Why the New Minister for Finance Should be a Default Nut

The first-order policy challenge the new government faces is to restore the creditworthiness of the State and the banks. Without market access, Ireland becomes effectively a permanent ward of the international community, continuously vulnerable to withdrawal of support, and thus in a persistent state of insecurity that undermines recovery.

To say that Ireland is not creditworthy is really just to say that markets put a high probability on an Irish default. At the moment, the cost-benefit analysis does not look favourable to a pre-emptive unilateral default, not least because of the likely backlash by official creditors including the ECB. But the high probability markets are placing on an Irish default means that the markets believe the cost-benefit calculation will shift. This could be because the perceived benefits of a future default are relatively high (say because of the high marginal cost of austerity measures), or that the costs of future default are relatively low (say because the official funders will condone and even facilitate future debt restructurings).

This places us in a bind. If it turns out that we do later have to default, it is best that it comes with as low a cost as possible. But the potential for a low-cost future default makes it impossible to raise longer-term funding now, effectively trapping us outside the markets.

Suppose, however, we could somehow raise the social costs of default (say by offering collateral on any new borrowing). This would be a double-edged sword. It would help us to credibly commit to avoid default and thus lower the market risk premium. But it would leave us facing a worse outcome in the event the benefits of default turn out to be high and the default decision is the sensible course.

But now suppose we introduce a political cost of default costs that fall specifically on the politicians who make the default decision. This allows for a more credible commitment to avoid default while not imposing unnecessary additional social costs in the case where default actually occurs. For reasons similar to those for appointing an inflation nut to head a central bank, it could make sense to appoint a default nut as finance minister — someone who sees massive political (or even personal) cost in defaulting. The credibility of the anti-default stance could be enhanced by a promise to resign in the event default occurs or even better to join a monastery/convent should the terrible event ever come to pass! (For this to work there would also have to be political costs to getting rid of a finance minister that refused to default, or broader political costs to the government as a whole.) One drawback of putting a default nut in charge of finance is that default might be or excessively delayed or avoided altogether when it is the right course. However, given how the perception of a soft restructuring down the road can trap a country outside the markets, this risk of an excessive ex post default aversion could well be a price worth paying.

The candidates for minister for finance should be falling over one another to signal to Mr. Kenny and Mr. Gilmore that default is anathema to their very being.

98 thoughts on “Why the New Minister for Finance Should be a Default Nut”

  1. A sovereign default nut would be great in Finance. Of course it would mean they would sever the links between the sovereign and the bank debt.

  2. I believe we need the opposite to what is suggested by this post.

    Someone is all in favour of default and rabidly for making bank creditors take the blame. Only then will the EC, ECB and most importantly, the Germans, sit up and take notice.

    Note, I am not actually advocating sovereign default. But we need the credible threat of default in order to get any movement on the restructuring of private bank debt.

    Paradoxically, this will make default less likely in the long run.

    Only when the un guaranteed private debts of the banks are decoupled from the state will we be able to re-enter the bond market.

  3. We’ve had a “Default Nut” as you put it—I would say an anti-Defaulter—as the Minister for Finance for the last three years. The country is consequently a financial pushover and look at where it has gotten us: The financial markets regard Ireland as a joke, the EU regard the country as a pushover, and the Banks regard the state as giant ATM.

    I am of the exact opposite opinion. We need a pro-Default Minister for Finance. Someone who is willing to seriously consider a default, and more importantly, who says they are willing to consider it. Only then will the bond markets, the EU, and the Banks take the state seriously. Only a credible threat of default will remove the veil of moral hazard that got us into this mess, and only the threat of default will make the EU consider renegotiation.

    Michael Noonan has previously state that he “believes in moral hazard”. On several occasions. Here’s just one instance:

    During a Private Members’ Dáil debate on accountability and the banking crisis, Mr Noonan said the concept of “moral hazard” that was “fundamental to capitalism” seemed to be an “unknown concept in Ireland, especially in Irish banking circles. AIB have had a scandal in each decade”.

    Michael Noonan, likely our next Finance Minister, happily does not appear the “Default Nut” you crave in your fiscal fruit cake. In my opinion, as Minister he will lay default—quietly—on the negotiating table.

  4. Sorry John. We have had too many ‘nuts’ occupying the position of finance minister in recent years. In most cases they acted as if their brains were in in their the nuts, with no great evience that their was brains where they should have been.
    History, if not economics, should also caution us against having nuts anywhere close to power.

  5. Could the banks not just be shunted off into a very long term SPV (like the mushrooms in that disused shed in Co. Wexford) at 3% or so in order for the sovereign to be put on a more sustainable path ?

  6. @all

    I hope you see that the post is partly tongue in cheek.

    @Bazza

    You say you are not in favour of default. But I assume that you are not proposing empty threats. I also assume you are mainly focused on the bank debt. Are you really so certain that the ECB would not try to isolate the fallout from a pre-emptive Irish move with an attempt a at isolation by providing all necessary support to the rest of the European banking system? This is essentially what the Fed and Treasury did with Lehman — quite successfully in the end. Less drastically, and probably more likely, they might force the Irish banks onto ELA with its signifcantly higher interest rate.

    @OMF

    Very nicely written. In this context, worrying about moral hazard amounts to worrying about a lack of market discipline. For now and for some time to come Ireland is not going to be suffering a shortage of market discipline. Merkel’s proposals for post-2013 burden sharing, for example, are an understandable attempt to bring market discipline back into the system, especially where Germany is being called on to fund a disproportionate share of the bail outs. But that threat to impose market discipline is widely seen as significantly related to the loss of creditworthiness of Ireland and others. Making investors feel they face harder budget constraints will make it harder to regain creditworthiness. I think we are all for market discipline, but it is not what you need when you are in the middle of a debt crisis.

  7. With respect to the sovereign / ELG default conundrum I think it is instructive to consider all sovereign liabilities.

    Consider a state where TD’s and ministers had their salaries, pensions, drivers etc clearly identified as ranking pari passu with the state’s obligations under a) vanilla “sovereign” issuance and, b) ELG.

    Many would suggest a geared linkage particularly for those who are responsible for ELG – say 10x gearing so that a 5% haircut to the bonds would result in a 50% haircut to ex-ministers pensions. In the event this were deemed unavoidable for the state many would think this appropriate and equitable. It would also make the default easier to sell to the markets wrt future funding.

    Choosing option a) or b) would incentivise politicians differently in terms of avoidance of default. It would also influence market reaction to an eventual default.

  8. “The first-order policy challenge the new government faces is to restore the creditworthiness of the State and the banks. Without market access, Ireland becomes effectively a permanent ward of the international community, continuously vulnerable to withdrawal of support, and thus in a persistent state of insecurity that undermines recovery.”

    Indeed that is where we are going ,” a permanent ward of the international community”, no cash no options, famine victims having to accept the soup. Perhaps we are to late to resist having being failed by our politicians. WE should not go down this path willingly. A referendum is a minimum requirement. The word manageable is no longer coming from the central bank, only the the generosity of strangers if we behave ourselves in their self interest.

  9. J McH to K O’R: “Where would you put the sovereign guaranteed (ELG) bank debt?”

    I won’t presume to speak for Kevin O’Rourke, but surely a sovereign default nut would define sovereign debt as narrowly as possible?

  10. Hey, what’s wrong with outside the markets? 5.83% and by all accounts due to be renegged down, is that such a pain for guaranteed funding?

  11. @Brian Mercer

    “no cash no options, famine victims having to accept the soup. Perhaps we are to late to resist having being failed by our politicians.”

    The German view which nobody in Ireland is empathises with is “pay yourselves more like what we think we can afford to pay ourselves and if that doesn’t work, maybe you will have to default”

    In other words “you have an option, you just don’t want to choose it”.

