The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
His ICMBS speech is here.
looks like the Governor has nixed the Noonan plan –
“If the shortcomings of financial engineering were a main cause of the global crisis, yet contracts tailored with its elementary techniques still have the potential to transform the financial viability of stressed borrowers. After all, official creditors have now taken on the burden of holding the majority of Irish debt – at least so far as the State and the Irish-owned banks are concerned. Could there be financial instruments that are better adapted for both sides of the transaction? Among the suggestions that have been made here are GDP-linked bonds, tail risk insurance and even bank equity. To the extent that it is the fear of anaemic economic growth challenging the capacity of Irish borrowers to service debt, then for example converting some of this official debt into a form whose return is explicitly linked to economic growth, could reduce the risk of borrower stress, while offering upside potential to those lenders. Alternatively, the provision – for a fee – of guarantees or insurance to banks or their lenders by official funds with the capacity to absorb credit risk could ensure or restore bank access to funding.
Of course such solutions are not as easily taken off the shelf as plain vanilla lending. In particular any insurance contract is beset by moral hazard problems. While these could be addressed, unfortunately no pre-existing template exists for intergovernmental arrangements of this type, and most observers are sceptical that one could be put in place soon.
If so, we must work with what we have, and that is the policy strategy worked out for the IMF-EU Programme. It has two main elements, which essentially continue and deepen existing policies.”
So is this stick to the memorandum?
“The direct lending by the Central Bank of Ireland is of course carried out with the prior knowledge and approval of the ECB: the suggestion sometimes heard, that the ECB might be about to cut-off the Irish banks, is very wide of the mark. They hope, as we all do, for faster progress towards restoring the confidence of the market in Ireland and its banks; but that is a very different matter.
All central bank lending to banks is collateralised, whether by other financial assets of the banks (with appropriate haircuts), or by Government guarantees. But inasmuch as almost all of the central bank lending has gone to repay bank liabilities that were already guaranteed, this process has not increased overall Government obligations. (It’s important not to double-count here). Indeed, the quantum of Irish Government guaranteed bank liabilities has diminished substantially over the past year.”
I can’t tell the difference between what the good governor has described and the actions of an independent central bank issuing its own currency on the basis of backing from its government. What am I missing, or does the Central Bank of Ireland really have the power to issue euros?
cannot figure it either but he did mention a legal framework for it.
I guess another possibility is that the ECB has the power to delegate issuance of euros, and has chosen to delegate the power to the Central Bank of Ireland subject to a ceiling.
Perhaps you are right. If they can delegate 70billion euro worth then wouldn’t it be better if the CBI issued the whole lot (187b). At least we would not be wholly dependent on the kindness of strangers.
It has been dubbed QE-lite here but there must be some rules or regulations governing it. Eoin Bond any ideas?
Steady as she goes … within Hegelian constraints … and some useful clarifications ….
‘ … vulnerabilities through mitigants …’ – lovely turn of phrase.
From mendicants to mitigants … might catch on.
Wonder is Geneva significant?
CBI is printing electronic euros, taking long assets like RMBS and who knows, fields in essence theoretically, onto its books in exchange. One of these is the promissory notes which are written by the state. The state is the shareholder and liable for claims (euros) issued by CBI.
If you want to, you could think about that last bit.
“”This year, we are determined to present a stress test that will not only be more convincing to the market, by providing much more granular detail, but also be better insulated against surprises by using aggressive stress assumptions and modelling. The emphasis is clearly on determining appropriate capital levels to meet stresses. The higher capital required will be driven by this rather than from any increase in expected losses: to be sure the somewhat weaker economic growth projections now available would imply some increase in expected losses, but it is the stress scenario that is the focus of the present exercise.
We will seek to largely free the tests of any excessive expectations from Irish exceptionalism in loan-loss recoveries (over the years very few Irish residential mortgages have been foreclosed in downturns by comparison with the experience in the UK and US, for example: with the help of external consultants we are referencing experience in those countries – though not slavishly so – in the analysis that will lead us to choose new tougher capital levels for the banks sufficient to convince the markets. And less reliance will be made on extrapolation from recent experience.”
The stress test figures are gonna be mega. This looks and smells like a coordinated policy of pre-release of them: Sindo/SBP suggest the losses and capital requirements, then Honohan explains the methodology behind them, ie a UK/US-style residential mortgage loss model. This will actually go beyond even a worse-case-scenario.
I agree. Under effective reulatory and supervisory pressures (since the appointment of the Governor and Mr. Elderfield) the banks have been forced, kicking and screaming, to come clean about the past and the present. Now they will be forced to come clean about the nature and probability of the worst possible future. This is precisely what investors of ‘good money’ (whom we desperately need to engage) want to hear and see.
However, not surprisingly, the Governor was less forthcoming about economic growth prospects (which are key to servicing the debt that, inevitably, will be accumulated to act as a bulwark should this ‘worst possible future’ transpire. I find it a tad dissapointing that the Governor, whose prose is so limpid, nuanced and subtle, still falls back on the cliched ‘cost competitiveness’ and ‘wage competitiveness’.
