Fuzzy Banking Maths

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

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

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

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

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

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

140 thoughts on “Fuzzy Banking Maths”

  1. Good call.

    Some comentators in the press fail to note funding are actually liabilities (the numbers under the impression deposits are assets was seemingly even more apparent in the media.

    The good folk on IE have correct the main newspapers in Ireland a number of times on banking issues and the like over the last couple of years – do they ever acknowledge the factual errors?

  2. I believe it has been mentioned a few times before that quite a lot of political journalists are moonlighting as economic journalists at the moment…and it shows…

    If anything this is a mild, and grateful, stab at QE for a chronically indebted nation, and as such should be welcomed, not discouraged.

  3. Oh absolutely not Bond, happy to see more pages devoted to the topics these days.

    I still wish they would correct themselves with a degree of humility every now and then though, if only for the benefit of readers who don’t get their information elsewhere.

  4. It is not clear that one type of guarantee is being replaced by another.

    Not all deposits are guaranteed. Also, there have been buy-backs of subordinated debt which is not guaranteed. There is also unguaranteed senior debt. If we are replacing the above with guaranteed debt then we are increasing the debt.

    The problem is that the whole system is completely opaque. For instance, the suggestion that unguaranteed senior debt is mostly owned by irish people. Who are those people? If most of the wealth is controlled by the top 5% the are they who we are concerned for? It is opaque for a reason, the least of which is a dodgy assumption that people will not be pragmatic about the benefits of protecting the private wealth of the well off.

    The pensions industry and the financial advice industry is still trying to hide its incompetence by persuading the govenrment and DoF that the people can’t handle the truth.

    Unfortunately for the growing fascist lefties, we do not need to seize private wealth when it is already committed through bad investment.

  5. @ John McH

    Absolutley correct. One of the major fall outs of this catastrophe has been the burgeoning of people for whom a little knowledge is a very dangerous thing. Everybody appears willing to pose as an expert on the arcane workings of our financial and monetary system and have no qualms in drawing the wildest of inferences. Of course they are encouraged by the fact that folks who do know what they are talking about like McWilliams can spout the wildest of inanities and seem to have no accountability for the fact that is it mainly rubbish.

    There was a truly excellent article, which I can’t link to, the other day in the Indo on the workings of the ELA by Laura Noonan. It drew attention to the incredible sums incolved and the apparent explosiveness of the whole situation but then pointed out that on closer inspection it was all pretty under control by the ECB.

  6. Hmmm, a John Mc post, with the only comments so far being by Rob S, Bond, Zhou and BWII. Some of the cynics will smell a bondholder conspiracy meeting taking place…

  7. @all

    Now now! Elaine is a breath of fresh air in her attempts to challenge the dodgy, crony, cozy taken for granted nature of what passes for political discourse in this island ….

    As for poor Sarah – well at least she has come out explicitly in her true blue colours – that little affair with 2_of_7 being so public one supposes she had to, particulaly after 2_of_7 (aka gimme more billions a dukes u dupes) placed that billet-doux in the Letters column of the Irish Times ….

  8. Indulge me in giving an idiot’s guide to banking for any journos on this site who are keen to learn.

    In the normal course people lend banks lots of money, multiples of GDP. The banks in turn lend out these moneys to citizens, SMEs, corporates, government etc. and these loans become the backing assets of the banks.

    The capacity of the banks to repay people their money is in the quality of their assets. Right now the only people who seem willing to believe in those assets (albeit substantially written down) are the ECB and the Irish Government. Hence it is only the ECB and the Irish Government who are prepared to fund the Irish banks.

    The first port of call is to accept the better assets as collateral, that’s the ECB as lender of last resort.

    The next port of call is for lesser assets to be accepted as collateral, but with haircuts, by the ECB’s surrogate the ICB.

    Both these facilities appear to be exhausted and we are left with assets not easily put forward as collateral. Instead the banks create bonds (guaranteed by the Irish government) which are implicitly backed by these residual assets and be presented to the ECB for more support from it.

    There is no doubt that there has been the most enormous run on bank deposits and there is also no doubt that the ECB/EU believe that this is irrational in that they must believe that the actual backing assets are still sound.

    Now anyone of an apocalyptic persuasion could postulate that the ECB is wrong, that Ireland inc. is a complete sham and that the backing assets will turn out worthless. The primary losers then will be the Irish people, but not because of a banking crisis but because inherently it had no economy of substance. Note that no amount of default will soften this apocalyptic blow.

    The secondary losers will be the ECB (not the Irish government) who will find that their faith in the Irish economy was misplaced and will lose all the financial support that they had proferred as an act of faith in Ireland Inc.

    The big winners would be a substantial and very wealthy section of the Irish population who cashed in chips that weren’t worth the paper they were written on, by moving their money abroad.

  9. @BW II

    Current policies have lead to a run on the banks ergo, you conclude, we must increase our efforts in the same direction. The logic is peculiar to say the least. It reminds me of Santayana’s remark that fanaticism consists of redoubling your efforts when you have forgotten your objective.

  10. @ AK

    I am not familiar with the pensees of Santayana.

    For whatever reason, and I am making no apologia for FF or anyone else, the punters and normal market agents have totally and utterly lost faith in Ireland Inc. Forget about the measly 30Bn in Anglo and just think that over 150bn has been withdrawn from this State by the above agents.

    The IMF/EU/ECB think that this “panic” is irrational and that is why (thank Allah) they are prepared to be lenders and funders of last resort.

  11. @BW II

    ECB support is (legally) contingent on converting tens of billions of unsecured private obligations into public obligations for which the exchequer is legally liable. We are still digging the hole for ourselves, and digging and digging — and all for non-specific, non-committal suggestions that alterations in the terms may come at some later date, after another €45Bn or so of red ink has been foisted on the taxpayer that is, all for the joys of a monetary policy that is anything but appropriate.

  12. @Mr. Bond,

    “Some of the cynics will smell a bondholder conspiracy meeting taking place…”

    I think Seamus Coffey’s research (discussed on other threads) and the increasing realisation of the extent to which the ICB and the ECB are holding the baby might have dampened the ardour of the ‘burn the bondholders’ brigade a tad.

  13. @BWII

    “Indulge me in giving an idiot’s guide to banking for any journos on this site who are keen to learn.”

    While you are no doubt qualified to provide an idiot’s guide . . .

  14. “Now anyone of an apocalyptic persuasion could postulate that the ECB is wrong, that Ireland inc. is a complete sham and that the backing assets will turn out worthless.”

    apocalyptic/sane whatever

    Not worthless but deffo worth less.

  15. @John
    I recall the T Balance Sheets that are included in the ‘money and banking’ section of Macroeconomics textbooks.
    These are hopeless over-simplified in the context of understanding the complexities of the current crisis.
    I think it amazing that the debate / discussion has trundled on without – to my knowledge – any attempt by a journal or academic commentator to enlighten the public by publishing a realistic but stylized balance sheet that would clarify the confusion raised by Elaine’s article.
    Over to you!

  16. @Paul Hunt

    I think Seamus Coffey’s research (discussed on other threads) and the increasing realisation of the extent to which the ICB and the ECB are holding the baby might have dampened the ardour of the ‘burn the bondholders’ brigade a tad.

    Au contraire it has increased our passion for justice – the opposition of the left/libertarians was to the socialization of private debts, not the socialization of foreign debts.

    If anything the preponderance of domestic bond holders makes selling whatever pain the state shares with bondholders politically easier abroad.

  17. “The IMF/EU/ECB think that this “panic” is irrational and that is why (thank Allah) they are prepared to be lenders and funders of last resort.”

    They are not lenders of last resort. They are not lenders, they are givers. Lenders assume there is some chance of getting their capital repaid. They are playing fast and loose with QE. All well and good if you have the economy and gunboats of the USA. QE to quell a massive bank run on dubious collateral, is good after bad.

    And, of course, we would not want to alarm the hoi pollio with any true account of the magnitud of the problem. That information is reserved for the bank runners.

  18. Re Fuzzy,

    “Thankfully the ECB appears willing to provide the funds”

    If you want fuzzy, it’s the “appears willing” – what can we rely on over the next 3 years? What strings are attached.

    If the “appears willing” is a temporary measure, all we are doing is putting greater risk on the sovereign. Perhaps John McH has access to information on what future support the ECB will provide; otherwise he’s missing some big assumptions.

  19. @ AK

    There is a run on the banks.

    We have two choices:

    (a) Support the banks with lender of last resort assistance

    (b) Let the banks close their doors

    Are you in favour of option (b)?

  20. @ Brendan (and BWII)

    “I recall the T Balance Sheets that are included in the ‘money and banking’ section of Macroeconomics textbooks.
    These are hopeless over-simplified in the context of understanding the complexities of the current crisis.”

    And if only we had an example of someone who is no doubt highly experienced in Macroeconomic textbooks hopelessly misunderstanding some of the more basic elements of Anglo’s balance sheet…

  21. @ Eamonn Moran

    “Not worthless but deffo worth less.”

    Yes that is were we are at. We have gone beyond the crazy property developer casino stage. NAMA has probably written that one down sufficiently.

    We are now in the territory of “was any aspect of Ireland’s economy what it seemed to be back in those heady days”? If the answer to that is ala Morgan Kelly “No, Ireland was overvaluing itself on all fronts and had substantially a sham economy” then at that stage we are beyond criticising bankers we were simply deluding ourselves as a nation.

    However, I personally think the malaise substantially stopped at the casino doors and the willingness of the ECB to pump such vast support at 1% into our banking system gives me comfort that they too think the doomsayers are way overcooking it.

  22. @Ahura Mazda
    It’s the “appears willing” bit that worries me too. The ECB appear to want out and demonstrated this when they called a halt last September.

  23. @Shay Begorrah,

    Don’t disagree with your contentions, but I fear the birds we should have singed may have flown; and we may wish to be somewhat tender of the flesh and feathers of those that remain. There is some political value in remaining publicly energised about this to keep the pressure on the EU Panjandrums, but at the end of the day any resolution is their call – and I’m reasonably confident they realise that and that the time available before they will have to extract the digit is shrinking rapidly.

    @John McHale,

    I see Prof. Walsh is handing out assigments and is fingering you. What he is suggesting would be very useful. I suspect Colm McCarthy may have developed something along these lines in the context of the State Assets and Liabilities Review, but the report, I undertand, (and assuming it will contain something of this nature) will not be available before next Friday to inform voters.

    @Mr. Bond,

    Tut, tut. The man who never made a mistake, never made anything.

  24. Hello everybody.

    On the charge that political commentators are moonlighting as economists, might I suggest that problem we have had in Ireland is that economists were moonlighting as economists during the boom and indeed during the banking strategy, and probably still are?

    @ McHale: “This kind of arithmetic – certainly not limited to Elaine – is unnecessarily raising fears and adding to confusion.”

    On the contrary, my article brings to light the schemes created by the Central Bank, the Government and the ECB to make senior debt holders whole and prevent them from taking loses. Why doesn’t the ECB, the Central Bank and the government issue a press release announcing such significant policies? Why is it left to *political* journalists to find the next scheme that burdens the Irish taxpayer?

    There is no fuzzy math here, there is no arithmetic here. There is no double counting here. We know the government guaranteed the banks liabilities. The government should come clean about the cost to guarantee all liabilities. In the US not all liabilities are guaranteed – deposits above USD250,000 for example. Why should the Irish government guarantee all liabilities?

    The point of my piece is to make the case that the government should not be implementing the guarantee. By doing this, there is no double counting. This is not about double or single counting. This is about the cost of implementing the guarantee.