  12. I’d have expressed the diffculties and challenges facing Ireland and other sovereigns quite differently. The EU Heads of State agreed a certain number of actions (CACs, etc) which will frame any eurozone sovereign **restructuring** in the years to come (the authorities continue to make a distinction between restructuring and some form of default). I presume the December agreement will form the basis for the upcoming EU summits, as it does for the op-ed by the Bundesbank economists in today’s FAZ: Bundesbankchef Axel Weber and economists Jens Ulbrich and Karsten Wendorff http://www.faz.net/s/Rub3ADB8A210E754E748F42960CC7349BDF/Doc~E91F3FE991911488883FC3FA14345AC72~ATpl~Ecommon~Scontent.html Indeed this is required reading for anyone interested in resolution of the fiscal crises. It describes the issues in quite different terms to the discussion above.
    Interesting to note that Greece laid out its programme today for its 2012 budget, and the Finance Ministry identified three other countries which are likely to have budget deficits bigger than Greece next year (guess which!). The Portuguese MoF today too was anxious to emphasise progress in Portugal towards fiscal responsibility.
    The outgoing Irish government has bequeathed with a plan for a deficit to GDP ratio of over 10% (as foreseen by the IMF and the EC) for 2011 (and similar to levels seen in 2010 and 2009 ex banks). Will the new government follow that same programme, and how much progress will be made in the coming weeks in adopting more ambitious targets for 2012 (the European Semester now requires all eurozone countries to draft their budgets in a reasonable timeframe – hopefully Ireland won’t stand out like a sore thumb on the planning front again)?
    I think as well the academic literature on the topic is quite clear on the optimal moment for repudiation – when the country in question is back to running primpary surpluses at least.
    So whatever the objective is, whether to play by the rules or not, what is required is a nut for fiscal responsiblity. And hoepfully one that has some public leadership qualities too.
    {BTW it is not so much “Merkel’s proposals for post-2013 burden sharing”, it is what the Member States have agreed, including Ireland, although Mme Merkel and others may have more ideas now on further enhancing the December agreement. … As for “worrying about moral hazard”, it amounts to worrying about too little incentive for Ireland to act in a fiscally responsible manner, as it has overly easy access to cash; “market discipline” is out of the equation for now. … Also I don’t understand what you mean by “investors feel they face harder budget constraints” etc. }.

  13. Some preparation has to be done before Ireland even dreams of engaging in negotiations to alleviate our heavy indebtedness. First and foremost the public must be informed of the depth and width of the debt hole we have dug for ourselves. Second and equeally important the depth and width of the hole is increasing monthly and will continue to do so until it swallows the country whole. Then and only then publicly present to the people of Ireland the three most likely scenarios that the gov’t is seriously considering implementing in order to stop the downward slide. The public will understand the concept of not digging the hole deeper. Any plausible solution will affect the majority of the population either in higher taxes, reduced benefits, lower wages, higher interest rates, lower housing prices, lost jobs, lower profits. We are in the fourth year of magical thinking which has to stop abruptly as the ECB removes the intravenous drip and iron lung. The EMU has allowed us to indulge in our Celtic fantasy world where we are all entitled to be cossetted by the state as it borrows itself into collapse. That state of affairs is now ending whether we like it or not. The European Commission, ECB and IMF treated us gently and humanely up to the election so as not to be perceived as meddling politically in our affairs. Those inhibitions are no longer necessary and we will now be on a more open footing where honest opinions and decisions will be prominent. Under no circumstances discuss what happens after we stop the slide until we are in balance.

    As it stands we are guaranteed sovereign default it could happen in 2012 or we could string it out to 2017. We had a good run 1987 to 2007 we are now setting ourselves up for a matching two decades of stagnation.

  14. I note that hedge fund billionaire George Soros is suggesting that Ireland should impose haircuts on senior bank debt; it would obviously not hit him or his clients.

    A year ago, he sent a rep to a Manhattan dinner to plot how the group of hedgies could profit from the collapse of the euro.

    Even a default on all the senior debt would just fund the budget deficit for 18 months at best.

    Yesterday, Trichet said a ‘world doctrine’ endorsed by the IMF opposes ex-ante haircuts on senior bondholders.

    The IMF will be part of the new 2013 regime in respect of new debt and the risk of default will have been built into the cake.

    Trichet said last Dec that in the previous 20 years, 80% of sovereign debt crises were resolved through IMF lending, without any debt restructuring

    He told the European Parliament last month: “The investors that are long, private sector investors, are losing money when you practice this haircut, while those investors that are short are making money. The message we have for Greece, and in Ireland it’s exactly the same, is we have a programme approved by the international community, the IMF board, and the European [side…] that programme does not comprise [bondholder haircuts]. Let’s apply the programme to recover credibility.”

    We are a member of the EMU and we’re out of aces.

    So let’s “apply the plan” for the next 2 years and REFORM broken systems.

    We could have burned bondholders if we were outside the EMU but what then?

    We can default in future but I assume we will get generation long funding to avoid that course of action.

    It’s maybe ironic that Fianna Fáil first gave 35-year mortgages and now we face 35-year public debt loans.

  15. Whether we eventually default or not, the quickest way to restore room for manoevre is to eliminate the primary budget deficit.

    Until we do that, our capacity to default is limited. And the probability that we won’t eventually default will grow.

    Sadly, Labour’s argument that aggressive fiscal retrenchment will further weaken the domestic economy is correct. But they draw the wrong conclusion. Their argument means that we must cut even deeper in gross terms to achieve the same net effect.

    The sooner we get on with it, the sooner economic options will reopen. At present we are – in the words of Morgan Kelly – condemned to live “by the kindness of strangers”.

  16. Sorry, line in my post above should read:

    Whether we eventually default or not, the quickest way to restore room for manoevre is to eliminate the primary budget deficit.

    Until we do that, our capacity to default is limited. And the probability that we will eventually default will grow.

  17. @Cormac and Ciaran

    Just a quick response on your points drawing in the theory of rational default — that the time to default is when you have a large debt but are running a primary surplus. I certainly understand the logic. But I agree with those who say that this is not how things work in practice, at least for developed economies.

    See, for example, Argument 3 from this IMF paper, and pages 23-24 from Willem Buiter’s “The Debt of Nations” report.

    As noted in my post, the markets clearly do see a significant risk of default down the line. Part of this could be that Ireland simply can’t manage and is unable to retain external support. More likely, the concern is that there will be some orderly restructuring process imposed down later when European bank balance sheets are stronger, with official creditors probably being largely protected and the losses falling heavily on private creditors.

    Ciaran, this is what I mean by hard budget constraints being imposed on private creditors — policy shifts from its current bail out focus to bail ins. But this threat of future market discipline can lead a country to be excluded from the market now for any sort of medium- to longer-term funding — what investor wants to get caught in a bail in? I can’t believe that this is not part of your focus as an international bond market strategist.

    The bottom line is that the current bailout arrangements create a bailout trap, and the mechanisms need to be revisited. But it also helps to send a strong credible signal that the intention is not to default. Surely, again, bond market strategists must be making the assessment of decision-maker incentives. The most important signal, of course, is actual fiscal adjustment. We are doing this at the cost of prolonging the recession, but it is just the most important element in a broader mix required to regain creditworthiness.

  18. No thinking person can dispute the notion of fiscal responsibility. The political resistance arises from an all too accurate perception that some folk are utterly determined to evade. Responsibility has many dimensions, and it’s hard to see corporate governance in Ireland as anything more than an old boys’ club.

    Every report which emerges illustrates the inability of our system to withstand private vested interests. The bank bonus story is just the latest outrage. Management were expected to be ‘responsible’, because they went to the right schools, but the reality is sadly otherwise. Hard neck still takes you a long way, and the public has a short memory.

    Extract xm euros. Cover it up for as long as you can. When fingered, hand back a small fraction, on the understanding that a line must be drawn uinder the matter. Sit out a bit of ritual finger wagging in some sunny bolthole. Idenity another xm euros…rinse and repeat

    As long as the cozy sports club chat takes precedence over the Dail, nothing will get better.

  19. Hey you guys, watching crude oil and food commodity prices – like! If they stay where they are, default here (and in a few other places as well) has a probability of 1.01. My guess is that there will not be one default event, but a series spread over the next 5 years. That’s when the global crude oil production plateau is scheduled to enter long-term decline – permanently!

    Most commentators are focused on the obvious business-as-was model, its the business as-will be model is where you have to get to – through a thick fog of guff and Spinola.

    I hope I am incorrect about this, but there appears to be some silly idea about that a heavily indebted state can exit that position – only if it takes on new debt. Something not quite right there. Hope it comes to me.

    Had me fooled for a bit there John! Nice one!

    BpW

  20. @John McH

    wrt Buiter’s point, it’s not that the market doesn’t believe the theory of rational default. The market is looking forward. Usually the curve tells you that medium term default is high probability – short term much lower, and this fits with both the short term impossibility (almost) of default and the longer term rational reason for defaulting.

