EU Needs to Share Ownership of the Irish Banks

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Here‘s an article I wrote for today’s Irish Times. It argues that a conversion of central bank loans to equity is now the best way to end the banking crisis and avoid a sovereign default.

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68 Responses to “EU Needs to Share Ownership of the Irish Banks”

  1. Celtic Phoenix Says:

    Any thoughts on the likelihood of the proposal being considered?

  2. John McHale Says:

    Karl,

    Interesting article as always.

    If our European partners are willing to make a large expected net tranfer and accept a large amount if risk then this proposal provides a good blueprint for how to use the transfer. I find it hard to believe it could happen.

  3. colm mccarthy Says:

    Surely this would massively over-capitalise the banks (unless Karl knows something!) and would require immediate de-listing to avoid windfalls to shareholders?

  4. Kevin Donoghue Says:

    A fine idea, but if we can’t persuade the ECB that unguaranteed bondholders should take their lumps it’s hard to imagine that we can inflict such a deal on the EU’s own institutions. At this point, is there any better course than simply to refuse point-blank to put another cent into the banks unless the EU will share the risk? That would be a drastic step obviously, but better to bring this thing to a head now than let it drag on. There’s not much point in discussing what the EU might be persuaded to do unless we take into account the possibility that they don’t intend to budge at all.

  5. Seamus Coffey Says:

    There would be huge amounts of money being transferred around to save the State €16 billion – immense and all as that figure is. It seems to be a €150 billion recapitalisation of the banks, as much as anything else, and the only value in the banks will be this money. The €120 billion “equity” the EFSF and the CBoI would have in the banks would be the money they put in minus the underlying losses. To get this money back they would need someone be willing to pay this amount for a huge cash sum with a couple of ailing banks stuck on at the side?

    Why not just tell the ECB to suck up €16 billion of losses up front and move on from there?

  6. Seamus Coffey Says:

    Also, surely the EFSF and CBoI would only get back their “equity” (cash) in proportion to their shareholding in the banks. Are all existing shareholders (including the State) to be completely wiped out?

    Why not just a give the ECB assets (customer loans) to the notional value of the money it has lent to the banks and get the ECB to sell the assets for whatever they can get for them? They already want the banks to sell these assets so they could just do it for them.

  7. Paul Hunt Says:

    Am I missing something here? The liquidity support from the ICB and ECB is backed by short term bonds and promissory notes issued by the government – which, in turn, are backed by haircut bank loans and utlimately the property purchased using these loans. I see Karl’s proposal as a formal ‘warehousing’ of these broadly matching assets and liabilities (as opposed to the informal ‘warehousing’ our core EZ partners have managed) with a view to managing them down over time using an up-front equity buffer to absorb any potential losses. The balance sheets of the banks would shrink with the warehousing of these assets and liabilities, so I can’t see how this overcapitalisation of what would be left would arise.

    But I’m probably being dumb.

  8. Eamonn Moran Says:

    And in one fowl swoop all the remaining private losses become Irish and European public losses.

    So we have given up on the idea of asking the bondholders to making even a small contribution?

    This policy would be brilliant for the banks.
    But for the European and Irish people?

  9. tull mcadoo Says:

    Based on the numbers in KW’s article the “banks” would end up geared 5-1 on an assets to equity basis. 500bn of assets supported by 100bn of equity-plus or minus. Given that a bank would earn an 1% ROA, this would imply a ROE of 5% plus or minus.

    I cannot see any private investor ever buying into such a franchise. They would remain permanent wards of the state. Colm McCarthy is correct, they would be massively overcapitalised.

    This gets me to the 2nd point, you can recap AIB to 20%, 30% or any number above that but it will be years before any corporate depositor returns. The only way it ever becomes a viable franchise again if it is immediately sold to a 3rd party.

  10. Justin Collery Says:

    Slightly modified scheme –

    1) Create BoI MkII and AIB MkII.
    2) Move all deposits from the current AIB and BoI to the new ones.
    3) Asses all loans and move only the highest quality loans from the old AIB and BoI to the new AIB and BoI. Keep moving the good loans to the new banks until there is approximately the same value of loans as there are deposits.
    4) Sell the new BoI and AIB (or float them) and return the proceeds of the sale to the old banks.
    5) Remove the bank guarantee.
    6) Run down the remaining loans of the old AIB and BoI over time (merge with Anglo?)
    7) Let the bondholders / ECB / ICB fight over who gets their cash first.

    JC

  11. zhou_enlai Says:

    In the context of ongoing international negotiations in relation to our national situation, it would be great to have a post addressing Nouriel Roubini’s G-Zero theories which posit that individual countries are starting to see more and more elements of international economic co-operation as a zero-sum game. This fits in with talk of a transfer union in Germany and the way our corporation tax is an issue for other countries. Obviously, this way of thinking mitigates against the ECB being allowed to pursue a debt for equity swap.