    @ McHale argues that all liabilities should be guaranteed because the Government already told us so. Well, can’t the Irish government change its mind? Is the Government’s wrong decision of 2008 to guarantee all liabilities worth destroying Ireland?

    The point of the column IS to raise fears. Irish people have no idea the weight of the burden that is being placed on the tax payer in order to make sure the government continues to implement its full guarantee on the banking system.

  25. Anyone been through the party manifestos re wobbly maths? Any chance of a thread mods?

    I attended a chamber of commerce organized Q&A with local candidates recently, feelings approcahing a strong desire to strangle some of the worthies rippled through the room. No point being overly colloquial about it but ‘clueless’ would be polite description of most of them.

  26. @ Brendan Walsh

    I think it amazing that the debate / discussion has trundled on without – to my knowledge – any attempt by a journal or academic commentator to enlighten the public by publishing a realistic but stylized balance sheet that would clarify the confusion raised by Elaine’s article.

    It is amazing that the facts on this crucial issue remain so uncertain.

    There is for example a difference of €75bn on the estimated exposure of German banks to Ireland between what the Bundesbank says and the data of the Bank for International Settlements.

    Excluding Elaine’s article as I haven’t had time to check the various points but as a general point, it’s amazing how the media generally accepts official commentary on policy issues that is often no more than spin.

    In the IT yesterday, a story by the science editor Dick Ahlstrom was headlined ‘Science funding remains central to recovery’ but there is no data in the script to support this claim.

    The article is essentially based on comments of a private consultant, John Travers, who retired as director of Forfás in 2002 and is currently the interim director of Science Foundation Ireland.

    The way the system appears to operate is that when enough people, including vested interests, repeat something it becomes a fact.

    @ The Alchemist

    Just sticking to science policy, the Labour Party accepts the ‘success’ of current policy which I would say is a failure, based on available evidence and adds some bells and whistles:

    http://www.finfacts.ie/irishfinancenews/article_1021527.shtml

  27. @ Elaine

    “The point of the column IS to raise fears.”

    I don’t know if the point of any column should ever be to raise fears. Raise questions, thoughts, issues etc fine, and if fear arrives as a result then ok, but i don’t think thats your responsibility, is it?

    Also, the issue of political journo’s commenting on economic matters is, quite frankly, 100% correct. I never said i didn’t understand the reason for it, simply that it occurred, and that it led to mistakes being printed in fact or in context. I noticed you didn’t actually deny this, but instead decided to use a far less factually based jibe in your retort…

  28. Elaine,

    I support wholeheartedly the intended point of the piece (though you may need next week’s article to make it).

    But can you really argue, with hand on heart, that a reasonable reader, not an expert on bank balance sheets, would come away believing anything other than that the new bond issues raise the State’s liability by €18+ billion? Since this is not correct, and I think you agree with that, don’t you think these paragraphs add to the confusion? And yes a democratically elected government can change its mind and default on existing ELG and deposit guarantees. But it is better not to sugar coat what they are doing.

    I am sorry that I argue so badly that it comes across as “all liabilities should be guaranteed because the Government already told us so”. I believe guarantees should be honoured when costs of defaulting outweigh the costs of sticking with the guarantee. Yesterdays’ post was not about honouring guarantees at all, but a simple recognition that there appears to be a quid pro quo with the ECB to protect unguaranteed bondholders in return for extraordinary support, and there is significant risk in breaking this (informal) bargain.

    By the way, I did find the rest of the article interesting, so sorry to pick on the last bit.

    John

  29. @Bond. Eoin Bond

    The point of the article is to raise fears because this issue is being ignored.

    In reality, the auto-issue of bonds is a scheme created by the ECB to circumvent its own rules. ECB rules are very clear about the collateral they will take. By August 2010, there was no collateral left in the Irish Banking system that was acceptable to the ECB. Someone somewhere came with the first scheme: a) the “creation out of thin air” of IOUs by the Central Bank of Ireland. These IOUs were given to Irish Banks in order to go to the ECB and get liquidity. This scheme was quietly and obscurely implemented without the knowledge of the Irish people.

  30. @ Elaine

    What is happening here is a run on our banks. It is not caused by dated senior bondholders withdrawing funds, they have to sit tight. It is caused by the removal of deposits. We either fund those deposit withdrawals or we force the banks to close their doors. Which do you advocate?

    If we announced ala Sinn Fein that all bondholders would be burned the run on deposits would become even greater (if that is possible). This ECB/ICB support has absolutely nothing to do with the fact that there is a bank guarantee.

    I note that your motivation was indeed to raise fears. Before embarking on such a campaign I think it behoves you to be absolutely sure of your facts. IMHO you have got those facts spectacularly wrong.

  31. @ Eoin

    You’re nit picking in fairness…check out JTO’s debt clock above…then hit the add nama button…then factor in yourself all the added bank debt we’re liable for…..trying to raise awareness/fear of this, as JTO and Elaine are doing, is a worthy exercise. Every man and woman in the country should at least be aware of how large the problem is becoming, then maybe they could temper everything else with that knowledge

  32. @BW II

    Back to the false dichotomy again. There are any number of bankruptcy resolution processes that would permit the banks to continue trading; equally, emergency legislation could be drafted to enable a resumption of operations with minimal delay.

  33. @Brian

    I really hope I have got my facts wrong.

    But… http://www.irishtimes.com/newspaper/finance/2011/0217/1224290024749.html

    The objective is to challenge complacency.
    I refer to my earlier point:

    On the contrary, my article brings to light the schemes created by the Central Bank, the Government and the ECB to make senior debt holders whole and prevent them from taking loses. Why doesn’t the ECB, the Central Bank and the government issue a press release announcing such significant policies? Why is it left to *political* journalists to find the next scheme that burdens the Irish taxpayer?

  34. @ Elaine

    i think John’s point is that the 18.35bn would have to be repaid by the government (per the current policy) even if they hadn’t issued these fresh bonds in the first place – the liabilities are already baked into the existing mix. Thats why its double counting. So the problem is not the new issuance, but the original implicit and explicit guarantees. The new issuance doesn’t change any of that if we don’t plan on reneging on those guarantees, which even the main contenders for the next government are not suggesting we do.

  35. Elaine
    Dont argue with BWII…not worth your while
    Eoin Squared is a useful if (imho) sometimes rather obnozious source of bondmarket views.
    Keep up the good work. Its a scary time.

  36. McHale, I recommend you read in depth the events that lead to the Argentine crisis of 2001. It is true that Argentina did not have an ECB that would fully backstop its banking system. But Argentina had the IMF and other multilateral institutions that were very happy to support an unsustainable situation for too long. While IMF support lasted, Argentina was able to increase its amount of debt in order to “ensure” the sustainability of their economic situation. Eventually, the IMF realized it was wrong and decided not to continue to throw “good money after bad”, cutting loose Argentina.
    Make no mistake. A few more months of massive capital outflows from the Irish banking system, as the ones reported by the Irish Central Bank for November (EUR26.7bn) and December (EUR40.17bn), and the ECB will find it very difficult to continue to fund Ireland. The ECB will at some point realize that Irish government collateral is no longer good. Ireland still has deposits of EUR429bn. Do you really think the ECB is going to lend Ireland more billions against Irish government paper, when it is clear now that the Irish economy cannot support the current debt load?
    At that time those that told us that there was no other way but to indebt the Irish people to death in order saved them, would realize that there were two choices. 1) Cut the losses and deal with the problem with a smaller amount of debt, 2) Cut the losses and deal with the problem with much more debt.

  37. Furthemore, accusing Elaine of trying to raise fears is like accepting the claim made by the driver of a car, that he did not want to use the horn before striking a pedestrian because he did not want the pedestrian to panic.

  38. Can we not take stock for a moment.

    John McHale is arguing that we shouldn’t do anything rash re the bondholders because we are receiving extraordinary bank support from the ECB as a quid pro quo – and, in any event, it’s all underpinned by the terms of the EU/IMF deal and previous legislative – and binding – provisions.

    Brian Lucey is saying burn some of the bondholders because the ECB morally, pragmatically or otherwise will feel unable to retaliate by withdrawing the liquidity support.

    Elaine Byrne, I fear, is sowing confusion. If anger isn’t a policy, fear most certainly is not.

    My sense is that the EU’s Grand Panjandrums are well aware of how het-up voters in Ireland are and will assemble some sort of package – which may, only may, provide some relief – by the end of next month. But panic here or rash unilateral actions won’t speed this up or improve the terms – and could very easily worsen them.

  39. @Brian Woods
    “However, I personally think the malaise substantially stopped at the casino doors and the willingness of the ECB to pump such vast support at 1% into our banking system gives me comfort that they too think the doomsayers are way overcooking it.”

    I think the overriding reason that the ECB are pumping such vast support into our banking system is because a) they are pursuing a no bond holder left behind policy and b) if they didn’t they afraid the euro will fall.

  40. It would seem that a bigger problem is emerging in Euroland with Moody’s today downgrading some 280 different securities of German Banks. Perhaps we are focusing too much on our native banks when Angela has such problems with the likes of Westlab who seem to have their own Nama at 77b of dodgy stuff.

  41. You probably don’t want to compare a stock (some bank debt) to a flow (tax receipts). But Moody’s favoured metric just now of ability to repay for sovereigns are comparisons between projected flows, those for recurrent public revenues (mainly tax receipts) set against prospective interest payments. By the way, this kind of ability to repay analysis features heavily in Moody’s Aaa Monitors – so it is not just for sovereigns rated less than Aaa.
    I have yet to see a somewhat decent analysis of where interest payments for Ireland are headed. The IMF’s December report, along with the EC’s “Economic Adjustment Programme for Ireland” (10 Feb) make a stab at it. However I’d have liked to see there more consideration for the kind of issues that Elaine is raising, and the possible impact on public finances.
    True, it is quite difficult to form an idea of the contingent liability to the State coming from banking. Yet the issue ought to be of paramount public interest. It’d require some idea of the value of banking assets and the prospective stream of income, along with debt, and how long the taxpayer is going to remain on the hook. If banks had funding in the market and that is now coming from the CBI/ECB through those auto-bond issues that Simon Carswell has been looking at, well that can add somewhat to the contingent liability. How much two or three years down the road is not obvious, but you’d want to have some idea, however imperfect.
    Call that balance sheet analysis, as Brendan Walsh suggests. Hopefully that’s prospective and hard-nosed analysis (the REVIEW GROUP ON STATE ASSETS AND LIABILITIES is a quite different animal – see http://www.finance.gov.ie/viewdoc.asp?DocID=6396 ).
    Obviously interest payments depend in large part on prospects for the stock of debt. The IMF projects another large increase in the public deficit this year (over 10% GDP), diminishing somewhat in the coming years. The European Commission, in its latest report, sees borrowing for Ireland at some EUR55bn this year (including support for the banks), public revenues stable at near EUR33.6bn ( ec.europa.eu/ireland/press_office/news_of_the_day/economic-adjustment-programme-ireland_en.htm – p90 for the borrowing and p88 for the revenues).
    It’d be interesting not only to work out the prospective interest / revenue ratio for Ireland in the years ahead, but also compare to the last time when Ireland got itself into deep water, back in the mid 80s. e.g. Receipts and Expenditure of Central Government by Item and Year – http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/Define.asp?maintable=NAH19 Of course, the Irish exchequer had much greater policy flexibility back then, and not only far more favourable interest / revenue debt ratios.
    Today’s prospective figures, in comparison to what was experienced in the 80s, are quite a different kettle of fish. I find it very surprising indeed that neither the rating agencies, nor the recent reports from the IMF or the EC, have quite got to grips with prospective analysis.
    I’d think the new government would have an interest in doing so, as soon it takes over the reins of power. That would then in turn help inform Messrs Rehn, Bini-Smaghi etc., given that the research from the European authorities to date doesn’t show much evidence of advancing far enough where it matters.
    @ Joe McHale – some sovereign balance sheet forecasting is the kind of exercise I’d like to do before concluding what the shape of future policy is. You referred to it in your contribution yesterday. But future policy must be rooted in reality. I don’t quite agree that “the difference in views comes down to how we see the obligations of the ECB”, as you say. Rather it is the art of the possible, rather than the merely desirable, that should make a difference. Elaine’s article is another reminder that the options are rapidly diminishing on the back of unchanged government policy for now.
    @ Brian Woods By the way that Laura Noonan article is maybe http://www.independent.ie/business/irish/bank-giant-citi-plays-down-risk-of-ela-assistance-2540407.html But I’m not sure about “was all pretty under control by the ECB.”