    Interestingly though, the Irish 2 – 10 spread suggests recent reassessment to include forced default.

    wrt the IMF argument:

    “Casting the net wider to capture the emerging markets, too, it turns out that practically all defaults occur against the background of debt sustainability issues (to varying degrees) but are triggered by refinancing problems, often accompanied by large external shocks.”

    SMALL PRINT
    “Of course, there is substantial variation within the emerging economies sample with respect to real interest rate levels and the factors underlying them. For example, in countries such as Indonesia and Uruguay, a major contributing factor to the real interest rate was the capital loss on the external debt stock due to nominal depreciation (prior to default), only partially compensated by the correction for inflation. Indeed, in those cases the default was largely triggered by the devaluation which in turn reflected external factors (including debt crises in Russia and Argentina, respectively).”

    I would simply note here that it is not difficult to interpret the addition of the ELG debt and the “recapitalisations” of the Irish banks as analogous to an external shock – like a local currency devaluation and its implication for outstanding $ debt.

  21. Anyway, back to your original contention

    “Why the New Minister for Finance Should be a Default Nut”

    Alternatively, and in view of the fact that he or she will be from a pool of Irish carrer politicians:

    “Why, the New Minister for Finance will by default be a Nut”

  22. ‘Moral Hazard’ – well there’s an old fashioned concept – applies only to ‘little people’ though – the ‘Griftopians’ scoff at the very idea and continue on their greedy way laughing at the academic positions and discussions of economists and the like and return time and time again to the citizen-backed payout window for more free dosh to throw after their lost bets – and we – the ordinary citizens pay out and will pay out until a penny drops somewhere………..

  23. Look at debt as an exercise in cashflow management. At present the country is paying about 4bn in interest and receiving 20bn in net capital. We are really enjoying debt at the moment. Calls to default now are clearly totally misinformed on this reality. At some stage in the future the tables will turn, that’s the way cashflow management works, now that’s the time when it may be tempting to think “why should we pay them back?” but please keep that thought to ourselves just now.

    And for those who will retort that bank debt is different from sovereign debt, sorry the EU has dictated that a condition for their continuing to bankroll this country is that we do not regard them as different.

  24. Can anyone out there answer the following question please:

    Will Ireland be repaying back its IMF/EU loans at each of the maturity dates associated with each issue on a principal plus rolled up interest basis? i.e. will Ireland pay the interest charged on the each bailout loan on an annual basis or given that the country is currently insolvent, will the interest be rolled up and paid when the individual loans from the IMF/EU mature thereby giving Ireland some leeway in relation to its interest repayments. The flip side of this is of course whether we will be in a position in 2014 onwards to repay in full the principal and interest.

    Can anyone clear this up…..

  25. @Cormac Lucey

    “Whether we eventually default or not, the quickest way to restore room for manoevre is to eliminate the primary budget deficit.”

    Agreed. But how does a country such as Ireland with so much private debt get back to being a low wage economy without destroying itself? – mortgages being tied to wages (traditionally) etc.

    If anyone caught Judge Mary Fahy’s observations on a person with 8 children on welfare taking home €850 per week, the scale of the adjustment needed to social welfare is enormous, not to mention state welfare for the legal profession.

  26. “I hope you see that the post is partly tongue in cheek.”

    I don’t see the amusing side of this. IANAE but it is patently obvious that the financial markets expect Ireland to default sooner or later. We (and EU, IMF, ECB) have a choice, facilitate separation of Ireland’s bank debt and default on this (with containable contagion) or await sovereign default and deadly contagion spreading across the EU and euro.

  27. Christy, er, that is net presumably – so what would that be gross of prsi, paye, levies, employer prsi etc?

  28. @ Vinny: “penny drops” ? Lovely, that large coin with mother hen and chicks gave a beautiful ‘ping’ when dropped on a tiled floor.

    The current coinage is a tad ‘light’ so when it hits that wall-to-wall carpeted floor – it, well is noisless. Griftopians: Good one!

    @ Alchemist: “Agreed. But how does a country such as Ireland with so much private debt get back to being a low wage economy without destroying itself? – mortgages being tied to wages (traditionally) etc.”

    Now were sucking diesel. But no one, sure as hell, wants to go (back) there. There is some story about being in front of a steamroller. We’re static, the damn steamroller is trundling toward us. We hop it or get pancaked.

    @ Christy: What is the average (real) wage now? Is it disposable enough to deal with energy price x 2 times current? Interest rate at 8% or above? You really do have to wonder about the folk who live in Hopium World.

    BpW

  29. Sticking to thinking about Government strategy within the parameters expressed to the electorate.

    Finance Minister and others engage with our fellow Europeans for the good of all.

    We say, ‘very much looking forward to the stress tests – can’t wait in fact’. Note we have taken e16bn out of the economy through over the last 4 years tax and spend and are right on top of the e9bn to come. Our fresh government mandate has given us the right to push on with reforms too.

    We note Angela Merkel’s observations that European taxpayers cannot be expected solely to bear the cost of a private banking disaster and concur. We look forward to helping to ensure this is not the case.

    Restate that Ireland is willing to pay its way.

    When the stress tests come out we say, well, it looks now as if e50bn plus of that bailout money is needed for the banks alone. Even though we have followed the EU/IMF strategy there is simply not the cash to run the economy as envisaged by all partners. In order to stay within the parameters of the MoU, we will have to crack on with burden sharing. The monies from the unguaranteed debt will help the country get to its position of returning to a budgetry surplus in 3 years, and we will then be able to return to the market.

    That alright with you? Would you care to suggest an alternative?

    PS We also look forward to a little further clarity as to whether the interest rate on our much-welcome package is a political or economic issue, and we are happy to be part of a EZ that is fully functioning for all our partners.

    PPS We’ll have a chat about the setting of a ‘one-size’ interest rate, as well and see how that can be made more equitable for all member countries.

  30. @grumpy

    I understand from hookhead.coms (superb) PAYE employee calculator its about 65k.

    Hardly an incentive for rampant fecundity. Multiply it by 10 and I’ll talk to the wife.

  31. John I think its a great idea.
    No need to be modest by adding that bit about it being tongue in cheek.

    I have a plan

    Step 1. Dig up Nicolai Chauchesku

    Step 2. Attach sunglasses and a clever puppet on a string pulley system similar to the popular 90’s comedy ‘Weekend at Bernie’s’

    Step 3. You can put on your best eastern European accent and tow the ‘Default Nut’ line.

    Step 4. sit back and admire as the Irish ten year bond yield goes below that of Germany.

    Nice one!

  32. It strikes me that the obsession about defaulting is akin to a struggling company that has cut some staff numbers and the remaining payroll is dominated by worry as to when the grim reaper makes the next visit.

    I have said before that the closest comparison that I believe to be appropriate for a firm facing impending collapse is with the death watch of a close relative.

    Business managers and their staffs need to have some optimism about making the effort to sell and the invisible unemployed need some hope.

    I haven’t become an admirer of the Herbert Hoover faith in railroad billboards such as ‘Wasn’t the Depression Terrible!’ in 1930 but while the issue of default is is obviously more interesting/exciting, with the foreign dimension, for the comfortable, in the short term, getting the economy back on track is more important.

  33. I disagree and draw the opposite conclusion.

    There is no point going to renegotiate the deal with the IMF unless they think we are going start imposing losses on investors. German investors will be pressuring their government to take a hard line unless they think that doing so will drive us into unilateral burden sharing. To increase the chances of them thinking like this, we should appoint someone who will be more than likely to default unless a reasonable deal is offered to us. For instance, if Gerry Adams was appointed as Minister for Finance, then we would find the other countries would be breaking down our door to come to terms.

    Once that is done, then we can appoint an anti-default tsar and allow him/her to reassure markets that it’s now OK to come out from behind the couch.

    Basically we need to get to a place where we won’t have to default, then we can talk about giving assurances that we won’t.

    I was very anti-default myself until the IMF deal. Now it seems like an absolute necessity.

  34. @Michael H,

    I fear this threat of default may have a far deeper, popular resonance that merely a matter of interest/excitement ‘for the comfortable’ as you put it. In every generation there is an urge or desire to replicate or exceed the deeds, or, more often in the Irish case, the words, of illustrious predecessors.

    This David v Goliath posturing pitching little Ireland against the alleged malign might of the European powers may evoke echoes of Dev’s respinse to Churchill: “…there is a small nation that stood alone not for one year or two, but for several hundred years against aggression; that endured spoliations, famine, massacres, in endless succession; that was clubbed many times into insensibility, but each time on returning to consciousness took up the fight anew; a small nation that could never be got to accept defeat and has never surrendered her soul?”

