfortunately, the two Brians read too many textbooks saying otherwise.

BTW: watched the ‘Inside Job’ this evening – several academic economists don’t present so well, and several do. Interesting item but old hat now.

John Mchale, you said:

“If you owe someone a sum of money, and with sacrifice could pay them back, then how is it different from stealing if you choose not to pay them back?

I assume you consider stealing immoral.”

I stopped reading after I read that from you, as it is just amazing.

It presupposes the Irish Taxpayer owes the Bondholders of Anglo and other insolvent Banks back the Money which was borrowed by Anglo et al, and loaned to so-called developers and builders here.

Why are we, the Taxpayers, under any obligation to repay the debts of Anglo, etc. and their cohort of gambler customers?

Who is stealing from who here.

Just because a Stupid Corrupt and Shameless Government decided to issue a stupid Guarantee in 2008, for the benefit of their crony supporters, does not make robbers of the Irish Taxpayer Citizens if we choose not to repay the debts of the morally bankrupt Anglo et al.

We owe nobody anything relating to Bank Debts, regardless of the stupid Government Guarantee, so therefore stealing does not come into the equation.

You accuse the Irish Taxpayers of immorality for refusing to take on the immoral debt of the Bankers, that is rich indeed.

Perhaps you also feel that we should eat our own children.

As a suggestion, could it be feasible for the bond holders to be given these ghost estates, land banks, shopping centers, and apartment blocks instead of money?

Money flowed into Irish banks from abroad, the money went largely into property developments some of which are listed above.

If the money cannot be returned, then give the property (in what ever shape or form it is) to the bondholder.

A very simplistic theory I admit, but I don’t see any other solution, burning bondholders or haircuts is one thing, but taxing the bejazuss out of a small population is definetly not going to work. The sums involved are just too big.

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