  42. @cet. par.

    +1

    Our problems are relatively huge for us, but absolutely small when compared to what the Germans, French, Belgians, etc. have ‘warehoused’.

    I have a sense nothing will be sorted until everything is sorted.

  43. @Adrian Kelleher
    “Back to the false dichotomy again. There are any number of bankruptcy resolution processes that would permit the banks to continue trading; equally, emergency legislation could be drafted to enable a resumption of operations with minimal delay.”
    The issue is not the scheme. The issue is what depositors (primarily external to the eurozone) would do. The British government announced to no avail that depositors would be protected when Northern Rock went into administration. After Icesave and without an FDIC, nobody believes official assurances. Even with the FDIC, there are bank runs in America.

    @Elaine
    It is not quite true to say that there is a limit to FDIC insurance. It depends on the kind of account http://www.fdic.gov/deposit/deposits/changes.html

    On the other hand, I agree with you that self-issued bonds can be added to liabilities of the state. In theory they are backed by assets, but given that one of the reasons for issuing them is a dearth of collateral acceptable to either the ECB or the ICB, one wonders what squidgy sort of stuff it is (presumably sterling mortgage backed securities created by some of the maddest lenders in a mad, mad, mad, mad, mad mortgage market…).

    People should be afraid and not just about the banks.

  44. @ Ciaran O’Hagan
    “I have yet to see a somewhat decent analysis of where interest payments for Ireland are headed.”

    I’m not sure if this is a decent analysis but Moody’s gave a presentation last December in Dublin. (Reading from a chart handed out) their baseline interest to GG revenue is c.22% and their adverse scenario of c.30%.

    It’s hard to put a figure on the banks. If the ECB forces banks to dispose of assets, the costs could balloon.

  45. @ Elaine & AK

    Picture me going into my bank to withdraw €100. Bank manager says, sorry no cash left, but wait a minute. He then consults with his boss and comes back and announces “guess what? the boss says he ain’t going to pay back those nasty bondholders, isn’t that great news”. “Fantastic, does that mean I can get my €100?” “Well no, I told you we ain’t got no cash and we sure ain’t goin’ to be able to borrow any from those nice people at the ECB after the boss announces this great bit of news”.

    Get the picture? The banks have run out of cash. Nothing to do with guaranteees. Banks must close if they cannot source cash from the ECB. No amount resolutions or bondholder bonfires is going to produce that cash.

    Perhaps the ECB are solely motivated by a desire to save German bondholders or to save the Euro. Heck do I care when a surgeon saves my life, if he is only doing it for his pay cheque?

    Elaine, don’t worry about the fuzzy math. A well known TCD Prof once suggested that €28bn of Anglo liabilities should really be regarded as €21bn of assets and the whole damn mess would simply be a nightmare that we wake up from.

  46. @ Ceteris paribus,

    I think Moody’s actions relate to the new German Bank Resolution Act rather than a deterioration in asset quality. It looks like German taxpayers aren’t going to pay losses that should be paid by bank creditors. I think it’s something to do with capitalism.

  47. @all

    Elaine Byrne says: ‘In reality, the auto-issue of bonds is a scheme created by the ECB to circumvent its own rules. ECB rules are very clear about the collateral they will take. By August 2010, there was no collateral left in the Irish Banking system that was acceptable to the ECB. Someone somewhere came with the first scheme: a) the “creation out of thin air” of IOUs by the Central Bank of Ireland. These IOUs were given to Irish Banks in order to go to the ECB and get liquidity. This scheme was quietly and obscurely implemented without the knowledge of the Irish people.’

    Can we all agree on that much?

  48. @Elaine Byrne

    In a way it doesn’t matter that this bit:

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

    …..is probably (see later) wrong in that the underlying liability not new.

    Thing is this is a very understandable conclusion for you to have reached. The Central Bank’s handling of this has been archaic. The usual attitude is that CB’s tell you naff-all and highly paid analysts are employed by investment companies to try to discern something from the accounts and announcements. If you take a look a this thread starting at the comment linked here you will see that even people who are very used to watching this sort of stuff are struggling to work out exactly what the Central Bank is up to – based on mushroom farm style communications:

    http://www.irisheconomy.ie/index.php/2011/02/09/new-imf-statements-on-ireland/#comment-123188

    It is one thing when there is fine tuning of liquidity going on – which is the sort of thing envisaged in their tradition of communication but it is totally inadequate when they are printing billions of euro. You are right to draw attention to this even if you might have tripped up over a technicality.

    You might like to have a look at the latest Central Banking mystery concerning about 16bn that might have been an accidental under-application for cheap funding, or might be something centred on Irish banks – nobody knows:

    http://ftalphaville.ft.com/blog/2011/02/18/492341/clues-to-the-eurozones-e15-8bn-fat-finger/

    Frankly I cannot understand how the CBI cannot understand that a) intelligent journalists that are not used to this subject will be very interested and b) that their briefing is inadequate.

  49. @ Paul Hunt

    “I have a sense nothing will be sorted until everything is sorted.”
    I agree. T he German bank downgrades are as a result of the German Resolution Scheme (as Ahura Mazda points out) and it is interesting that Moody’s are only now reacting considering this was enacted in November.
    The scheme seems to only cover subs and unsecured seniors. So it would appear that unilateral senior bondholder burning will be verboten.

  50. @Cet. Par.,

    Thanks for this. It seems to be in line with our bit of rushed legislation here – the only difference being is that that kind of haircutting might solve some problems there, but it only shows up the size of the problem here.

  51. @Brian Woods II

    You’re talking nonsense quite deliberately. Since when has insolvency equated to ‘no cash left’?

    @hoganmayhew

    Again and again we’ve been told not to spook the horses. The focus of our elected leadership should be on competent government — confidence will follow after that.

    Some of the scaremongering about the consequences of deviating from the current policy proven to be disastrous, as exemplified by Brian Woods II and Dominique Jean-Raymond, have been hysterical beyond words.

    The apocalyptic pictures they paint are short on detail however. What they don’t say is how an economy with a prodigious ability to generate foreign exchange and assets of great value, albeit one with severe liabilities, is to be laid low by a momentary disruption to payment mechanisms. Every effort is made to instil terror, little is made to explain how the nightmare might come about. In fact the image they conjure up has never become a reality anywhere.

    Their reluctance to move away from their phantom terrors to real analysis signals a lack of faith in their own arguments. The winter of discontent and the ’76 bank strike were each worse than what they describe, let alone 1968, yet on none of these occasions was the society in question reduced to the neolithic level of their fantasies.

  52. @ hoganmahew

    Why do try to undermine Elaine’s credibility by bringing confusion about FDIC limits? In effective terms, only noninterest bearing accounts have full insurance until Dec 31, 2012. But you must be ware, I hope, that most US deposits are NOT in noninterest accounts but rather on money market accounts, interest accounts and CDs. So, although you might be right on the technicality, the reality is that most all americans will not be covered over 250,000 because they do not hold fully insured accounts.

  53. Domenique and BWII remind me of lear “I shall do such things, what they be i know not, but they shall be the terror of the earth”
    Im surprised DFT (distinguished former taoisig) havent been brought into the debate yet to suggest the inadvisability of inducing fear in equines…

  54. @ Elaine

    I withdraw one comment, your facts are presumably okay. But your interpretation of their significance is entirely wrong.

    What is happening now is about keeping the banks open, despite AK’s unbelievably blind inability to aknowledge that. It involves, as John McHale states, transfering an implicit dependence on the quality of our bank assets to an explicit one. It has nothing to do with the guarantee. We have absolutely no choice but to keep our banks open (or do you disagree?). This needs the ECB and the ECB won’t give the cash unless the government guarantees repayment.

    Whether we can or will honour that guarantee is another day’s work but there is absolutely no choice but to do now whatever it takes for the ECB to keep our banks open.

    You suggest that what has happened in the last couple of weeks in our banking system is the equivalent of squandering more than a half year’s tax take. Have you paused to wonder why in the middle of an election campaign even SF/IRA have not latched onto this apparent outrageous treason.

  55. “the ECB won’t give the cash unless the government guarantees repayment.”
    you know this how? You REALLY see the ECB presiding over the closure of the banking system in ireland? REALLY? heres the thing…they wont. They darent, as that would be an act of economic warfare.
    Man up, Enda, and say “NO”. Your problem JeanClaude. Talk to Angela and the rest, were off home.

  56. @ AK

    I see now the source of your misunderstanding. Right now the banks are facing a liquidity issue, big time. As far as the ECB are concerned the solvency issue has gone away, the Irish Government has set aside a contingency fund of 25bn to add to the already capital injections.

    But the citizenry are having none of it. The banks may or may not be solvent so far as they are concerned, they are taking no chances. This is a full blown liquidity crisis and so far the only succour in that regard, the ECB, has been found up to the challenge.

  57. @ Prof Lucey

    If you really want to do Shakespeare how about Macbeth:

    “And I say unto you a great liability
    shall becometh an asset of such
    wondrous proportions as to banish this
    dagger that I hath before me”

  58. @ Brian Woods II

    I am very happy you checked Elaine’s facts and you concluded that she was right and that you were wrong. Non harm done. Just please make sure next time you check the facts before accusing people with such sedition.

  59. @BW II

    We’re literally placing the nation in hock to the ECB to preserve the banks, the same ECB that is legally barred from reflationary measures, legally barred from returning the assets until when, if ever, the banks find the wherewithal to redeem their lodgements, and about to raise interest rates due to inflation resulting in part due to rising demand caused by QE in the US and UK.

    The chicken littles meanwhile claim we’ll be left without a payment system otherwise, except a legislative reordering of bank assets and bank liabilities could easily circumvent this, seeing brand new banks emerge within days of the old ones going bust, all based on the same infrastructure and with the same staff. That’s the most frightening suggestion, not one likely to occur in reality, and you suggest it’s worse than the alternative?

  60. @ AK

    We are probably agreed at what is happening. The difference is that I believe we have no option but to keep the banks open even if that means being in hock to the ECB.

  61. It is precisely because people were not scared enough that we have suicidal guarantees and NAMA only game in town. Yes, the Irish government can. nay must change its mind or it will have its mind changed for them as happened when our yields went awol all down to those nasty bond vigilantes attacking poor old Ireland who’s banking system was inherently solvent, sound and well capitalised if we were to believe certain economists. It is healthy that the deposits are leaving because it shows that people are not going to put up any longer with the lies and deceits.