  12. Paul Hunt Says:

    @Zhou,

    Was it not ever thus? The costs of removing trade barriers, of sovereignty-pooling or of solidarity are always incurred up-front; the benefits are in the future, are uncertain and there is grave doubt about the efficiency or equity of their allocation. The UN, the WTO and the EU all rely on some adherence to enlightened self-interest. There are cycles in the extent of this adherence. The world is becoming more mercantilist and we are heading into a trough.

  13. The Alchemist Says:

    @Karl

    Post equity conversion (hypothetical outcome), what would stop the new owners of the banks from calling in all the debt, e.g. mortgages etc. and force a crisis that would bring the wheel around to the starting point again?

  14. zhou_enlai Says:

    @Paul Hunt

    Roubini links it to the lack of dominant powers who can force the enlightened agenda. It may be this doesn’t apply in Europe and Germany is such a dominant power.

    On the other hand if a “zero-sum game view” is taking hold, whether it is G-zero or trough in the enlightened self interest cycle, than our government had better take a view on how this is likely to play out for us depending on which course of action we take.

  15. Michael Hennigan - Finfacts Says:

    Isn’t it like likely that an SPV would be created to transfer the laons from the ECB and Ireland would have say 20 years to pay it down with asset sales and from tax funds?

    Justin Collery’s proposal has the merit in using the ‘new GM” model.

    Merging IL&P with one of the big 2 could make the new group attrctive as the Irish Life franchise remains pretty strong.

  16. Gregory Connor Says:

    A very interesting proposal which makes good sense at first reading. One question (related to Colm McCarthy’s above) — what is the share price at which current shareholders are diluted? Are current equity shareholders set to zero or allowed to keep partial (small) ownership at some nominally low percentage of consequent bank equity? It would not be fair to let them take too big a piece of this positive-NPV transfer by the EFSF (done partly in the EFSF’s own interest to restore Irish sovereign and bond market stability).

  17. hoganmahew Says:

    @Justin Collery
    +1
    That is what should have been done two and a bit years ago.

    Is it too late to do that now? Not without significant losses to the state, but then that was always likely to happen. At the very least, the state had to pony up something to atone for its lack of oversight.

  18. Karl Whelan: a massive debt-for-equity swap to stave off crisis « dublin notes Says:

    [...] full article can be found here. Prof Whelan has also posted a link to the article on the Irish Economy blog, which, as ever, generates a lively and informed discussion in its comments [...]

  19. vinny Says:

    @Justin Collery
    This sounds very much like the proposal put forward two years ago by Richard Bruton,our new Min for Ent/Jobs/Innovation?

  20. zhou_enlai Says:

    BTW, Karl Whelan’s solution looks very elegant legally, administratively and it shares the pain politically with Irish tax payers taking more pain than any other country (including money alread paid into banks and because) and other EZ taxpayers sharing the pain in circumstances where it is an EZ decision to avoid any Lehmans style default.

    Elegance is key to market confidence and to recovery.

  21. Rory O'Farrell Says:

    Could someone please explain to me the difference between ECB support and ICB support?

    If the Irish Central Bank takes a loss on the loans to the banks, is that covered by the Irish Government or the ECB?

  22. Hugh Sheehy Says:

    This proposal would still have the taxpayer underwriting the whole deal.

    The main political issue, here and in Europe, is to avoid having the taxpayer underwriting everything – so while this would help Ireland it may be just as unacceptable in other countries.

    We’re still in a position where the solutions for Ireland involve and imply more pain and loss for other countries taxpayers. That’s the real knotty issue.

    Meantime, Ireland is still paying wages and welfare well in excess of the countries from who we are borrowing money with one hand and discussing how not to pay them back with the other hand.

  23. John Kennedy Says:

    Anyone got access to post below story of revealing interview Aynsley gave to Ozzy financial newspaper?

    http://www.afr.com/p/business/financial_services/euro_zone_fix_piecemeal_LVP9XSKklaaS2pRVwplakI?hl

  24. Paul Hunt Says:

    @Zhou,

    This thread, quite rightly, is focused on the mechanics of any arrangement that might be developed, but I think you are correct to highlight the requirement for consideration of Ireland’s strategic positioning as this will establish the parameters within which any possible bank resolution arrangement will be developed.

    I linked previously both to Karl’s op-ed piece and to a report of an intervention by the ‘great and the good’:
    http://www.irisheconomy.ie/index.php/2011/03/14/john-ihle-on-the-stress-tests/#comment-132292
    I am uneasy about these interventions – particularly when the proposals are under wraps – and even more when some serious strategic thinking and debate is required.