    In this context this rhetoric (and the underlying sentiment) is about as much use as a eunuch in a harem, but how do we tell that to the ‘green marines’?

  35. It is now becoming clear that accepting the bailout has limited our ability to impose losses on bank creditors.

    It is now also becoming clear that we would be imposing such losses if the bailout not preclude us from so doing.

    Therefore, it is clear that the EU is using our need for a bailout as a means of forcing us to repay privately incurred debt.

    The EU may believe that it is in both Ireland’s and their interests that we repay the debt. I would say that while it may be in both of our interests that the debt is repaid, it is not clear that it is in either the EU or Ireland’s interest that Ireland be the people who repay it.

    An appropriate compromise could be that each EU member takes their share of the losses.

    For example, the total losses on unguaranteed seniors at Anglo, assuming say a 50% recovery, would be about 1.5 billion. This loss could then be split between the EU members according to the country of origin of the current owners of the bonds. As half these bonds are in Irish hands half the cost would fall on Ireland.

    Such an approach has several desirable features, not least of which is that it makes states whose financial system facilitated these developments bear the cost of their folly.

    It is unreasonable for the EU to insist we alone bear the full cost of bailing out seniors as a condition of our bailout. It dramatically increases the cost of the bailout from our perspective.

    If we could knock 2 percentage points off the debt and half the cost of bailing out unguaranteed seniors, Ireland would be meaningfully closer to solvency and it would demonstrate that the EU is capable of making decisions and coming to compromises that don’t just put off the evil day and which don’t threaten financial stability.

  36. @ Ger

    Maybe rather than having the subliminal threat of terrorism, by having Gerry Adams leading the posse, we send a troika of smoked salmon socialists such as O’Toole, McWiliams and Browne.

    However, in the real world, just 3 months into the EU-IMF program and no evidence of reform of the system of rent-seeking vested interests, the most likely outcome would be a big PFO from the Germans, Dutch, Finns and Austrians.

  37. Sorrry for going off topic (as I am enjoying this topic) but Forbes have just tweeted a few minutes ago that US unemployment now stands at 8.9% which is lowest since Spring 2009.

    IMHO if this trend continues than the argument for an early stimulus package ie: 2012-2014 in Ireland may be stronger as such a move could ride in tandem with increasing demand within th economies of our trading partners.

    No response please it is only a quick IMHO and the current topic is fascinating. I (as I am sure most readers are) am reading comments with interest.

  38. @ SoL

    on the IMF stuff, i believe there is no repayment of principal or interest until 2015.

  39. @ Christy

    Yes, the EFSF’s only effect has been to block the normal channels for reforming overindebted states (i.e. the IMF).

    The EZ’s approach is to prevent its members from going to the IMF (who would demand burden sharing), then set up a mini-IMF in the Eurozone, except their version is not as good as the real IMF and baulks at the necessary burden sharing.

    End result: Ireland does not have access to the facilities that normal countries would have in our situation, and has taken on absurd levels of investment in the main banks (bringing us to an eye-popping 30% budget deficit last year) in order to keep things going without recourse to the IMF. For our trouble, we are now facing demands from the other EZ countries in areas like corporation tax that are targeted at improving the domestic situation of other EZ States rather than our own.

    The EZ has gotten the whole policy wrong, we need to face that and scrap EFSF, allowing Greece and Ireland to turn directly to the IMF. They will be more focused on fixing our problems than preventing the exposure of weakness in other MSs.

  40. We need to communicate to the EZ that we do not want to borrow money at any interest rate in order to pay off the debts of bankrupt banks.

    We need burden sharing, not a tweaking of interest rates. They can keep their money and we can turn instead to the IMF.

  41. Livonian, don’t think the payroll figures are off recent trend and the 8.9% is partly due to the fall in the participation rate. Move along please.

    @Ger

    “For instance, if Gerry Adams was appointed as Minister for Finance, then we would find the other countries would be breaking down our door to come to terms.”

    Not so at all surely. Gerry negotiated with Unionism on the basis that something unpleasant for them was going on and there was sufficient popular support to ensure it would continue to go on. If however they made some compromises with him and his friends then they knew people who knew people…..etc.

    Send him to Brussels ad Gerry would look like a joke because everyone would see straight through his bluff. He has no popular support for a zero deficit policy that would be a consequence of the EU saying “its our way or the highway”. Further he didn’t even ask for popular support for this.

    If he returned from Brussels with no significant debt write off what then. Would he then say to the Irish people “right they won’t play ball so lets default on this debt and if the market won’t lend us another 20, 30, 15, 10bn a year or whatever, tell them we don’t need them anyway and just cut the public payroll and raise taxes to eliminate the need for borrowing”

    Would the public cheer him patriotically to the rafters or tell him to feck off?

  42. @John McHale

    IMHO a new finance Minister should not “show any cards” (ie anti default or pro bailout referendum) until the end of the Month.

    By which time the pre election rhetoric in Germany(state elections on 20 and 27 March) will have died down and two crucial EU/EZ meetings will have taken place on 11 March and 25 March.

    While Ireland will face pressure to make commitments on 11th and 25th March a “fledgling” government (which also has to celebrate a National day) can easily play for time.

    Transfer of payments to banks can also be easily postponed until the end of the month. The ATMś did not shut down in Iceland and the Irish finance minister, because of recent legislation, has the authority to fire any bank executive or contracted spin doctor who encourages rumour to this effect.

    A new finance minister who has to be “fully briefed”,enable the outgoing Minister to “empty his desk” attend 2 EU crucial meetings, represent his/her country in some far flung port on St Patricks Day can easily resist pressure (or being “bounced”) from within or outside the country.

    It is easy to believe we do not have too many “economic” tools remaining but we do have plenty of political and (probably) legal tools to play with.

    My guess is that the rhetoric will start to become more flexible in Europe at the end of the month as our partners realise that Ireland is one of the better players in these current (and future?) “bailout sagas”.

    If they do not, then the new Government needs “breathing space” to decide what relationship we should have with our European friends and partners and whether or not continued membership of the EU (but with a separate currency following default) may be our only logical option .

    Logic would dictate that we should not stay where we are not wanted. One of the best ways our Euro Zone partners can show us that we are not wanted is to make our continued currency membership as uncomfortable as possible.

    On the other hand if we are welcome there is very much our Euro Zone partners can do by demonstrating their friendship and “sharing our burden”. Time will tell and in this case” time is our friend” who can help us find out who, and where, our other friends really are within the European family.

  43. @Christy

    I think the bailout was put together by chancers who were always trying to catch up with market opinion. Rehn said it would solve the problem of market credibility decisively. It was supposed to bring the bond yield down. It didn’t. I don’t think it was designed for the long term.
    Trichet must have pulled the plug on FF and triggered the intervention but did he really want a situation where some of the major banks are 30% funded by the ECB after the bailout?

    A lot of the decline has been about the evaporation of confidence. I don’t think the bond market believes the new overlords.

  44. @Grumpy

    If you examine the data closely you may discover your tune may be getting slightly old (Although I am glsd you qualified your statement by using the word “partly”)

    However as you appear to be inclined to “play the man and not the ball” please rest assured that I will “move along” in order to avoid engaging in what would probably (IMHO) turn out to be an immature form of debate with you.

    Best…L

  45. Why limit the nuttery to the Finance ministry?

    There is already an ‘exceptional circumstances’ clause in the Croke Park agreement.

    I suggest that this clause be extended to all parts of the ‘Programme for Government’, and ‘exceptional circumstances’ to mean default.

    So: no reduction in old age pension – unless we default. No increases in class sizes beyond what has already been agreed – unless we default. No further reductions in minimum wage – unless we default.

    All election promises to be torn up – if we default.

  46. @ Christy

    Interesting thoughts and it may come to something along those lines. Two objections, though, if I was a foreign taxpayer.

    1) The money is still in Ireland in the hands of some very wealthy individuals who creamed it from the bubble. In effect you are asking foreigners to let these bubbluppies keep their windfalls because Ireland hasn’t the political will to take it back from them.

    2) The regulatory fault lies almost entirely with Ireland. There is no way you will convince a foreigner that in some way they are to blame for our madness.

  47. @BW

    “The money is still in Ireland in the hands of some very wealthy individuals who creamed it from the bubble. In effect you are asking foreigners to let these bubbluppies keep their windfalls because Ireland hasn’t the political will to take it back from them.”