  62. @Grumpy

    Ta for link to Lorenzo’s most recent ….. let me see …

    ‘“The degree of heterogeneity plays no role in setting the appropriate monetary-policy stance,” Bini Smaghi said.

    Another one for the yet to be re-written text-books. It plays NO ROLE. Does anyone around here agree with this? Does this mean we get screwed on the way up [no role in capital flows for Lorenzo] and we also get screwed on the way down? [citizen-sers pay ALL debts of the EZ financial system] Is this double accounting – or is there any point in being a bit heterogeneous at all at all? Have the BORG taken over the ECB?

  63. Whilst we all agree that articles on these subjects are a positive thing for the Irish public in general, I really don’t think we can progress on this point until the author admits a fairly obvious mistake in the article.

  64. While we are on it, I wish the bailout would stopped being referred to as an €85bn fund.

    It isn’t an €85bn bailout if we are providing €17.5bn of it ourselves. FT, Economist – nobody seems to make the distinction.

  65. @ Robert Browne

    “It is precisely because people were not scared enough that we have suicidal guarantees and NAMA only game in town.

    Failte romhat. I don’t know why complacency is not one of the seven deadly sins.

    @ all
    I thought this thread was great earlier. If I wasn’t an oul fella, I’d call it awesome.

  66. For what it is worth Elaine’s article may double count in the sense that the debt already existed and, just because the Irish government is issuing new debt to redeem old stuff from the ecb, there is no new debt creation.

    But in two things she is right. This debt turns the guarantee from a possible liability to a hard liability for Irish taxpayers. also it gets the private sector banks that offered the debt as collateral off the hook. So when the government said “it’s a guarantee but we won’t need to honor it cos this is a liquidity event” everyone said ok, cool with few exceptions. Now that this guarantee is being turned from potential tax payer liability to hard cold cash, and Elaine points it out, we are told, hold on, the government guaranteed it so they must honor it, EVEN though the term of the guarantee expired in September of 2010! (I know it was extended but the original point holds)

    As for sowing fear, well what’s wrong with that? It seems economists are happy when commentators sow lazy complacency, greed, “keep up with Jones’ envy” it’s all good. Maybe she should say that “all’s for the best, the government understands and will do everything to protect you well being, now please don’t think just spend” she’d be lauded as protecting confidence.

    And when it all goes teats up as Latin observer might say, they go “who cuda seen dat?

    Inc

  67. @Rob S
    “It isn’t an €85bn bailout if we are providing €17.5bn of it ourselves. FT, Economist – nobody seems to make the distinction.”

    I was under the impression it was a loan – in which case we will be providing all of it ourselves as well as a punitive interest repayment – or do you implicitly accept we can’t afford to pay back any of the €67.5bn?

  68. @Adrian Kelleher
    “What they don’t say is how an economy with a prodigious ability to generate foreign exchange and assets of great value, albeit one with severe liabilities, is to be laid low by a momentary disruption to payment mechanisms.”
    Perhaps because they understand that most of that foreign exchange is ‘resting’ in Ireland and is not vested here.

    @Latin Observer
    “Why do try to undermine Elaine’s credibility by bringing confusion about FDIC limits?”
    It is not to undermine Elaine’s credibility, but to show, as recently as last November, that the FDIC has been fiddling with the cash guarantee. That fiddling will, no doubt, continue if there is a threat to cash funding of the banks (from corporate treasurers, for example). The point is that the FDIC is a credible fiddler, notwithstanding the fact that it nearly ran out of money last year. It has a secure funding line and a promise from a government that is still considered solvent. Compare and contrast with any sum the Irish state ‘guarantees’.

    In terms of the article, it is correct to wonder when a guarantee becomes a liability. When the assets backing it become suspect? When the guarantor becomes suspect? When the prospects of payment on the guarantee reach a certain level? What level?

    It is simple risk management to view guarantees in the current situation as liabilities. If the guarantee didn’t have to be issued, there wouldn’t be a question about its nature. Because it has, one wonders why it has…

  69. @AMcGrath
    “I was under the impression it was a loan – in which case we will be providing all of it ourselves as well as a punitive interest repayment ”
    Absolutely. And what then of the reasons for having the NPRF in the first place? Have Public Sector and state pensions suddenly gone away?

  70. @Michael Hennigan

    The Irish Times yesterday “ACCORDING TO THE director general of Science Foundation Ireland (SFI), John Travers, a change of government will not mean any significant change in approach to State investment in research, and that there is an acceptance across all parties that investment in research will help rebuild the economy when recovery comes. He takes an optimistic view on the continuity of funding for research, no matter what happens after the election: “I have no inkling there is any change in approach.”

    I reiterate a point I have made many times on this very useful forum. No amount of empirical evidence will ever unseat policy in Ireland. In the midst of the most egregious economic collapse to affect any OECD country since WWII, any demand for continuing and increased R&D funding requires the equivalent of Lot’s wife tipped onto the lunch plate. The Smart Economy plainly isn’t working.

    No surprise that Labour would want to roll up high paid public service votes in its moon-faced admiration of failed research commercialization policies. It is a continuation of its smoked salmon socialism for the well-off. The irony of course is that its union ‘support’ cannot make recruitment headway within the MNCs – yet Labour in time honoured fashion will praise the same MNcs to the heavens. I feel guilty at times in not having paid for a ticket to read some of the political fantasies floating about.

    Curious isn’t it that none of the main parties has suggested a default on legal fees for tribunals?

  71. @Bklyn_rntr
    “Now that this guarantee is being turned from potential tax payer liability to hard cold cash, and Elaine points it out, we are told, hold on, the government guaranteed it so they must honor it, EVEN though the term of the guarantee expired in September of 2010! (I know it was extended but the original point holds)”

    I have believed for some time that the extension of the guarantee – via the issuance of the ELGs was a far greater crime than the original guarantee, for the reason that the original one was issued in panic, and although there were unforgiveable aspects to it – it at least had the exscuse of ignorance (concealment) of the bank liability status. The ELGs had no such exscuse and they are wrapped in statements of irrevocability which amounted to a theives charter.
    The irony is that the guarantees which ostensibly were introduced to ensure funding for the banks look like that they will break the banks and drag down the sovereign. There is in my view and I am glad to see that this view is shared by many people on this site particularly those who are not somehow involved in the bond industry, and that is to revoke the guarantees.

    There are two arguments in favour of honouring the bank guarantees.

    The main one seems to be based on the moral position (DJR and others – also Barrosso in his famous answer to Joe Higgins) that because a duly elected government was guilty of lax regulation, and pursued unorthodox fiscal taxation policies in the past, somehow we share a collective guilt – and we and our children must pay.
    I don’t buy this – even in a moral sense the concept of scapegoating one person – the taxpayer – for the crimes of another – the banker who broke regulations – is alien to any modern civilisation, and I just don’t understand the logic.
    The other arguments as advanced by BWII – i.e that we pay the bondholders or the ECB will close our banks – amounts to scaremongering, and even if it were the case, if we can’t set up an alternative banking system rapidly, we stand guilty of incompetence, and that is truly unforgiveable. Not to speak of UB and the other unguaranteed banks which are well networked.

  72. A McGrath
    Well said sir, I am buying you a pint!!

    The moral argument is repugnant! In the US they trot out the moral argument to try to force ordinary suckers into honoring their mortgage debt while, in the next breath, arguing that business is business when banks or commercial borrowers walk away. The daily show had a good sketch on the mortgage bankers association when it came out with this riff while defaulting on the debt they took on for their headquarters.

    What is absolutely unbelleivable to me is that politicians will take on debt they know they can’t pay (that is a morally reprehensible thing to do for an individual and for a government IMHO). How do we justify this? On a hope that ” well when it comes time to sort it out, they’ll look after us, surely” well guess what, they won’t. When they time comes Germany, UK France etc will look after themselves because THAT IS WHAT THEY WERE ELECTED TO DO…and our lot and whining and whinging…..

  73. And the consequences of defaulting are horrible, I understand that. But whenever anyone only mentions the consequences of default and then refuses tk admit that there are massively negative consequences to not defaulting too, they lose my vote.

    When somebody says the Irish nations owes x today and if the current liabilities of the banks do end up on the balance sheet then we’ ll or Y. To repay what we owe, with interest over, say 20 years, the government will need to run a primary surplus of Z and that means that government has to take A% of economic value from the system for the next 20 years to do it, then I’ll at least feel comfortable that ordinary people understand what they are taking on when they decide to honor the guarantee, until then most of what people say is BS, because they a spinning a position that is in their individual best interests. They are not looking after the health of the next generation and they are not thinking of the overall common good, they are, instead kicking it forward and hoping for the best. To justify it they come up with fiendishly complicated detailed models to show that it’s impossible to know what we are getting into, or that the moral imperative os to honor a guarantee we made in a panic!

  74. @ AMcGrath

    …if we can’t set up an alternative banking system rapidly, we stand guilty of incompetence, and that is truly unforgiveable. Not to speak of UB and the other unguaranteed banks which are well networked.

    You appear to expect miracles after the 2-year slow motion response to the banking crash.

    You also appear to be insulated from the travails of the SME business sector.

    Over 1,400 Irish companies were declared insolvent in 2009 – an increase of 82% on the previous year, and up 287% on 2007; over 1,500 companies were declared insolvent during 2010.

    In addition there were hundreds of sole trader and partnership collapses.

    The survivors at this point have endured falling sales revenues, stretched payment periods and unpaid debts owed by the collapsed businesses.

    Many are undoubtedly in fragile state and a banking shutdown would surely be the tipping point.

    This is a sector with the economy’s most vulnerable workers in terms of pay, pensions, redundancy and for some, the prospect of new employment.

    @ The Alchemist

    If State enterprise agency heads are as sycophantic in private as they are in public to ministers and the official line, they should be put out to grass.

    All the parties see opportunity in the BRIC countries even though the multinationals in Ireland who are largely responsible for the trade, are directed from elsewhere as to where they should ship to.

    In Nov 2009, Irish companies were warned by several senior executives who run some of the country’s most successful indigenous companies, to be cautious about expanding into emerging markets and focus instead on developed markets.

    “More fortunes have been lost than made by getting in too early,” former CRH CEO Liam O’Mahony told a conference on making businesses international at the Smurfit Business School.

    O’Mahony, who ran the world’s second biggest building materials company from 2000 to 2008 and now chairs IDA Ireland, said Irish companies should consider expanding into the US, UK and other mature markets before looking at countries such as China. “Some of these markets are very large and there is still scope to grow as long as you have value propositions,” he said.

    Mahony’s advice was repeated by Glanbia chief executive John Moloney and Glen Dimplex boss Sean O’Driscoll. “China is a long-haul, a slow-burn,” O’Driscoll said.

    In 2009, exports to China were 2% of total Irish exports.

    All we need is to get a tiny percentage of the 1bn+ consumers!!

    Yes indeed and how easy it is to say from an armchair in Ireland!

  75. The banks asset at the moment is mortgagees. By pursuing aggressive fiscal policy the quality of this asset is being compromised.
    It’s a catch 22! The trick is to see how much fiscal tightening you can do before you seriously jeopardize the quality of that asset. There is a presumption that default rates are linear (if x amount of money is taken out of the economy then y mortgages default) but maybe mortgage default rates actually operate on a critical mass basis. The rate is steady for a while and then rapidly increases. I don’t know

  76. @hoganmayhew, Michael Hennigan

    So long as payment mechanisms exist at all, MNCs could only be glad of a fall in the currency. Their competitiveness would be boosted and the net impact after repatriation of profits would otherwise be unaffected.