    As I see it, the door is open to us to integrate more fully with the EZ’s ‘northern core’. (This CT spat with Sarkozy is just an aspect of something Chancellor Merkel has to to deal with similar to the Cross of Lorraine that Churchill had to bear.)

    The question remains: do we wish to investigate fully this strategic option and its implications? It is not divorced from the bank resolution issues being discussed here.

  25. grumpy Says:

    @Rory

    Straight to the Irish taxpayer as national debt.

  26. Colm Brazel Says:

    Our latest government notion to deal with our crisis is pretty pathetic: Some vague notion of reducing the interest rate on the LOAN ? FG manifesto speaks of insurance, a levy on the banks, perhaps to negotiate a deal with the EU that if the bailout costs go above a certain ceiling, they’ll step in. All predicated on bank stress tests results expected end March. The markets will treat this plan with the derision it deserves.

    However, Karl Whelan’s plan is a very good one, simple, clean and elegant. Yes it follows along the lines of a debt for equity swap many of us have advocated. It builds a strong safety valve through the mechanism currently being expanded of the EFSF to protect both the ECB and the Irish sovereign from default.

    Through its hook into the EFSF which is already being expanded in other ways it also has hooks into the present proposals being negotiated on the capping of losses and also should take away some pressure from the stress tests.

    It should form the first part of a two part contingency plan, that should have a further component, a modest proposal to leave the EZ, if his plan above is rejected.

    Our negotiators should follow its terms to the letter. But because it does not have similar detail on a structured default and exit from the EZ, it only gets 8 out of ten from me:)

  27. grumpy Says:

    @Paul H

    Have to agree with you about

    http://www.irishtimes.com/newspaper/frontpage/2011/0315/1224292164700.html

    This is the way the country was led astray in the first place. Same in the UK with the capture of the New Labour project.

    Influence of the inner circle and all that, maybe dish some details out to tame journalists as kites need to be flown. Just what is required.

  28. Gavin Kostick Says:

    @ Paul Hunt

    Do you mean this?

    http://www.irishtimes.com/newspaper/finance/2011/0315/1224292164063.html

    I got depressed when I realised it is 16 men and no women.

    @ Karl

    Are you in a position to take this further with government or are you floating an idea? Would you be happy if the country went on to explore “The Whelan Option”

  29. Colm Brazel Says:

    @ grumpy

    lots of fingers in the greasy till among that lot. Love to read it, why is it being kept under wraps? At least it has proposals to bring down the NAMA monster that will anchor the economy to the grave for the next decade or more. With KW proposals for debt for equity swap, Fire sale NAMA and within 2 years the economy will take off. Rather than reducing the public service, get rid of the financial ants consuming public money pouring over Nama!!

  30. hoganmahew Says:

    @Colm Brazel
    +1
    Fire sales are required after a bubble. Not just to get a market price, but to allow a return to normal (pre-bubble) levels of activity. Bust the incumbents, let new entrants put their capital at risk and start the game again.

  31. grumpy Says:

    Apologies to Karl for no actual direct comment on this post, but suggest readers might get a it of context from

    http://www.bloomberg.com/news/2011-03-11/germany-france-said-to-fight-basel-rules-forcing-banks-to-reveal-leverage.html

    http://www.bloomberg.com/apps/quote?ticker=SX7P:IND

    This is now back at IMF-opening-the-new-airport prices and has caught up with the tenor of debate on this site in the month or so since I first linked to it on here.

    http://www.bloomberg.com/news/2011-03-15/paris-home-prices-jump-at-fastest-pace-since-1991-as-investors-shun-stocks.html

    Put these together with the open derision among many bond investors about the proposed exclusion of mark to market of sov holdings for the banks – and you might a few ideas about what the Irish should be drawing attention to.

  32. DOCM Says:

    A question! Where in the treaties or the statute of the ECB are the powers that would allow the proposal to be implemented?

    As far as I am aware, the ECB’s job is to run monetary policy in order to maintain stable prices and to carry out the other normal responsibilities of a central bank.

    The political issue remains as outlined above by Hugh Sheehy. Any approach that ignores it is in cloud cuckoo land.

    As to the summary reply by Rehn, what else could he say? The ink is hardly dry on the deal negotiated in discussions in which the Commission participated.

  33. Paul Hunt Says:

    @Gavin K,

    Grumpy beat you to it. And I think you’ll find a chapess in there. But that’s not the point. The gender composition is irrelevant; the intent is.