    You don’t have to be a foriegn taxpayer to object this or to the fact that our politicians, rent-seekers and senior administrators are grossly overpaid

  48. @ Brian Woods II

    The counter to your point 2) is caveat emptor – nobody forced greedy French and German banks to try and pick up some extra yield by loaning to out-of-control Irish banks. How can you convince a domestic tax payer that they are to blame for the madness of European banks that should have known better?

    Both arguments are true, depending on your perspective, and the reality is subject to negotiation.

  49. @ Eoin Bond
    Hi Eoin I think in William Buiters paper for Citi group he mentioned that we were expected to pay 1/6 of the principle (nearly 10billion) for 6 years from 2014 till 2020. i am guessing the presumption was we could be back in the market to roll it over by then.

  50. @Livonian

    “play the man and not the ball”

    L, ??? that was attempted humour, but average workweek unchanged, average hourly earnings more or less the same, participation low, U6 hardly moving – I don’t see much different in it.

  51. IMHO we need to tackle this now within the next six weeks.

    By “kicking the can down the road”(which is what we will do if we roll over now) our public servants may face over 40% reduction in real wages as early as 2014. No reasonable pundits across the political spectrum are advocating that.

    “Kicking the can” would also ensure that by the time you and I retire we will be “luxuriating” at UK level pensions in our late 60″s recounting fascinating “legends” of occupational, private, and public service pensions to our offspring by skype.

    We need to face up to the “possibility” of default now rather than the “inevitability” of default in three years time when we may no longer have any (political, strategic, and legal) tools to work with and nothing left in the sovereign kitty.

    Right now we can still contemplate debate and examine options at a time when the Euro Zone appears to believe a departure by Ireland (or even Greece) is not a desirable outcome and “burden sharing”pending “haircuts” is probably a price worth paying to avoid this.

    I hope Ireland can stay in the Euro but we all know it can not be done at any cost. I would also prefer to know where we stand now in relation to our Euro Zone partners rather than “delaying and praying”.

    Two years ago we were heaving a collective sigh of relief that we were not in the “same boat” as Iceland now we were looking at them differently.

    What will we be doing in two years time?

  52. @John McHale

    I guess we are all agreed we need a “nut” in Finance.

    Probably a “nut” who is prepared to contemplate (and diplomatically articulate) default and anti-default options is exactly what Ireland needs right now.

    @grumpy

    We will have to agree that the glass is either half empty or half full stateside.(At least there is something in the glass rather than the scenario some commentators were painting in winter 08-09)

    As for the other: Mea Culpa I should have realised you were being humorous.

    I really enjoyed this thread and now I am off to enjoy spending some Euros while I know they are still being accepted as legal tender.

    Best….L

  53. @ Edward

    When a Regulator insists (right up until the last moment and beyond) that all banks are fully sound and that Hedge Funds are deliberately shorting them as part of some conspiracy, how much “Caveat” is an Emptor supposed to apply? The point of a Regulated banking system is to spare punters the need to Caveat.

  54. @Margaret Hurley

    “I suggest that this clause be extended to all parts of the ‘Programme for Government’, and ‘exceptional circumstances’ to mean default.

    So: no reduction in old age pension – unless we default. No increases in class sizes beyond what has already been agreed – unless we default. No further reductions in minimum wage – unless we default.”

    This is an interesting idea but there is, from a market and – now more importantly – a Germanic perspective, a seniority problem.

    The “no unforeseen budgetary deterioration” clause was included only because the unions had to accept it otherwise the was no deal. The sovereign bonds obligation and “irrevocable” sovereign ELG for most bonds and deposits was entered into by the state without the insertion of such a clause because had there been one nobody would have bought the sovereign bonds or bought any more bank bonds.

    So Germany thinks the right order to do things is to default on the domestic agreements that have such a clause in them first, then see if it is possible to avoid defaulting on the other agreements later. Can you blame them?

  55. @ BW 11

    There is connection between the separate points you make above. The absence of bank regulation reflected the grip which private vested interests hold on our political process. Personal and private interests are also highly active within the public sector and the trade union movement. The underlying ethos was that windfall gains were grand because ‘it is coming off a broad back’.

    We have killed the Golden Goose. The task of economic development is going to be much rougher going forward, as social conficts are bound to escalate in a deflationary environment. No matter who issues the edict, ordinary geeses will hate the plucking goverment.

    @ I see Michael H can’t resist an oul dig at the Shinners, but I doubt that his own ‘crowd’ has the nerve to tackle some of our fattest geese. The party’s traditonal affliliation with the commanding heights of the legal profession is the first obstacle.

  56. @all

    I note the ‘turn’ to figurative language within the ‘aesthetic turn’ in Irish economics: initial attempts at irony are encouraging …. yet appear to confuse many readers – that said, McCarthy and McHale are making progess. No allusions to illusions please. Metonomy and the black hole of synechtoche appear to be under-represented and hyperbole, of course, is the domain of the political wing of political economy and has been for quite some time – Cormac Lucey, I hear, provided a few tutorials to the neoCon Mick McDowell, who of course was never of member of the PDs, never really served in a cabinet, and was never informed that a principle of collective cabinet responsibility exists due to the simple fact that Mick does not believe in anything that might possibly be associated with a collective – ideologically, however, CLucey is consistent and at times is even right, unlike Mick who thinks he is always right, which he is and he isn’t ….

    I really am awaiting Kutz McCarthy’s upcoming take on synechtoche – I expect it to be ground-breaking, seminal, earth shattering ….

    @KO’R
    +1

    @Derval O’Rourke
    Still magic. Still on the A-Team.

  57. @BWII
    “The point of a Regulated banking system is to spare punters the need to Caveat.”
    Really. I don’t think so. The point of banking regulations are to ensure that banks behave. Breaking regulation should incur penalties – on the banking system and their executives – not on taxpayers.

    Not penalising them as per the US model post Lehmans has resulted in the likes of Goldman Sachs Merrill Lynch etc. who were bailed out massively, winding up for yet another go at the public purse – see the last chapter of Michael Lewis’s The Big Short.

    As someone else pointed out above moral hazard seems to be only for the hoi polloi.

  58. @BW

    “2) The regulatory fault lies almost entirely with Ireland. There is no way you will convince a foreigner that in some way they are to blame for our madness.”

    Important coincident point. The ‘reassurances’ of the regulatory authorities in Ireland also led Irish investors to significant losses.

    Logically, if one accepts the validity of the default argument, Irish mortgage holders should default on their mortgages with domestic banks. The same major argument premise based on reckless lending would apply. Yet, I haven’t seen any of the default lobbyists lead the charge on that one. Not one of the recent ‘Left’ parties promoted a mortgage boycott/default/repudiation which, arguably, says something interesting about Irish radicalism.

  59. @Mickey Hickey

    I like this one – http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND&n=y

    and the Vichy_Bank/Sovereign debt Coflation trend also takes the 45 degree positive route …

    I placed them both on the wall of the play-room for me neice-nephew high_infants graduates some time back and they figured em both out in less than 10 seconds. “We can’t reach it!” they shouted ….

  60. @ Livonian

    We need to face up to the “possibility” of default now rather than the “inevitability” of default in three years time when we may no longer have any (political, strategic, and legal) tools to work with and nothing left in the sovereign kitty.

    Maybe we would need to reveal some home truths about our growing mfg and services sectors and export boom?

    Arguing that we need a remedy now because we may default would likely earn a laugh or two.

    How many more should be included? Italy? Or should the Italians be left out because of their prudent private savers?

    A case could be made in respect of bank support at some stage if the IMF was minded to help.

    @ paul quigley

    I doubt that his own ‘crowd’ has the nerve to tackle some of our fattest geese.

    Paul,

    As Groucho Marx might have said, I wouldn’t join a tribe that would have me as a member.

    There is a greater likelihood of balanced reform, which I strongly advocate, from a Fine Gael minister, than from a conservative leftie – whether of the kipper or smoked salmon variety.

    Note how quiet the traditional trade unions are about their wealthy counterparts in the protected private sector.

    Adam Smith would have termed it a ‘tacit’ understanding to avoid knocking the wheels off the status quo applecart.

    Someone else had proposed Gerry Adams as the ‘man on horseback’ or should it be camel, to lead us back to the Promised Land.

    I thought it better to have the SSS Technical Group [less fishy than the double S but still slippery when ‘wet’] exposed to some realpolitik.