    Hysteria about the banking system as a payments system as opposed to a legal and financial entity is wildly overblown. Preparation for the ability to recreate a new banking system from the ruins of the old is something that should be carried out as a matter of prudence. So long as legislative groundwork had been laid, this could be effected in a matter of hours — the tidying up afterwards would be laborious but no more, and that is a side issue.

    Just to emphasise what I’ve maybe not made clear, I don’t advocate this step as such, nor do I advocate floating a new currency. On the other hand, the need to insulate ourselves politically from the quite mercenary manoeuvring of Merkel and Sarkozy is paramount.

    Each has exploited matters, engaging in cheap populism, and our own government has joined in the 12.5% charade — everybody knows all sides are playing to the gallery on this issue. The theatrical performance is a side issue for Germany and France, however, but cuts to the core of Ireland’s national interest. The country’s political leadership simply needs to demonstrate that it has the legal and economic wherewithal to resist populism that is in no sense ‘European’. My strong preference is then, having established this, to advance as constructive and creative an agenda as possible within the EU framework.

    Having had a quick perusal of the French and German press, I detect little of the ill-will Jesper, Dominique Jean-Raymond etc. caution us of. I’m sure that in government circles there is some residual ill will resulting from the rapacious behaviour of the current government, but it should be remembered that businesses all over the continent lobbied for the current structures. There’s no sign of the popular backlash we’re being frightened with. It was European businesses after all that drooled over an EU of open markets and tax competition, without the political structures to ensure the primacy of elected leadership.

    The spectres we’re being frighened with are just that — spectres. The measures advocated, far from being radical, are simply prudent contingency planning.

    Current policies are ruinous, eliminating all room for manoeuvre while bleeding the last reserves of currency from the country. It is beyond belief that an utterly discredited rump administration could take decisions of such profound importance to the nation’s future while maintaining a fantasy nobody takes seriously — neither the politicians nor the markets.

  77. @Michael Hennigan
    “You also appear to be insulated from the travails of the SME business sector.

    Over 1,400 Irish companies were declared insolvent in 2009 – an increase of 82% on the previous year, and up 287% on 2007; over 1,500 companies were declared insolvent during 2010.

    In addition there were hundreds of sole trader and partnership collapses.

    The survivors at this point have endured falling sales revenues, stretched payment periods and unpaid debts owed by the collapsed businesses.

    Many are undoubtedly in fragile state and a banking shutdown would surely be the tipping point.

    This is a sector with the economy’s most vulnerable workers in terms of pay, pensions, redundancy and for some, the prospect of new employment. ”

    Your catalogue of recent banking failures does no more than reinforce the point of the absolute futilty of pumping good money into a banking sector whose sole purpose in recent times is to convert the wealth of the populace into executive pay.

    There are alternatives which have been shown to be effective. The Irish times had a recent article on peer-to-peer online lending companies which are in operation in the UK (e.g Zopa) but not yet in Ireland. Do we not have the wit – we who were hugely influential in the development of the Cooperative movement – to take lending off the hands of the increasingly speculative and TBTF financial industry, and transfer it to the people?

  78. IMF’s statement on Iceland (comment)

    “Financial sector restructuring is moving forward [in contrast, one may add to Ireland’s]. Savings banks and non-bank financial institutions are being recapitalized [in Ireland’s case, recapitalizations of the banks have been predominantly wiped-out by the continued writedowns, so net increases in actual capital have been negligible], and the supervisory framework is being strengthened by amendments that will be enacted in the coming months [no serious far-reaching amendments have been introduced in Ireland since the beginning of the crisis and the marginal ones that were are yet to be enacted].

    “Moreover, recent agreements to restructure the debts of households and small enterprises will help put households, corporations and banks on a more secure financial footing, which is essential for a sustainable recovery [this stands in contrast with what has been happening in Ireland. In addition this directly and indisputably puts the blame for the policy errors in the Irish case onto our Government and EU shoulders, for it is clear that within the EU/IMF deal framework, the IMF was basing its policy proposals on their experience in Iceland].

    http://trueeconomics.blogspot.com/2011/02/13022011-imfs-statement-on-iceland.html

  79. So long as payment mechanisms exist at all, MNCs could only be glad of a fall in the currency. Competitiveness would be boosted and the net impact after repatriation of profits would otherwise be unaffected.

    It’s foolish to expect that MNCs would welcome devaluation, a hike in import costs and staff subject to a jump in inflation and double-digit mortgage rates.
    It’s also foolish to believe that mayhem would be welcomed.

    So we could prepare an alternative payment system to handle punts?

  80. @ Aidan Kelleher

    You just don’t get it do you?

    €150bn and rapidly rising has left this country and has had to be replaced by hard cash. There is only one possible source for that kind of cash, the ECB.

    This is not a discretionary situation. This is not “should we let Anglo/INBS go bust”, “should we burn bondholders”, either course would do nothing to stem the flow of cash out of this country.

    There is absolutely no choice but we have to keep the banking system open. You talk about opening a brand new shiny bank which will replace our current system. How long do you think it will take before that €150bn comes flowing back to Shiny Bankco?

    Ireland Inc has pledged nearly all its assets to the ECB in return for the lifeblood of liquidity that it is injecting. This is a full blown liquidity crisis and we have no room for manoeuvre.

    It may turn out that we have a meltdown solvency crisis as well and that we will be unable to pay back the ECB but that is deffo another day’s work.

  81. off Subject but Will Hutton has written an artical on Ireland in today’s Guardian.

    http://www.guardian.co.uk/commentisfree/2011/feb/18/ireland-austerity-measures-irish-labour-party

    Has anybody read Hutton’s “Them and Us”? Any views?

    Hutton splits what he calls good and bad capitalism. Bad capitalism represents capitalism captured by oligrachs (such as large banks); and good capitalism represents capitalism which is build on fariness and mutual trust.

  82. @BW II, Michael Hennigan

    I must say I’m tiring of what is evidently a dialogue of the deaf. I never advocated and don’t advocate any of the nightmare scenarios. What I do advocate is preparing all reasonable options to the maximum degree short of enaction.

    This is not a discretionary situation. This is not “should we let Anglo/INBS go bust”, “should we burn bondholders”, either course would do nothing to stem the flow of cash out of this country.

    Wrong by 180 degrees. It’s the massive overhang of private debt that’s undermined the credibility of the sovereign. It takes an incredible blindness to reason and common sense to take the confidence crisis attributable solely to the policy of state support for private banks and then ascribe it to policies that would eliminate the sole cause of that lack of confidence — the massive bank debts that have ruined the country.

  83. @ AK

    We are were we are. On Monday when business opens our banks will need maybe another couple of hundred million to meet the run. If you were MoF for the Weekend, what announcement would you have for us on Monday morning? Would it be: “by decree I now ban all withdrwals form our banking system”?

  84. @BW II

    In what sense is it my responsibility to justify and make reasonable the failed policies carried out for corrupt reasons by politicians whom I never supported?

    Your question begging does not constitute fair argument. On the contrary, it illustrates precisely the failure of the policy I oppose.

  85. @ AK

    I think we should park it there. It is clear that we wish to discuss different topics. You wish to discuss the blame for the whole sorry mess and that is indeed a useful though somewhat tired discussion, which takes up about 90% of this blog.

    I was focussing on the topic of this thread which is the continual extension of the explicit State guarantee in order to secure ECB liquidity support. In this regard I am stating, for I think it is a fact, that we either give the guarantees or we reject further liquidity support. The latter course would not at all be pleasant IMHO.

  86. @BW II

    Nonsense — you ascribe to policies that have not been tried the consequences of the failed policy you support, bizarrely challenging your opponents to make those consequences disappear overnight.

    Without conceding any point you’ve claimed, how can it be claimed that alternative policies must achieve exactly what the existing policy has failed to do, i.e. guarantee liquidity, in order even to be considered? How can scaremongering about alternatives be justified when the policy you advocate has mired the country in a disaster without precedent in the postwar world? And lastly, why must your opponents demonstrate to you in painstaking detail why none of the phantasms you seek to frighten people with is actually real when the crippling effects of the current course are concrete, immediate and all too obvious?

  87. @ Adrian Kelleher
    If you peruse the French press ,the only mention you are likely to find about Ireland concerns rugby (this is not too surprising ,there is very little mentions of France in the Irish Independent or the Irish Times either) .You are right ,there is absolutely no ill will towards Ireland, it is ,for example, one of the French favorite tourism destination and generally speaking the French have a very positive image of the Irish ,without any of the negative stereotypes that they can have about their big neighbors (the German, the British ,etc).
    In March ,right after your elections ,however ,there will be a general discussion of the reforms to be made in Europe .At the same times a plan will have to be discussed to refinance the bail-out ,so that the Greek, the Irish and maybe the Portuguese have a decent chance to avoid default. Also, the ECB desperately needs to extricate itself from the refinancing of your moribund banks .This plan will extremely unpopular in France and in Germany .At that time you will see that the French and German press will be very much against doing anything and there will not be many favorable comments towards Ireland in the newspapers.
    In order to make their public opinion accept the new bail-out they will need some change in the EZ governance .It will be difficult to agree on the retirement age or wage indexation on inflation, but nobody will defend the corporate tax rate besides Ireland, except maybe the Dutch .The French and the German technocrats are dead set on winning that one (I know).

  88. The timing is unfortunate because Ireland needs any advantage it can have to start its economy growing again, also if your new Prime Minister loses that fight a few weeks after having announced that he told Merkel it was not negotiable, he will look like a fool. Maybe there is a possible compromise : you keep the 12.5% rate and agree to the common consolidated corporate tax base.
    At least we would get to tax in France profits made in France and we will stop seeing American firms having a token presence in Ireland in order to be taxed there without having any economic activity in the country. The Irish public is not even aware of that abomination ,so it will not cost too much in terms of public opinion and your government could be able to say with a straight face that he won.

  89. @Dominique

    I’m in troll-feeding humour this morning …

    Perusing – interesting stuff – Liberation et Le Monde – The French Foreign Minister cutting a few .. er .. property deals across the other pond with Ben Ally of Tunisia …. and .. er. suggesting that the French Security Forces might intervene to .. er… restore order in North Africa ..[they have more sense, according to me cousins in The Legion]. hmmm …[is she still around?]. and what was it that Minister Christine whispered in Minister Brian’s ear ..[and he bought it! le pauvre imbecile].. minding the dodgy capital flows from French banks to .. er.. dodgy Irish banks … so that …er — dodgy French Capital Flows be paid for by Irish citizens whose minimum wage is now … er. €2 LESS than the French one … and … er… Nicolas lecturing rest of le monde [oui – tout tout tout tout tout le monde] on how to conduct its affairs at the G20 this weekend …. and real French Corp tax at .. er 5%-7% …. quelle surprise ….. c’est 12.5% ici … hmmmm and last time the French ran a budget surplus was … er .. er… er in the time of Charlemagne me-pense ….

    Quant a moi – je pense que Nicolas et al est certainment foutou 2012 – Allez l’autre Dominique – DOMINIQUE STRAUSS-KAHN, UN VRAI AMI D’IRLAND

    petit dominique – longstanding friendships between the Gaels and the Gauls ain’t gonna be upset by petit trolls such as you ………..

  90. @Adrian Kelleher

    +1

    The most surreal aspect of this debate is how the opinions of those who failed to identify some or most of:

    * The existence of a property bubble
    * The appalling state of Irish bank finances
    * The consequences of the initial banking guarantee
    * The consequences of extending the banking guarantee
    * The ineffectiveness of all the measures so far enacted to stop the deterioration of Ireland’s financial situation

    are being taken as serious as the opinions of the people who identified most or all of them?