    @grumpy,

    Agree. But, without distracting from consideration of Karl’s proposal, I still think, echoing Zhou’s interventions, that consideration of Ireland’s strategic options is required to anchor any proposal of this nature. The point is that there is no legitimate forum for reasoned disputation about these options. In better governed polities there would be a government appointed commission setting out the options in the public sphere or hearings before a committee of the parliament or legislature. All we have are op-eds in the IT/Indo and fora such as this. While the ‘great and the good’ are able to get straight into Govt. Bldgs to secure engagement with Government on their unrevealed strategic proposals.

    As I see it, we have two broad options: one is to seek to agree some bank resolution mechanism with our EU partners that will allow us to revert to the late 1990s model and continue to leverage our location at the intersection of the trans-Atlantic economic space defined by the US and the UK with the EU economic space. The second is to reform this model to make it more compatible with the EZ ‘northern core’, commit to pursue further integration with this core and secure a less burdensome bank resolution mechanism.

    The CT spat with Sarkozy is only a symptom of the extent to our national economic model is out of sync with our core partners. Hugh Sheehy raises the point about our wages and welfare rates being above those of the countries from whom we seeking some burden-sharing. But this is simply a result of the low tax/high ‘point-of-use’ charge model that Ireland has pursued. The high charges relate to every service provided by the sheltered sectors (whether public, semi-state or private). Taxes are low to ensure there is enough disposable income to pay these high charges. And the charges are excessively high because they cover embedded deadweight cost, inefficiencies and profit-gouging.

    We will not secure effective engagement with our partners until we strip out these deadweight costs and refrom our economic model. And the nature of the engagement with our partners will determine the nature of the bank resolution mechanism that will be devised.

  34. Karl Whelan Says:

    @ Colm McCarthy, Tull, Seamus

    It may not be necessary to convert the full €150 billion. The point is that mechanism is there to make the Irish banks solvent beyond question again. And this is within the powers of the Irish and EU authorities to do on a shared basis while hopefully avoiding an Irish sovereign default.

    I’m not sure I get the questions about current shareholders as their equity is worth very little now and their ownership share after any debt-to-equity conversion would be minimal.

    This is an example of how the banking situation can be resolved and a relatively clear and clean one, I hope. There are, of course, other mechanisms for achieving the same goal, e.g. have the EFSF buy large amounts of assets at face value, but it’s not clear why this is any less of a political challange than a debt-for-equity swap.

    @ John McHale

    “I find it hard to believe it could happen.” Well, we have to decide what it is we want to bargain for first and it’s not clear to me what it is we’re really looking for. A bit off the interest rate is grand but it should not be the priority. If something like this doesn’t happen, then all the brave talk about things being manageable for the Irish sovereign may amount to nought.

  35. Michael Hennigan - Finfacts Says:

    There is no likelihood that a proposal like Karl’s would be seriously entertained in the short-term.

    Agence France Presse reports that a diplomat who attended last Friday’s summit told the agency that Rutte, the Dutch PM, Merkel and Sarkozy told Kenny that their people’s wouldn’t understand why there would be a major renegotiation just 4 months after the IMF-EU deal was agreed.

    I have said the same myself.

    Noonan has to have patience; he has played it well by engaging directly with Trichet and Rehn; the reality will dawn soon enough and it’s also positive that the Irish bank stress tests will not only be more comprehensive than last year but will have realistic scenarios.

    What will add credibility will be when the IMF will suport radical action.

    It would be foolish now to create a big dust-up when the facts will inevitably lead to a remedy that is not currently on the table but after the IMF can credibly endorse it.

    ECB officials are due in Dublin tomorrow – maybe they will stay for the craic on Paddy’s Day when I will be enjoying a free night in KL on you folks!!!!

  36. Karl Whelan Says:

    @ Michael H.

    “What will add credibility will be when the IMF will suport radical action.

    It would be foolish now to create a big dust-up when the facts will inevitably lead to a remedy that is not currently on the table but after the IMF can credibly endorse it.”

    Can you be so sure that the IMF do not already support more radical action?

    They would most likely promote the case for such an approach inside the tent rather than in making radical public statements.

  37. Karl Whelan Says:

    @ Michael H.

    “Merkel and Sarkozy told Kenny that their people’s wouldn’t understand why there would be a major renegotiation just 4 months after the IMF-EU deal was agreed.”

    But their peoples are applauding the renegotiation of the Greek deal?

    People are talking about all sorts of major reworkings, of EFSF\ESM, of bailout terms, of competitiveness pacts, why in god’s name wouldn’t we wish to add the Irish banking situation to the list?

  38. Colm Brazel Says:

    Re KW debt for equity proposals my own comment to those above, I should have stated why I believe we need an exit EZ strategy as well.