    @ The Alchemist

    +1

  61. @ The Alchemist wrote

    “But how does a country such as Ireland with so much private debt get back to being a low wage economy without destroying itself? – mortgages being tied to wages (traditionally) etc.

    If anyone caught Judge Mary Fahy’s observations on a person with 8 children on welfare taking home €850 per week, the scale of the adjustment needed to social welfare is enormous, not to mention state welfare for the legal profession.”

    I couldn’t agree more.

    The most basic rate of welfare payment for the long-term unemployed amounts to €188 weekly in Ireland. That is equivalent to €819 monthly. The most basic rate of welfare payment for the long-term unemployed in Germany (Hartz IV) amounts to €359 monthly, less than 45% the Irish rate.

    I have written in both Business & Finance and in The Irish Daily Mail on the strange political silence about Irish welfare rates. They exceed double those in Germany and the UK, two states we are borrowing heavily from on an emergency basis.

    But there are few politicians who wish to make themselves unpopular making this point. And there are few commentators, analysts or economists who wish to do so either.

    Not the least of Ireland’s problems is a generalised cultural reluctance to call things as they are and to prefer “nice” people to “effective” people. The saintly veneration in which Jack Lynch is held is symptomatic of this mistaken mindset, IMO.

    Nearly everyone in Ireland wants to play Santa Klaus. Nobody wants to be Scrooge.

  62. @CL: Interesting data on comparative welfare rates.

    I think I made the totally insane proposal a while back that we needed an approx 50% reduction in income levels, tapering down to 0% at the average wage – whatever that is. No exceptions. Sorry Brian, no-can-do! 🙁

    Now the interesting obverse of the above would be a significant writedown in assets. Oppps, can’t go there either. 🙁

    Also, there might be a tad of a problem with legally bindind stuff – like keeping your house and vehicle insured. I can expect ditto style reductions there as well. Not bloody likely. That’s out. 🙁

    Options seem to be getting kinda short, like. 🙁

    People are, well human, kinda like we need a daily ration of food, water, etc., etc. So each of us need a minimum income to survive. Being hungry on a regular basis is not my definition of survival, but its as long as a piece of string in some minds.

    Now I have this nasty concern about energy. There would not be the probability that it might become a tad expensive? No? We have plenty of alternatives, and shure we can substitute if necessary. Pass out the Hopium pipes chaps.

    The cost of health insurance is set to increase on an annual incremental basis – say 7%. So it doubles in a decade. Incomes will do what in same time frame? Yes, I was afraid of that. Bye, bye VHI.

    Its not Santy or Scrooge, Cormac, its the complete and utter inability to even attempt any meaningful engagement with our awful economic situation. The few commentators on this site excepted.

    Going for the coffee and scones now.

    BpW

  63. @ Cormac Lucey

    On a related topic, the 80,000 number of non-nationals on the Live Register is shocking in my view and given the size of the population, supports a case for some EU burden-sharing.

    It’s sometimes a matter of trying to achieve the unachievable balance.

    Franklin Roosevelt said: “Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.”

    The Irish Times has a story today on a Czech family in a homeless shelter, with a recently arrived baby.

    Families like that should be in their home countries but this one is from the Roma ethnic minority.

    We should aim for a just society where welfare rates are not so much out of line with other countrie and where lawyers as public contractors do not become multi-millionaires investigating claimed corruption – – finding where the real corruption is does not require public tribunals.

    Anyone for a Toblerone?

  64. @ Brian Woods II

    I respectfully disagree with your analysis of the role of the financial regulator with regard to banking or any other bond holders.
    The objective of the financial regulator/Central Bank is “to minimise the risk of failure by ensuring compliance with prudential and other requirements” (http://www.financialregulator.ie/about-us/Pages/default.aspx – this is post the reform act, but the pre-crisis principle was the same). If their stated objective was to completely ‘eliminate’ the risk of failure rather than ‘minimise’ it, then I might have more sympathy for the plight of bond holders, but we are supposed to be living in a capitalist society, where broken businesses are allowed to fail. The regulator’s mandate reflects this.

    Financial regulators are like referees – they set the rules in a way that minimises the chance of a player getting hurt, but ultimately they can’t control whether a player trips or even if they’re pushed. They can only react after the fact. Insisting that the game is still safe when the players are getting bolshie is part of their job.

    I appreciate that this analysis might sound callous, but it is important to realise that financial regulators make a clear distinction between financially informed institutions and ordinary investors (the proverbial widows and orphans). This protection of ordinary customers and investors is a stated aim of the Irish regulator, as well as regulators throughout Europe and the US, because ordinary investors cannot be expected to perform their own due diligence. I believe this protection to be both efficient and morally correct. It is the reason why deposit accounts are guaranteed up to a certain level and financial marketing materials are regulated.

    Because financial institutions and high net worth individuals are considered to be capable of completing their own investment due diligence, they are not offered a similar protection by financial regulators and in return are permitted to invest in a wider range of asset classes. These banks, insurance companies, pension funds, hedge funds etc are the holders of Irish bank bonds. They bought the bonds because they were greedy and liked the incremental interest they were getting over the bonds of safer banks. Let’s not forget that before any German bank loaned money to Anglo in the bond market, a team of analysts on 6-figure pay packages would have assessed its default risk and a credit committee of senior bankers on 7-figure pay packages would have approved it. I have no sympathy for any losses they may [hopefully] face because it is part and parcel of the investment business. I also find it difficult to believe that informed and professional investors paid any credence to the Irish Regulator’s claims that the banks were A-OK. If they did so they were being negligent.

    In my opinion, Michael Lewis summed the bank guarantee up perfectly with his description of a Merrill Lynch bond trader that went to bed one night resigned to the fact that his Irish bank bonds were worth 50 cents on the dollar and awoke to find the Irish taxpayer had decided to make him whole without even being asked (http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103 page 6). This may not reflect the reality of every investor but its closer to the truth than many of the stories being peddled about.

  65. @Michael H,

    You are venturing on to very dangerous territory here. There is a risk of mindlessly joining this ‘race to the bottom’ beloved by the Neocons. Our Swedish friend, Jesper, raises the issue of ‘social dumping’ on another thread.

    The fundamental problem is the provision of universal entitlements in an association of nations where, in general, it is funded by the Ponzi scheme, pay-as-you-go method. The combination of expected economic performance and demographic trends in much of the EU means that this is unsustainable in the medium to longer term.

    This is the real driving force behind the Merkel-Sarkozy Deauville accord and the Barroso-Rompuy ‘Competitiveness Pact’. The logical response of applying general taxation to contribute to a fund for each citizen and resident that would finance an actuarial projection of the benefits and entitlements they would be expected to receive over their lifetimes is probably a step too far. Given the preponderance of centre-right governance throughout the EU, the instinctive reaction is to curtail entitlements, to slash social funding, to increase the pension age, impose austerity, etc. The founding EU principles of ‘competition, co-operation and solidarity’ have been temporarily suppressed and the centre-left carries too much ideological baggage (and is to protective of its own ‘insiders’) to secure the popular support to change the narrative.

    It is also driven by the recognition that a combination of enhanced economic performance and fiscal support will be required to address the ‘great unmentionable’ – the EZ banking crisis. Fiscal austerity is required to be able to provide space for some fiscal support for banking recap without frightening the horses in the sovereign bond market. While the EU as a whole may not be over-extended in terms of sovereign debt to GDP, many members are vulnerable and uncertainty about the fiscal impact of EZ bank resolution could spook the market. It is better to focus on enhancing economic performance (thereby reducing debt to GDP) and to build up the fiscal space in advance before revealing the bad news to the market.

    Ireland’s current problems, urgent and all as they seem to us, are merely a tiny sub-plot on the edge of the stage as this grand performance unfolds at the EU-level. Can we not for a moment take a break from the navel-gazing? We’re not is such bad shape and there are plenty of things we can do to help ourselves. But, for goodness sake, let’s try to form a view of the big picture.

  66. @ Michael H.

    I wish it were possible to be generous to everyone but that is the route to insolvency but even Santa Klaus only does it one day a year!

    Your argument is unanswerable except by using the “well we can’t go down that road because that is to venture on “dangerous territory”, to use @ Paul Hunt’s phrase. I think we are already on dangerous territory and will only come off it when we reverse the sort of situation which @Michael H describes so clearly.