    If you did not predict any of the things that did happen why exactly should we take your pronouncements seriously about what is going to happen? Like a chronic gambler do you think that your run of failure now makes success more likely?

    Of course the Irish malaise of fear, deference and conservatism explains some of the continued currency of the Market Pollyanna to Change of Course Cassandra school of opinion but the commitment of much of Ireland’s political and media establishment to the status quo is a significant and awful factor.

    Our national motto should be “Will get fooled again.”

  91. Dominique Jean-Raymond

    …American firms … in Ireland … abomination

    It will be difficult to agree on the retirement age.

    JTO again

    The reason this will be difficult is because of the French who mostly want to retire at age 55, who regard a working life of more than 30 years as an abomination, and who will only agree to work even that paltry amount on condition that they never have to work more than 35 hours in a week, have a public holiday every second Monday, take the entire month of August off, and generally work one-third fewer hours annually than the average American. What needs to be realised, but generally isn’t’, is that French spleen about Ireland’s CT rate is not anti-Irish. I can fully believe those French, like Dominique Jean-Raymond, who say that their opposition to Ireland’s CT rate is not in any way motivated by hostility to Ireland. It is actually motivated by hostility to America, a country the French hate and have never forgiven for liberating them in 1944.

  92. @ DJR

    “nobody will defend the corporate tax rate besides Ireland, except maybe the Dutch”

    Relatively certain Malta, Cyrpus and Slovakia will defend it. And most of Eastern Europe and the Baltics if you want to go into the broader EU. The world is bigger than just France anf Germany.

    “The Irish public is not even aware of that abomination (US firms based here for CT reasons)”

    Eh, do you know anything about this country, or are you just guessing? Its pretty much the only thing the entire electorate more or less agrees with. Best of luck convincing us to change it, the term “cold dead hands” springs to mind.

  93. @Elaine Byrne

    Well, can’t the Irish government change its mind?

    JTO again:

    I thought there was an election taking place in the 26-counties?

    If so, it is entirely open to all those who want to rescind the bank guarantee to put up candidates. If, like Fintan O’Toole and Eamonn Dunphyy, they rant all year about setting up some political movement to fight the election on that basis, and then chicken out when the election is called, tough luck. If a party, pledged to maintain the bank guarantee, wins the election, then there should be no question of it changing its mind after the election as a result of scaremongering (on her own admission) by some left-wing journalist who can’t get basic facts right.

  94. @DJR

    We all welcome ideas on how corporation taxes, accounting standards and tax loopholes can be simultaneously made more consistent across Europe so as not to favour any particular national model but instead ensure that TNCs and wealthy individuals pay their fair share of tax.

    Of course this is not a trivial exercise if fairness is the desired outcome – we must not forget that large countries already enjoy advantages merely by being large and that the favoured tax policies of larger countries reflect their own interests more than any idea of how best the common good is served.

  95. I reckon we should stop German and French car companies that make profits in Ireland from declaring those profits in their home countries…

    @Shay Begorrah
    I predicted most of those things; I’ve been in countries where the banks collapsed. There was no hard currency to be had. It is not a trivial step to take. Introducing a new currency that is backed by nothing more than defaulted debt is also not trivial. Nor are 30% budget cuts.

    In particular the actions taken to date have limited future options. The deficit has not been cut enough, the bank shareholders have not been wiped out. Large chunks of bond-holders have been paid back (both subordinate at a haircut and senior at none). The banks and the state are reliant on external funding with agreed future actions to be taken. Unwinding all of this is not a trivial exercise.

    I challenge those who advocate burning bondholders or collapsing the banks to say how they would address these issues. It is not enough just to claim that external actors will lump it. There’s plenty of evidence from history that they don’t.

    I see no solutions currently. The situation is hopeless, though not yet desperate. When we reach desperate (as I think we will, contrary to Mr. McHale’s optimism) there will be more scope for action. A quick reading of “This Time It’s Different” should give you no cause for hope, though. Pensions, domestic bonds, domestic deposits, domestic wealth will all be hit before external actors suffer a loss.

  96. @John The Optimist

    Do you not think it is time for the 6 to take over the 26? Or might this be a bit too Sinn Fein or DUP for you?

  97. @ hoganmahew

    “I see no solutions currently. The situation is hopeless, though not yet desperate. When we reach desperate (as I think we will, contrary to Mr. McHale’s optimism) there will be more scope for action. A quick reading of “This Time It’s Different” should give you no cause for hope, though. Pensions, domestic bonds, domestic deposits, domestic wealth will all be hit before external actors suffer a loss.”

    Is this not a bit OTT?

    On a different note I see today that AIB have been issuing letters of credit to US munis which have been placed on negative watch by Fitch.
    How much exposure there?

  98. @Cet. par.
    “Is this not a bit OTT?”
    See your note on AIB… the banks are attempting to speculate their way out of a speculative boom…

    Maybe, but sunny optimism isn’t going to get us far. Nor are uncosted solutions. At the moment, the costings of the solution that is in place are not feasible (even at most hopeful GNP growth rates). That is why I say hopeless. However, there is funding in place for the next couple of years (this and next), so that is why I say not yet desperate.

    Long-term cheap Central Bank debt for fully nationalised run-off vehicles would go a long way to easing the situation on the debt side, with the possibility then of reducing consumer interest rates on legacy debt without necessarily having to take debt writedowns (the mortgage term could, for instance, be increased). This addresses just one of the problems. The sovereign debt load remains a difficult proposition.

  99. @Ceteris paribus

    I don’t know, but it you may recall that Irish banks also went long Spanish real estate credit risk. That they were still up to this as late as 2008 is telling. I reckon crap bankers are scarier than Elaine’s maths.

  100. @Dominique Jean-Raymond,

    I’m not rushing in to defend you because you have achieved the remarkable feat of uniting Mr. Bond and Prof. Lucey jointly contesting your contentions – or because you are unable to fight your corner; I simply wish to register some support for the validity of many of the insights you offer and to lament the lack of strategic thinking on the Irish side on this board.

    There is no doubt that Ireland’s low CT rate has fostered some egregious abuses – by both EU and non-EU firms – but equally there can be no doubt that, in face of the ability of large. mobile, sophisticated MNCs to evade or minimise tax payments in any jurisdiction, shifting the burden of taxation from corporate profits to other sources of revenue is a challenge that the EU will have to confront. Shifting taxation from income, whether that earned by capital or labour, to ‘bads’, such as pollution or CO2 emissions, or to asset-ownership or activities that generate economic rents has to be the future – and Ireland has been ahead of the game in this respect. But the abuses of the current Irish regime – the ‘double Irish’ and the ‘Dutch sandwich’ for example will have to be addressed. This ‘cold dead hands’ stuff is ridiculous. In addition, we need to view defence of the low CT rate as a ‘holding job’ while Ireland develops a feasible international economic strategy in the context of Germany’s strategic vision for the EU (which you, I and Richard Fedigan have discussed previously.)

    On the other side, senior politicians in Germany and France have painted themselves in to a corner on this issue. They see it as something that might ‘draw blood’ from the Irish that they can sell to their voters as a signal concession and thereby will provide them with some cover to ask their voters to provide fiscal support, via their taxes, to offer some relief to Ireland in the context of the expansion of the EFSF and EFSM that is likely to be agreed by the end of next month.

    Irish citizens have accepted severe fiscal retrenchment – and the certainty of much more – not without complaint, but, with much less complaint than has been encountered in the other peripherals. Unfortunately, something more – and something different – is being, and will be, required by senior politicians in France and Germany.

    However, rather than seeking to dig into the last trench to defend our CT rate, Ireland should seek to shift the debate by arguing the case for low CT rates throughout the EU and a major shift in the burden of taxation on income. Shifting taxation to the CO2 emissions or major tightening of CO2 emissions in the context of the ETS (or a combination of both) will achieve more and more efficiently (as well as generating new state revenues) than the excessively burdensome 20:20:20 climate change vision the EU is pursuing.

    In addition, Ireland should pursue energetically serious structural reforms in the non-tradable, sheltered sectors (both public and private) and in the process of political governance. This would be primarily in our own interests, but it would demonstrate convincingly to our EU partners (both politicians and voters) that Ireland is serious about being a responsible member of the EU. It would also highlight the need for similar reforms in those countries that are excessively critical of Ireland.

    The terms of the EU/IMF deal include some high-level objectives and requirements in this area, and the report of Colm McCarthy’s Group reviewing state assets and liabilities should provide some detail, but, to secure voter support, a similar effort will be required in the private sheltered sectors.

    The extent to which the ICB and the ECB have been dragged in to support the Irish banking system means that any resolution will have to be crafted at the EU-level. Something will have to give eventually, but the terms on which this will be resolved will be more beneficial to Ireland, if Ireland is prepared to be forceful and proactive – and to pursue strategic objectives – in those areas where it continues to exercise some measure of sovereignty.

    I retain some hope, but despair threatens overwhelm because this generation of politicians can only think tactically and are pathologically incapable of thinking or acting strategically.

  101. @hogan
    Central Bank long term funding for the real crap would ease the situation but for the three remaining banks the only solution would appear to be credible purchasers who could fund themselves. These must amount to a sizable portion of the 177b in short term emergency money. We will not have a properly functioning banking system until this happens. This is a prerequisite for any recovery. Has anyone got the numbers on AIB,boi and ptsb ECb and CBI borrowings?

  102. @ hoganmayhew:
    “I see no solutions currently. The situation is hopeless, though not yet desperate. When we reach desperate (as I think we will, contrary to Mr. McHale’s optimism) there will be more scope for action.

    + 1 But at least the debate is more rooted in reality these days.

    @ Paul Hunt says:
    ‘I retain some hope, but despair threatens to overwhelm because this generation of politicians can only think tactically and are pathologically incapable of thinking or acting strategically’

    Yes. The pattern was set forty years ago. That’s what happens when the democratic process is subverted by vested interests, of which the most obvious, but by now means the only one, is Big Business. The Irish mouse invited the MNCs and the EZ megabanks to tea. Guess what was on the menu.

  103. @paul quigley,

    As a small open economy Ireland couldn’t avoid engagement with the MNCs and EZ megabanks. If you read my, admittedly lengthy, comment again, I think you’ll agree I’m not lamenting this engagement. In fact I believe there was no alternative. It was simply a logical development of the key change in Ireland’s economic strategy engineered by Sweetman, Whitaker and Lemass. The bank and property blow-out was inevitable; its scale wasn’t. We weren’t going to behave like the Finns who have an effective system of democratic governance and politicians who have a rational understanding of Finland’s strategic positioning. We don’t have such a system of democratic governance or politicians of this calibre. In this context, you seem to be suggesting a return to the depressing autarky of the ’50s.

    But I suppose it’s no worse than the apparent foolhardiness of Prof. Lucey and Mr. Bond who seem to suggest that, because she doesn’t wake up every morning fretting about Ireland, we should give Chancellor Merkel something that will focus her attention on us – respectively, burn bondholders and charge into battle to defend our low CT rate regardless of the consequences.

  104. Blind optimism is as much a curse as its polar opposite, and those who have a proclivity for calamity howling should remember that no modern country facing an economic crisis can do it alone.

    Both Argentina and Iceland got help from neighbours and both had strength in having bountiful commodity products for export. Comrade Chávez was no Santa Claus either when it came to the interest rate on loans.

    There can be better days for Ireland and firms in the productive sector can only survive when their people have that belief.