    Simply stated even with the current expansion of the bailout fund EFSF, those in Brussels with busy calculators may already have worked out, that even an expanded EFSF would not be able to absorb by way of debt for equity conversion, the full extent of losses among the peripherals from Portugal, Greece, to Spain as well as Ireland.

    There is already huge political resistance against any effort to sustain those losses as shared among EU taxpayers.

    But politically and financially the EU will have to decide one way or another and solve it as it cannot kick the can down the road forever.

    At the heart of the ECB is Trichet who stubbornly resists any moves to burn banks and bondholders. This policy was mistaken from the outset and has made EZ problems worse rather than better.

  39. Hugh Sheehy Says:

    I’ve just read the article in Der Spiegel (tweeted by LorcanRK http://www.spiegel.de/international/business/0,1518,750982,00.html) , which is relevant to this discussion.

    I wonder how Irish taxpayers would feel if our banks were fine and Germany turned up looking for money from our taxes to patch holes in their State owned banks. We’d probably be quite indignant, spluttering that this was an issue for the German regulator and government, that the perception that German banks would be protected by the German state created an implicit guarantee, etc…..

    If they wanted money from us we’d probably bitch about how they’re richer than us, etc.,etc.,etc. The transfer from taxpayer to creditor is the real issue, still, and is a really intractable problem too. I’m not sure that Karl’s solution, while suitable for Ireland, is a flier in the short term – especially with the way our PR is at the moment.

  40. grumpy Says:

    One thing that often gets missed with all the hundreds of bns of loans to the banks is the sale and repurchases part.

    If you miss out the Promissory notes (35bn or something) then the lending from the ECB isn’t really lending. They have bought bank assets and paid less than face value – by applying a haircut. They pretend to sell them back to the banks each week say, in exchange for cash that the banks don’t have and then buy them back straight away.

    In reality the ECB has bought these assets and the only way it can sell them is if the Irish central bank CBI effectively buys them with cash that it prints and is then owed to Eurosystem by the Irish state.

    The latest CBI figures suggest the CBI is facilitating such an exit by the ECB. Has political cover from Noonan been sought for this?

    The suggestion of swapping debt for equity seems a rather more indirect way of formalising the de facto current position but instead of the ECB holding an individual assets it would hold an equity share in the net assets.

    Either way the point is that unless some credible organisation guarantees depositor funds by overcapitalisation or ECB guarantee, it is not realistic to ask those with a fiduciary duty to deposit or buy bonds in the Irish banks.

    Setting up new or parallel banks together with resolution and depositor compensation for existing ones would have advantages in terms of exiting existing contracts (bonuses, pensions, salary levels) that would have a political appeal that would be understood not only in Ireland.

  41. zhou_enlai Says:

    Perhaps the debt to equity conversion should also be applied to senior unguaranteed debt to make it politically palatable.

    I think the welcome for a definitive solution would outweight negative bondholder reaction.

  42. Gregory Connor Says:

    Need more clarity regarding the unfair claim of current equity holders if the debt-equity swap is done using market price of equity at the time of the swap. They should not receive any sudden profit associated with the transaction.

    Suppose that the banks have assets with present value of expected cash flows equal to 400 and outstanding debt liabilities with face value of 450. If wound up immediately at fair value the banks would be insolvent but that is not a prospect. The shareholders have equity with current market value of 10 due to the option value of holding a limited liability claim with no downside and some potential upside. The market value of the debt liabilities is 390 by adding-up of asset value = equity value + debt value so the debt liabilities are trading well below par.

    The ESFS purchases 150 face value of debt liabilities held by the ECB for 150 cash. The EFSF then exchanges the 150 debt liabilities for X percentage equity ownership of the banks. Should it be X=100% ownership? It should, really, but as soon as the transaction is announced the market values of the shares increase, diluting the EFSF’s claim. Depending on how it affects the option value of the shareholders the market price could climb considerably diluting the fair claim of the EFSF.

    I have no problem with the “unfair” making-whole of the ECB and bondholders but do not think that the current equityholders should be included in any EFSF-funded “gift.”

  43. Ahura Mazda Says:

    Karl’s plan is a way to pass losses to other European states. To date, our European partners haven’t been willing to take any losses. My undestanding is that the current loan facility has the Irish sovereign on the hook. This idea involves isolating the Irish sovereign from a substantial portion of potential losses. Nice if we could get it, but it would require a big shift from other countries.

    This plan also leaves a large portion of risk with the Irish gov/CB (70bn). Though if this plan was implemented before any further recapitalisations, we would have funds available to cover a large portion of this risk.

    How would Anglo/INBS fit into this?

  44. Michael Hennigan - Finfacts Says:

    @ Karl Whelan

    I’m not saying that your proposal or a variation will not be considered in say the next 3 years, but it’s unlikely in the short-term.