    There was a lot of similar talk (of “dangerous territory” etc) in advance of the 2005 Citizenship Referendum. But that referendum found strong resonance and support from our fellow citizens. In my opinion, its passage reduced the prospect of ugly racial attack.

    But it is a difficult area and the language one uses does need to be calm and analytical (as @Michael H’s is) rather than incendiary as recent high-profile acts of political violence in the USA warn.

  67. Many of those who are outraged now were presumably in the amen corner during the bubble.

    We are a member of a currency union and the majority in the governing council support the view that a ‘global doctrine’ endorsed by the IMF is being implemented.

    American commentators tend to take issue with it but in the US 2 huge private mortgage companies had to be bailed-out because they were able to give guarantees that were generally understood to be backed by an implict federal guarantee.

  68. @ Michael Hennigan

    ‘We should aim for a just society………’

    I’ll buy that, and I think most people will too. There is plenty of room for disagreement both on the intepretation of social justice and the means for delivering it. We need a healthy dose of polticial economy, in the best sense of the word, because its obvious that the ‘cheap’ energy credit/consumer driven era is drawing to a close. The global consequences will be deep and manifold.

    I believe also that there is a growing and proper mistrust of ideology and political spin of whatever hue. Difficult issues like fiscal responsibility, tax and benefits or emigration will have to be addressed in a much more forthright, reasoned and transparent way. It is not going to be pleasant but it’s better than the alternative.

    @ Cormac Lucey

    ‘Not the least of Ireland’s problems is a generalised cultural reluctance to call things as they are and to prefer “nice” people to “effective” people’

    This is pretty close to Joe Lee’s central point:

    ‘The essence of the Lemass approach can be defined as the attempt to substitute the performance principle for the possessor principle in Irish life…the primacy of the possessor principle owed its power not to the whims of individuals, but to attitudes deeply rooted in social structure and historical experience’

    Ireland 1912-85 Politics and Society Cambridge UP. A must read which is becoming mustier by the day.

    Wih regard to the welfare rate comparison, I feel it more enlightening to compare the total package of benefits, including the notional value of access to various infrastructures, such as transport, housing, childcare etc. The exercise is probably not simple, but it’s worth exploring.

    Perhaps cash is too often used as a sop for economic difficulties, just as ‘tablets’ are often prescribed when no good therapy is available. Reducing the former, of course, means that we have to work much harder and more creatively, to deliver the latter.

  69. @Cormac Lucey,

    I am certainly not attempting to place the discussion of any topic ‘off-limits’. My comments were intended to place this issue in what I think is the broader and more appropriate context. Focus without context often leads to unintended consequences.

    But it is more important to focus on what we can do for ourselves. For example, why is the price level for household consumption 20% above the EZ average? What can we do to bring it down? A 20% reduction in this price level would allow a 20% reduction in the social welfare budget and leave no one, on average, worse off in real terms. Think of what this would achieve in fiscal terms, not to mention the impact on all other households and the economy. It might place any review of the benefit eligibility of non-nationals in a more appropriate context. Indeed, the economic benefits of such a step might allow them to find gainful employment.

    But, of course, there are far too many vested interests opposed to such a rational policy approach. So let’s pick off the easy targets.

  70. @ PH: “But, for goodness sake, let’s try to form a view of the big picture.”

    Thanks.

    “Focus without context often leads to unintended consequences.”

    I shall print this out and paste it up on my Quotes Board beside this one:

    “Simplicity has its attractions even when it leads to bad outcomes” [Chris Johns]

    WOW! (words of wisdom).

    Strange – but maybe not, that ‘we’ all know with absolute certainty what we cannot do, whilst we are uncertain about what we can (and probably need) to do.

    BpW

  71. @MH

    re

    Even a default on all the senior debt would just fund the budget deficit for 18 months at best.

    I am glad you said that. I understand the the sale of the ESB for €3 billion would keep the country going for 2 months. And a Coillte sale for €1.5 billion , which includes approx 1/6 of the land mass of the country, would keep us going for another one month at least.

    Both of these are being actively worked on. Economic sense or sheer insanity?
    Perhaps the bondholders or ECB will impose mortgages on all homes that currently don’t have them in order to get their money back. Who knows!

  72. @all

    The holodeck on the blog is becoming unstable!

    http://www.irisheconomy.ie/index.php/2009/10/06/donogh-omalleys-1966-announcement-of-free-education-the-hidden-history/#comment-129612

    @C Lucey

    Welfare rates are really shocking – she who cuts €18 from the blind gets a once off of €180,000 plus €100, 000 for life per annum; senior civil servants exempt, kuts only for the leetle peeple; barristers on fat pensions on 2-5K a day from Tribunals investigating previous fat barristers and accountants on fat persions that never go anywhere – billions in NAMA for other fat professionals; the farmers on Euro welfare of 20K to 50K perannum and no tax; randy stallions tax free; gazillions of party apparatchicks on quango boards who do nothin and get mega Ks from the state; fat developers protected; fat bankers protected; fat gombeen rezoning councillors protected; fat fu**ers all over the place protected ………….. and Joe_an_Joan Citizen expected to pick up the Tab.

  73. @ Cormac Lucey

    ‘Not the least of Ireland’s problems is a generalised cultural reluctance to call things as they are and to prefer “nice” people to “effective” people’

    Effective is not a useful word unless you give a clear idea of what changes you want effected. Thatcher was effective at concentrating wealth, Dubya at fronting for neocon deceit and the current EU at sacrificing the state for commerce.

    More generally you are going to be more effective in achieving your goals your goals if those goals are aligned with the powerful and the wealthy.

    How instructive then that the rights idea of political bravery encompasses struggles as varied as cutting social welfare provisions, agitating for employers rights and, of course, fighting the powerful African immigrants lobby (bravo by the way on the racist referendum, well played, you can all be proud).

  74. All

    Not sure if this is covered anywhere (but it should be)

    AIB decision to limit foreign cash withdrawls to €100.

    They say that it because of fraud.

    If so, why have no other international bank followed suit.

    Is this more likely to be the market loseing faith in AIB’s ability to settle its bills?

  75. The idea that it would be beneficial for the next Minister for Finance to be a default nut seems based on an assumption that this will actually make a difference to the markets. My impression is that it will not – that the markets’ assumption that Ireland will default is based on the objective conditions as they exist, far more than on stances adopted by Irish politicians.

    Insofar as it is possible to pick out a reasonable central view as to where Ireland’s debt to GDP ratio will top out under current plans, it seems to be about 130%. Thats equivalent to about 170% debt to GNP, with most of the risk being on the upside. If, as I think most of us accept, GNP is a truer measure of the tax generating capacity of the Irish economy than GDP, that puts us in a position where most countries, developed or otherwise, would be expected to default eventually, regardless of their politicians’ views on default.

    While the EU intervention has had the immediate effect of staving off the sort of funding crisis that typically triggers default, in other respects it has served to greatly increase the risks faced by holders of Irish sovereign debt.

    1) It is serving to faciltate a continuing rapid increase in the debt to GDP or GNP ratio, which is making the country rapidly less solvent.
    2) The new sovereign liabilities it is creating are likely to ultimately be treated as senior to regular Irish sovereign debt, greatly reducing the resources from which regular holders of sovereign debt can be serviced and repaid.
    3) A large share of the state’s existing liabilities are switching from being liabilties to private creditors to being direct liabilites to sovereigns and the ECB, which are again likely to ultimately be treated as senior, and which thereby threaten to wipe out private creditors rather than subjecting them to the sort of haircut they are accustomed to in a sovereign restructuring.

    Our propective government and the EU say that they do not want us to default on sovereign debt, but our actions and those of the EU say that we don’t really care about sovereign default, so long as it is delayed for a few years. If the outgoing government had cared about avoiding default, we would already be running a positive primary balance. If the new government cared, it would plan to run a positive primary balance from 2012. If the EU cared, it would not have agreed to support several more years of deficit spending, and it would not be providing debt and other forms of funding apparently senior to that owed to existing private creditors.

    People working in the sovereign bond markets are not stupid. Public relations stuff like putting a default nut in charge will not hide from them the fact that they are being shafted.

  76. @ Edward

    The Regulator has two roles in this context. One is to regulate with a view to ensuring the soundness of the banking system. This they didn’t do but one could argue that they could not anticipate the global crisis. A bondholder would probably find it difficult to sue on the basis of gross negligence.