    From my own experience of both events, the most apt comparison of a company where the staff fear impending collapse, is the deathwatch for a close relative.

    On selling overseas, who would want to buy from a company where its economy is seen as close to collapse?

    The first step back from the long national nightmare is surely on Friday next.

    This maybe my ‘Skibbereen Eagle’ moment but I do believe that it’s very important that a strong government with a commitment to reform is elected.

    Ireland is no longer a society divided by rich and poor but it is an unjust society of insiders and outsiders.

    http://www.finfacts.ie/irishfinancenews/article_1021673.shtml

  105. Merkel and Sarkozy are the two loose cannons on the good ship Europe at the moment. The only information all the other heads of State had on the “pact for competitiveness” before the last EU Council meeting was what they had read in Der Spiegel. At the meeting 19 of the 27 leaders spoke against it. Sarkozy lost control at the meeting, notably with Cowen. The “pact” is an attempt to sideline the EU Commission, bypass the Treaty of Lisbon, and to railroad the rest of the EU Council into accepting plans cooked up in Berlin and Paris.

    The EU is a complicated set of institutions with a complicated set of rules, and I think most of the other countries recognize the dangers of ignoring these rules and starting down the path of “voluntary” (in fact under duress) intergovernmental agreements driven by France and Germany since this way of working discards the protections for smaller and weaker countries built in to the institutions and the treaties. I am sure many “true-blue” EU integrationists, like Junker, are not amused at this behaviour and are working hard behind the scenes to neutralize it and to bring the “correct” way of working back to the fore, and view the French/German behaviour almost as an attack on the institutions of the EU.

    Accordingly I expect the “pact” to go nowhere as a standalone initiative, but instead for some of the elements to be incorporated into existing Commission work, such as a beefed-up SGP and a CCCTB that was already planned for discussion in March. The existing protections provided by the Lisbon Treaty will allow Ireland, the UK and others to prevent an EU-wide CCCTB or tax rate harmonization. What may happen is that a subset of countries move ahead under “enhanced-cooperation” to create a CCCTB for themselves. What this would mean for Ireland is hard to say, since things start to look very complicated with overlapping and conflicting CCCTB and OECD tax laws. It is safe to assume though that any change would be for the worse from an Irish perspective.

  106. We seem to have come a long way from John McHale’s original post, but, in some respects, we are making progress exploring the context in which these issues will be, and will have to be, resolved.

    @Michael H,

    Your ‘insiders v outsiders’ take may have validity, but I fear it doesn’t provide a basis for progress. We need quite a few of the insiders to have the courage and vision to shift the parameters of both debate and what is possible. And we need to have a clear-eyed understanding of where we are and where we wish to be in 5, 10 years time.

    We don’t seem to realise it but we are living in a polity that is almost identical to the late mediaeval principalities examined by Machiavelli. The only difference is that we have an opportunity every 4-5 years to elect tribunes of the people who elect the Prince and his Council. But the almost absolute powers exercised by the Prince and his Council often allow him to win successive elections and he is secure while he retains the tribal loyalty of his faction among the tribunes – and competing princes are unmanned and are forced to sing, badly, from the same hymnsheet.

    And, similar to these kingdoms and principalities, we have the Lords Spiritual and Temporal who seek to bend the Prince and his Council to their will. The power of the Lords Spiritual (enforcing the laws and dictates of a foreign autocracy) is in decline, but the powers of the Lords Temporal have increased as they have multiplied. We have the Lords of Travail (the unions), the Lords Mercantile (IBEC), the Lords Mandarin and the Lords of Quangoland. All exercise unaccountable power and do so by dealing directly with the Prince and his Council and by ignoring the tribunes of the people – even though they expect the Prince to ensure the assembly of the tribunes rubber-stamps the decisions they have forced upon the Prince. This the Prince achieves by whip or gift.

    In 1649 the English beheaded a king to ensure the supremacy of parliament over the sovereign. 140 years later the French did the same. Both systems of governance have since succumbed to increasing executive dominance, but we in Ireland have tolerated the most extreme executive dominance with an elected dictatorship in parliament deferring to the whims of the unelected and unaccountable barons and lords.

    Even Machiavelli would have scratched his head. Until we tackle this we’re at nothing and, despite the honeyed words of the various factions about political reform, we can be sure they will attempt to kick the whole bothersome exercise into the long grass.

    @Bryan G,

    All of the other EU parliamentary democracies are infected to some degree by this elected dictatorship in parliament (the French have theirs outside), but none to the extent that Ireland is. I agree that the EU has a vast panoply of institutions, laws and rules to advance “more Europe” in the context of varying extents of national executive dominance and to counteract low politics and the excessive pursuit of ‘beggar-my-neighbour’ national interests.

    However, I sense that Chancellor Merkel is intent on assembling a ‘coalition of the willing’ within the EU in pursuit of Germany’s strategic vision for the EU. By setting out her intent she has indicated not just to her peers, but to the EU institutions what she requires. The initial reaction of most heads of state/government is not surprising, but we can be pretty sure that the other five of the six founding members will come on board once arrangements are devised to increase the functioning of the EU’s institutions in this exercise. This is also like to satisfy Finland, Austria and the other smaller continental EZ members.

    It is likely the Danes and Swedes will continue to hedge their bets, but will also continue to be aligned in effect. Britain seems to be disengaging even more from the EU and there seems to be a weary acceptance on the continent that any compromises that might be needed to fully engage it would do too much damage to what is being endeavoured; so let them opt out.

    This leaves the peripherals. Despite the scale of the property and bank blow-out, Ireland, among these has, by far and away, the most resilient economy. There are significant deadweight costs to be removed and serious reform of political governance is required, but, beyond these, we retain significant strategic advantages and choices.

    And the first significant strategic challenges is: do we enter into pitched battle with Chancellor Merkel’s ‘coalition of the willing’ (and run the risk of insufficient EU support for the resolution of our banking crisis – with the real threat of expulsion from the Euro (either enforced or self-inflicted)) or do we seek to accommodate ourselves to this core EU strategic thrust and endeavour thereby to protect our national interests?

  107. @Cet. Par.
    “Central Bank long term funding for the real crap would ease the situation but for the three remaining banks the only solution would appear to be credible purchasers who could fund themselves. These must amount to a sizable portion of the 177b in short term emergency money. We will not have a properly functioning banking system until this happens.”
    I don’t think we will see any banks with 177bn in unallocated deposits (even a large number of them together) that will be able to absorb the Irish loan books. Particularly not at a time when Basle III is deleveraging all banks to some degree.

    If you look at a bank being worth 14-16x non-bubble operating profit, then BoI is worth about 15bn, AIB less and the others less again. This is less any realistic writedowns on retained loan books (i.e. remaining loan books at time of sale). Which brings BoI down to about 10bn. As the state just over a third of BoI, this brings the value of the state stake to about 3 bn LTEV (*snigger*).

    It is probably better, if there is some long-term funding available, to throw the book at it and leave only super performing loans in a much reduced BoI and sell it with purely matching customer deposits, so a bank about half the size it is now (just the bank, excluding all other bits). BoI itself seems to be setting itself up for that – it issued an unaudited accounts statement for the bank only, excluding the UK, mortgages etc. etc.

    The good minority will be sold off, the toxic majority will remain…

  108. @ Michael Henningan

    ‘Ireland is no longer a society divided by rich and poor but it is an unjust society of insiders and outsiders’

    We have many communities where less than 5% get to third level education. What do you call that if not poverty ?

    There are different kinds of injustice. The rich/poor divide is one. We could also note the gender divide and a few more besides, but that’s for another day.

    The problem of insiders/outsiders aka croneyism is real. In the old days it was called ‘pull’, but it could broadly be defined as unequal access to credit or opportunity for people of equal ability or credentials.

    We have able people signing on or emigrating while mediocre folk are comfortably ensconced, and not just in the public sector. Monopoly, rent seeking, and anti-competitive conduct take a lot of forms. That said, competition is not the only good in economics.

    I see your point about the need for strong government, but the reality is that FG did not really oppose bubblenomics at the time when it mattered. Few did of course, and it’s easy to be wise, and responsible, after the house has gone up in flames.

    @ Paul Hunt

    ‘In this context, you seem to be suggesting a return to the depressing autarky of the ’50s’

    We have tried a lot of economic development approaches until now, but we are stuck once more. As an ex-colony, we ought not to be too hard on ourselves for the current failure. If at first you don’t succeed…

    It’s a tough call to develop a modern service economy without passing through an industrial phase, and without oil or mineral wealth. The entrepot idea is good is you can pull it off, but you have to put your sovereignty in play to make it work. We did, and, let’s face it, we lost.

    Matters are no longer in our hands, and probably were less so than we imagined, or were led to believe in the ‘good’ years. It seems to me that 2011 will see the steady falling away of more chunks of our economy and our state. The breaker’s yard. It’s a matter of trying to do something constructive and collaborative with the parts.

  109. The issue is less the corporate tax rate than the naked exploitation of a European crisis for national advantage, a policy that will destroy the union if carried out. Merkel and Sarkozy pursue measures beyond their powers using means beyond their rights.

    I would certainly support tax harmonisation in the context of measured debate carried out honestly and with respect. What can’t be accepted — and what must, if EU institutions are to mean nothing and pivotal decisions are to be taken outside the EU framework, be met with all measures that can justly be taken to ensure the economic welfare of the nation — is the mortgaging of the future without even the promise of anything in return.

    The threat of economic warfare cuts both ways and common sense dictates the blade is rather sharper on the other side: the side that currently benefits from superficial but illusory bank solvency and an appropriate monetary policy, the side that still has something to lose in other words. Far from having nothing to offer in negotiations as has repeatedly been claimed, having little to lose the country has instead little to fear. Ireland is in fact currently paying handsomely for the privilege of remaining in the eurozone and propping up the EZ financial system.

    Those phenomena presented as nightmares, i.e. currency depreciation, quantitative easing, inflation etc., are in reality the measures that have restored growth and relative confidence in the US, UK and Iceland and which are advocated by disinterested commentators, the same measures that worked better for Malaysia a decade ago than the IMF programmes in Indonesia etc. that were much criticised and which lead to alterations in IMF policy.

    What I’ve tried to outline from the start is a political strategy within the context of the EU to secure justice for the Irish taxpayer, but this attempt has been obscured and derailed by the need to counter scenarios that are not realistic but which others conjured up again and again, unburdened it seems by the need to provide any evidential basis for them.

    The political strategy outlined involves the attempt to forge a horizontal coalition in the EU encompassing elements from all countries instead of a vertical block of peripheral nations. It furthermore encompasses all options, including tax concessions and broad constitutional changes, as well as independent options such as moving from the EU to the EFTA (as it equates to the political sanctions they threatened at Deauville, shouldn’t Merkel and Sarkozy welcome this?).

    Sadly, I believe hoganmayhew is correct in his assessment of the state of mind of the government and the people. This increases the need for leadership. The incoming government must explain to people domestically as well as abroad the depth of the crisis, reaching out to voters in the EU countries where governments continue to dissemble and politick with this nation’s vital interest.

    The idea that the country has no option but to accept any terms offered it is nonetheless false, and it is a dangerous falsehood to let take root among EU governments. A ‘rescue’ such as that of last November is an abuse of language. If the terms continue to be so unfair and are accompanied by moralising from governments featuring characters like Wolfgang Schäuble and Alain Juppé whose own corruption is a matter of public record, and where corruption is generally higher outside the top levels of government, the option to go it alone must remain, however painful. The moralising reinforces voters’ natural instincts to be tough to preserve their savings, but the policies it encourages achieve the opposite.