    We can see that Trichet has had limited influence with the politicians and from Nov 1st next, the new ECB chief is unlikely to pick a big fight with his main sponsors.

    Nicolas Sarkozy and the German vice-chancellor Guido Westerwelle are fighting for their political lives.

    Sarkozy will have formidable opposition from the right and the left (likely the IMF chief) and in a few months will be in full election mode; in Germany, the tax-cutting supporting FDP is in big trouble and it’s unlikely to support what you propose.

    I don’t believe that the EU summit of March 24/25 can mark the end of the
    debt crisis for existing basket cases. The authorities cannot just wash their hands of them.

    If the new Government is a reforming one, I feel that the IMF will not defend the indefensible if it’s clear that radical action is the only solution to the crisis.

    There would of course be demands for privatisations and there will be no blank cheque but as long as Spain doesn’t need a rescue, the 3 small countries in trouble are not going to bankrupt the EMU.

    Am I an optimist?

  45. Michael Hennigan - Finfacts Says:

    @ Karl Whelan

    Karl,

    Just to answer your point about Greece, extending the loan maturities is not apaprently seen as a big cost.

    Maybe we should look at it in terms of what the Bild Index measures.

  46. David O'Donnell Says:

    South Africa 272 for 7 vs Ireland; 50 overs. Manageable.

  47. tull mcadoo Says:

    KW,

    Your proposal illustrates that negotiating over the rates, be it CT or the rate on the bail out is largely irrelevant. Ireland’s sovereign debt is too big to be serviced by the cash flow of the country when the bank debt is consoldiated. As many have said this is a totally logical outcome of the decision, mandated by the ECB not to burn seniors.

    The negotiation should turn to mechanisms to cram down the loan books and burn somebody on the liability side. It would be extremely helpful in this regard if we were close to primary balance. Are there any takers for an emergency budget with 10-15bn in fiscal tightening now. Then we could right our own terms.

  48. David O'Donnell Says:

    It’s an option. And do we need options.

    Burden sharing is an Irish-EU equation; as the latter suspended basics of capitalism in the interests of the big boys closing out the usual IMF type restructuring …. we need IMF onside, and they are on our side ….

    Portugal and Greece are distinctly different equations; Spain is much closer to Ireland, and its bank problem is probably substantially bigger ….. and probably the biggest hurdle to be overcome if KW type move to work.

  49. grumpy Says:

    Tull it appears about ten people in the entire country are pushing for that. Hoards have peen pushing for the opposite and have just won an election as a result.

    You would have to assume it will take a couple of years at the current rate for that to gain popularity as an option. So it looks like Ireland just does whatever it is told to.

  50. ahimsa Says:

    @ Hugh Sheehy

    “I wonder how Irish taxpayers would feel if our banks were fine and Germany turned up looking for money from our taxes to patch holes in their State owned banks.”

    I think the whole point is that their banks are not fine either. And the preferred mechanism for patching holes in their Landesbanks is to channel the money to their own banks through loans to the irish government.

    Besides which, why do we persist in framing discussion in nationalistic terms of ‘Irish’ banks and ‘German’ banks? They are private financial institutions with no national allegiance or filiality and do not operate in the interests of citizens (regardless of nationality). The debate would more helpfully be framed in terms of ‘citizenry of europe’ versus ‘banks operating within europe’.

    @ Grumpy

    Why has nobody addressed your comment re exclusion of ‘mark-to-market’ asset evaluation? This absurdity of ‘mark-to-model’ and the secrecy of the the stress tests (which don’t seem very stressful!) is at the crux of Karl Whelan’s comment that we STILL don’t have a fecking idea just how insovent the banks are (and I am including banks all over europe!)

    Finally, what’s the bloody use in having equity in insolvent banks?

  51. Mark Dowling Says:

    I can understand (from a human rather than an economic point of view) why Anglo was not closed on Cowen/BL’s watch. Not only did the government fail to plan for the possibility of something like this happening by having resolution legislation enacted post-Lehman’s, the implosion of a major bank would have been grounds for the instant resignation of Lenihan if not Cowen himself. Now we have resolution legislation, we have the deposits shunted out of Anglo and there is a change of government so the current ministers cannot be deemed politically accountable for the failure to supervise Anglo. The inexplicable part is why the new administration is not grasping their one chance to make significant changes to how the Europe-Ireland relationship is unfolding. Perhaps closing Anglo is too big a step to contemplate, so why not wind up INBS instead?