    The other role is to advise the populace of the current soundness of the banks under their supervision. Here they are much more cuplable. They were telling us even in September ’08 that Anglo was totally sound, that this was just a liquidity crisis. I think any bondholders who kept invested in Anglo on foot of these assurances would have a very good case for gross misrepresentation. The Regulator would have to prove that (a) they really did believe that Anglo was sound and (b) they couldn’t reasonably have been expected to know the truth.

  77. @Cormac Lucey

    Very good point about the possibilities of harmonizing welfare rates across EU members. Harmonizing wages – interesting to ponder. Italian business friends were shocked to learn that police in Ireland are on salaries of €50k+. Flight attendants and teachers in Italy take home between €800 and €900 per month. Last summer La Repubblica carried a piece on public sector wages. It would have been grim reading for the Croke Park cabal.

    @Michael Hennigan

    A connection of mine runs a large horticultural business in North Dublin. He has been unable pretty consistently to attract and retain Irish employees. On the other hand, he has very little turnover in his Eastern European workforce (about 40 people). The hours are long, the wages are not public sector grade and the work is manual rather than Smart economy.

  78. @BWII, before the regulator had to prove either of those two propositions, a plaintiff would have to establish that the Regulator had a litigatable obligation to bondholders. I think the fact that no one has yet sued is more telling on this than your unsupported assertions regarding the Regulator’s responsibilities.

  79. Latest on the failed bank in Sweden:

    http://www.thelocal.se/32308/20110228/
    “HQ AB, the former parent company of the defunct bank, said in a statement it planned to propose “that compensation to the company be demanded from former board members, the chief executive and the accountant (KPMG).”

    What is happening with Anglo?

    As long as the bondholders are being made whole they have no reason to start any litigation. Who benefits by reduced demands for clarification on what happened?

  80. There are plenty of holders of Anglo bonds who are not being made whole. The losses look large enough to be well worth litigating if there was any prospect of sticking the losses on anyone with deep enough pockets to be worth suing, such as the Irish state.

    The Swedish example is of owners suing people with a clear duty of responsibility, rather than bondholders suing a regulator.

  81. @BeeCeeTee,

    so who in Ireland failed in their responsibilities & why aren’t they sued?

    People can be sued for many reasons: To get money or to get even. Bankrupting all the board of directors of the failed banks might not raise much towards the end bill but it certainly would allow some people to get even & might help improve the quality of governance. Ireland is not seen taking this step & the question is why?

  82. @BeeGeeTee
    “I think the fact that no one has yet sued is more telling on this than your unsupported assertions regarding the Regulator’s responsibilities.”

    It appears that for many in the financial services industry – the financial regulator is considered a latter day Midas whose function is mainly to convert taxpayers money into bondholders gold.
    @BWII
    What I find most offensive about this crap is that you seem to believe that by repeating is often enough some of us may start to believe it. Give us a break – if banks break regulations THEY should be penalised – not innocent bystanders.

  83. “Nearly everyone in Ireland wants to play Santa Klaus. Nobody wants to be Scrooge.”

    I think you’ll find that that’s because Scrooge was an utterly reprehensible fraudster, financier, a-hole, hell bent on maintaining his personal bottom line to the detriment of all of those around him…. until becoming enlightened by the spirits on the merits of the social contract, touched by compassion and an appreciation of human dignity to be the better man. He ends up bringing the turkey and leading the carrolls iirc.

    our country should be proud of its social welfare standards, sheltering our most vulnerable is the least a civilised society can do. Advocate the imposition of victorian work house solutions… I ask you.

  84. @Jesper, clearly the managements of several banks failed in their responsibilities to their shareholders. My guess is that they are not being sued because their pockets are not deep enough. There is also a question as to whether their failure was of a nature that would make them liable. This may be no more clear in your Swedish example than it is in Ireland.

    Clearly, the office of the Financial Regulator failed in its responsibilities to the Irish state. But it’s part of the state.

    There is also a question as to whether criminal law was broken. Decisions on criminal investigations are made by the Irish police (Gardai), and by other bodies such as the Director of Corporate Enforcement. Decisions on criminal prosecutions in Ireland are made by the Director of Public Prosecutions. We have to trust that these decisions are being made objectively, but I admit that I will be more certain that this is the case once the new government takes office.

  85. @ Bee Cee Tee

    ‘We have to trust that these decisions are being made objectively, but I admit that I will be more certain that this is the case once the new government takes office’

    People have all sorts of investments, which they usually try to defend. Well placed folk have more to defend, and more powerful means for doing so. That’s the objective view.

    It follows that the prospects for accountability are poor. The reasons are not very respectable but they are sadly real.

    1 The permanent government is untouched. The Wright report has its merits but overall it reminds of Dennis Healey’s comment about being ‘savaged by a dead sheep’.
    2 The Galway tent is out of fashion, but the waiting lists for private schools are as long as ever. Telling tales from school simply isn’t done.
    3 The Church has waned, but the fear of scandal is perennial. Our professions and institutions will continue to cover up what went on in the bubble. It’s a case of hang together or hang separately.

  86. @paul, there are will be people in government shortly who would be just as happy as you (and I) to see scandals over our banking and property collapses dragged out into the open.

    Here’s hoping that one of them gets the Justice portfolio. They could not and should not interfere in investigations or decisions to prosecute. But they could make it apparent that a robust approach in this area by law enforcement would not retard the careers of those involved, and might even be career enhancing.

  87. interesting breaking news about the Department of Finance being split in two.
    It makes perfect sense to have a new Department for Public Service Reform given the amount of reform which will be required to take place hand in hand with the significant budget cuts to public services to come over the next few years.

    Slightly strange though is the decision to split of public expenditure from Finance as well. Expenditure and tax are the two key elements in the annual Budget process. Now there will be two Government Departments and Ministers controlling part of the Budget process – who are from different parties and may end up in conflict with each other.

    Does Fine Gael realise how much power they have just given away? The new FG Finance Minister will be one of the weakest Finance Ministers in decades due to his lack of influence over public expenditure

  88. @Joseph O’Toole
    “Slightly strange though is the decision to split of public expenditure from Finance as well. Expenditure and tax are the two key elements in the annual Budget process. Now there will be two Government Departments and Ministers controlling part of the Budget process – who are from different parties and may end up in conflict with each other.”
    Well, the DoF should only really be responsible for its direct expenditure. What it does otherwise is agree a budget for other departments to spend. It doesn’t approve (that I know of) the actual spending unless there is a variation to the budget. So I don’t really see the conflict.

    What it looks like is the DoF returning to its traditional role of setting the amount of income and the amount of expenditure and then leaving the various departments to bunfight amongst themselves the share they get and what they do with that share.

    Personally, I have a poor attitude to beancounters setting organisational priorities beyond budgets.

  89. @ Bee Cee Tee

    OK. We’ll see what happens. It’s the widespread lowering of professional standards which, in my view, needs most exposure. Too many advisers couldn’t keep their fingers out of the pie.
    Interesting to see the proposal for independent regulation of the legal profession in the programme for govenment. They should start by reviewing the clever ways in which our respected lawyers helped to pump up the asset bubble. I am sure the Law Society would be only delighted to assist.

  90. “Does Fine Gael realise how much power they have just given away? The new FG Finance Minister will be one of the weakest Finance Ministers in decades due to his lack of influence over public expenditure”

    I see it that both sides can position to disavow what their core find politically unpalatable, i.e FG can cut back in areas they have popular support on (quangos, cost of PS) and Labour can make coy tax changes to hit political bete noir “rentier” classes. Its inevitable that neither side is going to enjoy (politically) the next 5 years but Finance was always going to be a poisoned chalice, now both groups can drink the poison they/their voters find most palatable.

  91. You can make this argument as technical as you wish. But, it only serves to satisfy the intellectual models (most of which are nonsense) of our profession.

    It is quite simple, and at this stage most Daily Star readers understand this better than our over complicated analysis. Irish public debt has jumped from 25 to 110 percent of GDP in three years. This is the result of bailing out the banks. It is not affordable. Sovereign and bank debt need to decoupled. The latter debt restructured. This is inevitable.

    I welcome any default nut who will call a spade a spade in the Dept of Finance. But, you wont find one amongst the academic or political professions.

  92. It’s amazing how quickly a new oxymoron can become part of our everyday language. Ger’s comment of March 4th above is the earliest occurence of `unilateral burden-sharing’ that I can find with a Google search. Now the phrase seems to be repeated in the Irish media every second day. I presume the intended meaning is `unilateral default’ as referred to by the original contributor.

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