    So long as the country advances its objectives in a measured way, the kind of commonsensical solution endorsed by objective commentators must triumph in the end over the kind of opportunistic politicking that cannot deliver a stable euro. Among the tiny number of French and German journalists I’ve been able to track who have given the issue attention, few are sympathetic to Merkel’s and Sarkozy’s populism. Their policy has a superficial appeal to voters, but that wouldn’t last long if the public there were actually focused on the issue.

  110. @Michael Hennigan

    “This maybe my ‘Skibbereen Eagle’ moment but I do believe that it’s very important that a strong government with a commitment to reform is elected.”

    The entire population of Eurasian pig herds just glided past my window.

    No meaningful reform will ever occur in Ireland. Vested interests control the pantry. The country is sliding backwards in the reform stakes.

    It was glaringly obvious to any intelligent person not a lawyer that employer and public liability claims in the 80s were creating a compensation culture that impinged on costs for businesses and social amenities. It took more than 20 years for PIAB to ride in and become partly successful. We were paying £8000 annually in insurance premia per employee none of whom earned more the £40k gross. It was unsustainable and had to fold up.

    The tribunals have created multimillion bonanzas for legal eagles and yet despite the obvious commonsense judgment that the public purse should not be creating multimillionaire elites, the payola continues.

    None of the three main parties are bothered by official expenditure on legal fees and consultancies. In many cases, public money is benignly redirected to wedding guests lists.

    In the mid-80s Garret FitzGerald worried that Health was employing more than 40,000. His concerns about public sector numbers seem rather quaint now. The Croke Park agreement is set in concrete and will deliver reforms Sphinx-like.

    Reform of the bankruptcy laws to bring them into line with the UK at a minimum is high on which party agenda? Likewise a change in the terms of mortgage covenants that would allow buyers to dissolve debt by the expedient of ‘returning the keys’ is in the bin. That most productive sector in the economy, the Section 23 landlord, was able to wring a derogation from Lenihan recently, and neither FG nor Labour have stated that they will trash the tax concessions.

    After independence we’ll have our own gentry, etc…

  111. @ Adrian Kelleher

    You are deluded if you believe that the majority of voters in well-governed countries would not support tighter monitoring and supervision of national budgets in Eurozone countries.

    Countries are not willing to go as far as the ECB in its call for a ‘quantum leap’ and there has to be agreement on the Merkel-Sarkozy proposals but the framework of the regime that will apply from mid 2013 is already agreed .

    Depending on the opinions of a few journalists in any country, may not be very reliable.

  112. @Michael Hennigan

    Countries may support tighter monitoring and supervision of national budgets, but I’m utterly at a loss as to what this is meant to achieve to resolve a financial crisis.

    The Merkel/Sarkozy approach will doom the eurozone unless amended. The popularity of their position can be evaluated by analogy with FF’s traditional performance during election campaigns: they may do okay while people’s attention is elsewhere, but as soon as it becomes a major news story people start to see the holes in the logic. It is the government’s job to make these holes obvious to everybody.

    I don’t know where you got the information that the regime to apply from 2013 on is already settled — see, e.g. this article on eurointelligence as well as the articles it links to.

  113. @AMcGrath

    “I was under the impression it was a loan – in which case we will be providing all of it ourselves as well as a punitive interest repayment – or do you implicitly accept we can’t afford to pay back any of the €67.5bn?”

    €67.5bn is being borrowed from European various European sources and the IMF. €17.5bn is being provided by the Government via the NPRF and cash balances.

    You could argue we are foregoing whatever interest we would be earning on NPRF investments of course but the point is the total added to our debt and interest repayments relates to the €67.5bn and not €85bn.

    Also, and speculating here, you could argue (hope, pray..) that the €35bn provided for the banks would not all be needed. Lets say we only needed 10.

    Well you could conceivably know €25bnish off the €67.5bn.

    Whether or not we can pay it back is, of course, questionable.

  114. @ Adrian Kelleher

    Von Rompuy is in charge of a taskforce on improving governace in the Eurozone as part of the development of a permanent bailout system.

    I’m utterly at a loss as to what this is meant to achieve to resolve a financial crisis.

    I’m sure you wouldn’t be if you were for example Dutch.

    While it’s a separate issue from solving the current crisis, political leaders need to show their taxpayers that the existing failed governance system is being reformed. It is also important in itself.

    @ The Alchemist

    Your analysis is spot on.

    The status quo would remain a comfortable palce for the many at the trough if we could engineer mass debt forgiveness.

    It isn’t going to be a free lunch even if debt restructuring happens.

    It is unlikely that we will become a well-governed country with an accountable system but there is potential to become one.

  115. @Michael Hennigan

    I really don’t understand where you got the idea I opposed either budget reform or better governance. I’ve stated repeatedly that there should be nothing off the table, in fact. The 12.5% rate is a red herring for Cowen and Kenny as much as Sarkozy and Merkel.

    That the Merkel/Sarkozy approach is generating broad opposition is a fact. No doubt they worked out some sort of strategy at Deauville, but Sarko went too far when he shouted down Trichet at the October European Council meeting.

  116. @Paul Hunt

    I don’t see any evidence of a ‘coalition of the willing’. The only way other countries will sign up is if the measures that impact them are removed. It is possible that all the measures except corporation tax could be removed, but even then it is far from clear that other counties would go along. Everyone can see that if it happens to be Ireland in the firing line this time around, they could be next, should French/German ‘strategic interests’ happen to conflict with their own.

    Here are some recent quotes from “original six” member states…

    As the March summit looms, opposition to the proposal is growing.

    On Tuesday, Italian foreign minister Franco Frattini announced Rome’s dissatisfaction with both the ideas in the proposal and their source in the Paris-Berlin duo.

    He said that it is premature to be discussion EU level tax harmonisation and constitutional changes.

    “There are issues in the pact that Europe is not ripe to solve yet, this includes for example harmonisation of taxes and tax systems,” he said during a visit to Prague, according to a Reuters report.

    “[Taxes are] probably one of the most sensitive issues. Frankly speaking, I believe it is premature to have even an agreement in principle on harmonising taxation.”

    “All countries should participate in the discussion, and there should be no groups created leading other countries,” he added.

    Luxembourg, Belgium, Austria and Spain have also expressed reservations about the proposed “competitiveness pact.”

    “We will not allow our social model to be undone,” Belgian Prime Minister Yves Leterme said on Tuesday. Luxembourg Prime Minister Jean-Claude Juncker, who is also the chairman of the Eurogroup of finance ministers, said he did not think “abolishing the indexation of wages should improve the competitivity of my country or of the euro area.”

  117. @Bryan G,

    I admit I was using some Bush-era argot for convenience – and, perhaps, inappropriately. It’s some tme since we’ve seen the Franco-German motor cranking up. And if we cast our minds back to those times, we’ll find similar dissent was expressed by the other founder members. And I think you might also concede that the sources of dissent you cite – Italy and Belgium – have long been treated with some indulgence by the other four founding members. Increased integration into the EU with significant imposition of EU-driven governance and net transfers to the south of Italy have helped to sustain the unity of Italy. It has been similar for Belgium – and that is even now vulnerable to total fragmentation.

    I think we may have to go back to Adam Smith’s ‘Theory of Moral Sentiments’ where increasing remoteness, in a number of senses, is associated with diminishing interest, care or concern. I think the EU’s motto should be “Out of adversity, progress”. Germany is determined that it is not bill-payer of last resort on its own when the bill to resolve the current EZ crisis is written out. It simply wants a proportionate contribution to whatever additional fiscal support is required to resolve the current crisis. (I see this in other areas as well. For example, Germany is spending huge amounts on renewable energy. But it is taking staps to ensure that its generous subsidies do not leach out to other members under the EU framework. It wants similar efforts by others across the board.) German voters will demand no less.

    It also sees an opportunity to recast the more amenable parts of the EU in its own image – as it sees this is the correct strategic approach in a multi-polar world. For the last 20 years it has shifted from an inward focus (re-unification and the Hartz labour reforms) to an outward strategic focus on the G20. France is going along for the ride as it has no alternative strategic option.

    The challenge now facing Chancellor Merkel and President Sarkozy is to bend the EU’s institutions to their will both directly and via the Council. It will involve the usual combination of lofty moral rhetoric, low politics and the horse-trading of matters of specific national interest. But my view is that will succeed eventually.

    The questions I am raising are: where does Ireland fit into this strategic shake-out? Are those who should be aware actually aware? Where is the debate on these key issues during a general election?

  118. @ Paul Hunt

    “I admit I was using some Bush-era argot for convenience”

    Ah the Bush era, simpler, more innocent times, when all we had to worry about was a clutz from Texas…

  119. Indeed, Mr. Bond. But it wasn’t the ‘clutz from Texas’ that worried me; it was the Neocon puppeteers. And, like Baron Adams’s allegedly erstwhile comrades, they haven’t gone away.

  120. @Paul Hunt

    “It simply wants a proportionate contribution to whatever additional fiscal support is required to resolve the current crisis.”

    What if, due to the German financial psychosis, the crisis that Merkel’s Germany intends resolving is not the one we (and perhaps anyone in Europe) is suffering from?

    Chancellor Merkel seems to increasingly resemble a German Thatcher, absolutely determined to remould society (I know, I know) despite the social costs to the periphery. If the EU is the UK, Germany is England’s south east and the PIIGS the north of England.

    I think our experience so far with submitting prematurely to the new CDU consensus has not been good, lets see if we can help it into the grave while the EU institutions still give us an element of cover.

  121. @Paul Hunt

    For the most part Merkel’s engagement with the EU over the last year has been a shambles, and I am not surprised that most other countries do not see themselves as suitable candidates for being recast in a German conservative image. I think the Bush-era phrase was apt, as I see many similarities between Merkel and Bush, notably the the manichean saints and sinners narrative, while denying or ignoring inconvenient facts (e.g. there’s a banking crisis going on). The “pact” is an attempt at an executive power grab using a crisis as a pretext, ignoring institutions and laws that provide checks and balances, something that George W. himself was quite adept at.

    Until the banking crisis is sorted, and the problems with the Euro currency area are sorted (e.g. the only tool available at national level (fiscal measures) cannot address capital flows and associated credit bubbles) an attempt by Berlin to micromanage fiscal/labour market policies in other countries is another example of the wrong solution to the wrong problem. If the problems in the Euro area were really caused by the wrong retirement age or CT being too low in some countries, then initial resistance might give way to acceptance. In this case however it is mainly viewed by other countries as just another misguided initiative that needs to be neutralized as quickly as possible, with some face-saving gloss put on the whole show.

  122. Repost with link closed correctly:

    EuroIntelligence has a pointer to this article (in French) that covers how the German narrative is just that – a story (irresponsible governments without the courage to refom) that gives comfort to Germans, allows them to feel good about themselves in opposition to others, and reinforces the illusion of elite German institutions. Since the story ignores the financial crisis and the problems with German banks, it exonerates them from any blame. For a large section of the public in Germany the story involves direct aid to indebted countries, rather than loans with a favourable interest rate, and it leads to the 6-point plan to show that Germany won’t give in to these irresponsible governments. It ends with the following call for opposition to the German viewpoint (courtesy of my browser translation extension)

    “A little more acrimony between European countries around a pact which anyway would be useless even if adopted and which makes no progress on the banking crisis – the real recipe for success. The stories we use to perceive reality can also have very negative consequences.”

    Trust the French to view the financial crisis through the lens of cognitive psychology. Maybe the DoF should open a new front in the battle and hire a few French philosophers…

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