    As Voltaire might have put it (if he wrote with the aid of Google Translate) “dans ce pays-ci, il est bon de mettre de feu de temps en temps aux obligataires pour encourager les autres”

  52. tull mcadoo Says:

    grumpy,

    not sure you are totally correct on that one. FG campaigned on a policy of quicker adjustment with the emphasis on spending allied to a spurious fiscal stimulus. Lab campaigned on a policy of putting off the evil day. How these are to be reconciled remains to be seen.

  53. Joseph Ryan Says:

    @Tull
    re

    Are there any takers for an emergency budget with 10-15bn in fiscal tightening now. Then we could right our own terms.

    Absolutely. As the prospect of not paying either bank or State debt comes closer there is or there certainly will be no choice except to live on our own resources. I may disagree very much with you on the kind of budget required to achieve a primary surplus but an immediate primary surplus is now almost essential for survival of the nation.
    The alternative is a survival of the fittest contest. The economically weak will lose such a contest but the biggest loss will be that of any remaining sense of national solidarity. A first world Somalia might seem an absurd notion at this point but a few months of no public sector payroll and no banks could bring it a lot closer.
    Far better an organised retreat than ‘a races of Castlebar’ scenario.

  54. David O'Donnell Says:

    @ahimsa

    ‘… The debate would more helpfully be framed in terms of ‘citizenry of europe’ versus ‘banks operating within europe. … what’s the bloody use in having equity in insolvent banks?

    Realist on the blog! (-;

  55. ahimsa Says:

    The whole reason the ECB is seemingly intractable on bank affairs here is because they are not our national affairs, rather they are the tip of the iceberg when it comes to european wide bank affairs.

    Also, why is Italy consistently left off the list of Greece, Ireland, Portugal & Spain?

    Oops, is that because it might be Too Big Too Mention?

  56. Eamonn Moran Says:

    Tull and Joseph I am also with you guys (more for Josephs reasons). We need rapid and massive fiscal tightening.
    We would have had to do it if we had made the right choice in Sep 2008.
    We would have had to do it if we wanted to avoid the IMF/EU bailout.
    We still have to do it. But all the while private losses get transfered to the public purse and the size of the eventual bill to the sovereign increases.
    However since no party expressly called for it (although Sinn feins Economic policy would have lead to it) Grumpy is right. But no matter how much we try to avoid it. We will be forced to live within our means. I have a feeling that day will be forced upon FG and Labour sooner than they dare believe. And when mammy Ireland is forced from her high horse she will have a long way to fall.

  57. The Alchemist Says:

    How would the EFSF get its money back in this scenario? At the end of the day, it is all about cash. The current market value of the main banks is what? Less than €1.5bn at a guess? Unburdened of debt, in a recession struck economy, would they fetch much more?

  58. hugh sheehy Says:

    @ahimsa
    I think you’ve misunderstood me.

    My point is indeed that many banks are in trouble and that the taxpayer, from whichever country, should be a last resort and not among the first resorts.

    Unfortunately, that’s not the path govts have chosen and the further we go down the path of “taxpayer pays” the bigger the political and nationalistic stresses will become.

    Real political stresses would make a bit of financial stress look like a garden party with pimms and cucumber sandwiches. We, and the politicos, need to avoid that outcome.

  59. DOCM Says:

    Listening to the interview with the Austrian finance minister on RTE radio just now, it struck me that it should prove to be a sobering experience for those who still believe in free lunches. It was clear that the “proposal” the rest of the Eurozone are awaiting from Ireland is on the lines of that agreed with Greece, including State asset sales. That should make for an interesting Cabinet discussion.

  60. ahimsa Says:

    Asset sales are recommended for states but not for banks?

    Further rape & pillaging of the public to subsidise banks and the international fincance class?

    Banks eschew mark-to-market common sense and hide their bubble priced assets away from view, doctoring their books with mark-to-model nonsense.

    Flann O’Brien couldn’t make this stuff up.

    @ DOCM the austrians have their own shit storm brewing with Bank of Austria (largest bank in austria, largest western bank in eastern europe) exposure to eastern european bad debt.
    ps. bank of austria is owned by unicredit, italy – see link in previous post

  61. ceteris Paribus Says:

    “The sale of the two big banks, AIB and Bank of Ireland, to international buyers is recommended. The group calls for Nama to be reviewed as it has failed to meet its objectives.”

    As one of your commentators said above the Irish Banks will not regain credibility any time soon and selling them to international buyers is pie in the sky having, in the case of AIB, sold the jewels in the crown to Santander and in the case of BOI sold dud equity to investors.
    One has to wonder about the wise men.
    The Santander deal was the worst strategic decision in this whole debacle.

  62. Colm Brazel Says:

    @DOCM

    I think you’ve struck the nail on the head. “It was clear that the “proposal” the rest of the Eurozone are awaiting from Ireland is on the lines of that agreed with Greece, including State asset sales.”

    We should maintain a chicken and fox attitude to negotiations. They want their money back. Germany made rich pickings from the Irish middle class who bought its beamers and potentially could pay its loans. Now the business plan is to protect the loans it sent to the Irish.

    We shouldn’t be surprised they want to strip the Irish state of its resources that can be sold to ensure Irish loans are repaid. We shouldn’t be surprised if they can extend a bailout to us of €85 bn based on our analysis of the cost of bailing out our banks, but only as quid pro quo they exact a penal rate of interest to provide for their risk taking.

    We should analyse though whose gaining from the bailout, here’s the answer:)

    1. The banks and the Irish financial Nama class that got us into the mess.

    2. The Croke Park agreement, let the party continue.

    3. The German bondholder banks, The ECB, The IMF

    Who will pay for it? Irish citizens including the Irish middle class who will see the social fabric of this country ripped apart.

    Part of the analysis should include a quick evaluation of the merits of putting up with the rubbish likely to be tipped onto the table in these negotiations, or, whether we have the vision to do an Iceland on the ECB and force the ECB through default, to pay for its own mistakes.

    This means leaving the EZ with a puntNUA or rejoining sterling. But are there too many ‘fumblers in the greasy till’ to even contemplate that, never mind allow it to happen.

  63. Gavin Kostick Says:

    @ Paul Hunt

    “And I think you’ll find a chapess in there. But that’s not the point. The gender composition is irrelevant; the intent is.”

    There is one indeed, her photo is seperate and smaller in the print version, so I missed it.

    This is not really the thread for it, but I do actually think that the nature of the crisis is overwhelmingly masculine in its personae, its formation and its playing out. An “Ireland First” type set-up, if it is serious, should be pulling from a much broader set of experiences and thoughts.

    The plucky Icelanders have the right idea.

    http://www.nordiclabourjournal.org/i-fokus/in-focus-2011/gender-equality/article.2011-03-06.9542989835

  64. ceteris Paribus Says:

    Mr Kenny said he had always held the view that it was unfair for the taxpayer to pay for the consequences of reckless banking

    “The economic burdern is very severe. No further monies will go into the banks without some sharing. My focus is on getting an improvement in the terms of this deal.”

    looks like the focus is on bondholder burning.

    If no further money is going into the banks is it the case that they will be legally insolvent after the stress tests or even before.

  65. David O'Donnell Says:

    South Africa win by 131 runs vs Ireland.

    Now for a final crack at the Dutch Roight!

  66. Mickey Hickey Says:

    I must be missing something here. It appears to me that the banks are in a de facto negative equity position even if the notional market value is positive. The notional market value is based on a continued supply of 1% or less funds flowing from the ECB or rescue funds through the Irish Gov’t (on the hook for repayment). We are on notice that the near zero interest rate gusher will be shut off. Swapping debt for equity is a misnomer which truly means swapping debt for more debt. If the equity can be sold off then the proceeds would be used to compensate the bondholders. Push the banks into receivership by shutting off gov’t support and let the market decide what they are worth and what compensation the bondholders receive. The ECB may or may not decide to fund an orderly restructuring. One thing is sure it is past time that the Irish Gov’t stopped the hemorrhage of taxpayer cash to banks that have failed. The country is not competitive on rents, wages, labour laws, regulation, governance. We have been reduced to the one trick pony LCTR competing with Cayman Islands, Bermuda, Costa Rica, Panama, Lichtenstein and their ilk. We are the proud bread in the Dutch sandwich. We are obsessed with LCTR, unable to see that LCTR alone is for losers and people devoid of imagination and busines sense. The easy way out, the scam that might work that is where we stand right now.

  67. DOCM Says:

    @ Ahimsa & Colm Brazil

    To be, or not to be: that is the question:
    Whether ’tis nobler in the mind to suffer
    The slings and arrows of outrageous fortune,
    Or to take arms against a sea of troubles,
    And by opposing end them?

    It did not work very well for Hamlet and will not work for Ireland. Leaving the euro would be a disater for the country. (Whether it was wise to join in the first place is another matter). One of th economists on this blog might volunteer a short essay on the consequences.

    OR, we can do the sensible thing and do what I suspect we are doing: negotiating a form of restructuring, to include raising capital through the sale of State assets, as the Greeks have done, in order to make the situation “manageable”, to use a word that was in vogue some months ago.

  68. ahimsa Says:

    @ DOCM

    Selling STATE assets to pay PRIVATE debts is sensible?

    Tell me, would you sell your personal assets to pay off enormous debts of your local bank manager? That is what we are being asked to do. More the fool you if you would.

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