This is the kind of language that causes serious discomfort to those of the left-wing fraternity within government and gives unnecessary ammunition to those with the bull horns without. It wouldn’t add much to his speech – or to those delivered by other senior politicians and policy-makers – if he were to highlight the deadweight costs, inefficiencies and the capture of rents and monopoly profits across all the sheltered, non-tradable sectors (both public and private) that are imposing unnecesary burdens on the economy, consumers and the tradable sectors. Prices are high because of these additonal cost burdens; and wages (and social welfare rates) are high to provide the disposable income to pay these excessively high prices.
This will actually go beyond even a worse-case-scenario.
What about the possibility of Dublin being hit by an earthquake like Japan has? Surely that should be included in a proper stress test?
And, of course, it is highly likely that Sellafield will explode in the next year, resulting in the whole East Coast having to be evacuated, which will cause a further collapse in property prices? It will be very remiss of them if that is left out.
And I forgot. A tidal wave is quite likely to come in from the Atlantic this summer and leave the entire Western seaboard under 20 feet of water. That must also be included if the stress test is to have any credibility.
And, of course, we must not omit the destruction of the tourist industry and its impact on hotel prices, when both Queen Elizabeth and Pope Benedict are lynched by angry mobs on their coming visits here.
Not forgetting the impact on land prices when a group of UCD scientists discover that eating the meat of animals fed on grass causes instant blindness and impotence.
And expect a further fall in house prices when the next ESRI Quarterly report estimates that emigration is running at 50,000 a day and that the only people still working are taxi drivers taking emigrants to the airport.
The whole thing is madness. It is simply an exercise in trying to eradicate Fianna Fail once and for all by claiming that that there was an enormous big financial hole that Fianna Fail kept secret. You could produce any figures you want for stress tests in any country by making your assumptions as absurd as you want. No wonder Ollie Rehn says that Noonan is talking through his rather large backside. I hope that Ollie Rehn will call Noonan’s bluff and put an end to this charade.
The most interesting comment of the night for me was Velasco’s (former Chilean £F Min) comments on timing. He said that those countries who sought restructuring of their own accord (unilaterally?) before they had no choice usually did better.
This was a surprise for me. I thought (for no good reason) he was going to say that the fecless debt averse countries who say they cannot pay before people really believe them do worse.
Therefore people who say that only the sheltered few can contemplate default now should consider whether their alternative amounts to something far worse for the unsheltered masses.
We are in the middle of one of the largest plates so the risk of earthquakes is fairly remote.
As an east coast surfer I can testify to my annoyance that there are virtually never any decent sized waves on the east coast.
Sellafield is safe from the type of threat that has caused havoc in Japan.
Oh and it is not at all uncommon for waves much much bigger than the Japanese wave to break off the west coast of Ireland.
You obviously are part of Brian Lenihans school of thinking when it comes to maintaining confidence regardless of the realities.
The problem with that is that people end up sounding like Chemical Ali and loose credibility.
If it is going to be government policy to reveal the true level of our bankruptcy then that puts in a better negotiating position with the EU/ECB with regard to burden sharing. Given the sums involved it more than out weighs your concerns about Micheal Noonan exposing himself to Ollie Rehn
But if it is an exersize in trying to eradicate FF once and for all by exposing the truth then they have it coming.
As is so often the case comments are diffused among threads. Mine on the previous thread:
might be relevant here.
But more to the point, if Ireland was not a member of the EU and the EZ, it would have had no option but to go directly to the IMF in Sep. 2008 – or shortly afterwards. Non-EZ, EU members went down that road. That’s where I would agree with Senor Velasco.
But we closed that option off – or had it closed off – after Sep 2008. We are now in the treatment room with the IMF in attendance. We are in no position to discharge ourselves. If we declare an intention to do so, or seek to do so, we are attributing extremely malign motives and intent to our EU partners.
If we truly believe this, then, yes, we should leave.
The problem is that, while it might be easy to fool people who read this site or who rely on the Irish media for their information, Ollie Rehn seems to wise to what is going on. So, if/when Noonan comes to him pleading bankruptcy and, in best MOPE fashion, claiming that the economy is in total meltdown because of his evil predecessors and that he needs help to escape from the mire, Rehn may well point out that (a) the balance-of-payments is in surplus (b) the manufacturing and export sectors are booming (c) the economy is growing (by how much we don’t know, but in Q1 to Q3 of 2010 at roughly the same rate as the EU as a whole) (d) the budget deficit is falling (e) the emigration estimates were clearly greatly exaggerated, and tell him to catch himself on.
@Eamonn Moran – Chemical Ali – an excellent characterisation of JTO. He has been telling us for ages how everything is better than it looks, yet it keeps getting worse. When statistics come out, like yesterday, that don’t suit him he simply goes on a tangent.
Well JTO – do you think the numbers of delinquent or defaulting mortgages won’t impact on the banks?? No doubt you believe that there are none? Do you think the increase in the unemployment rate is going to reduce the number of delinquent or defaulting mortgages? No doubt you believe that the CSO got it wrong and there is going to be a huge downward revision. Why do you think the banks have had to get 150 bn from the ECB and ICB? None of this has anything to do with migration forecasts, it has to do with simple fact that there are lots of people out there who can’t afford to pay their mortgage, who are unemployed, under-employed or who had to take a pay cut. It has to do with the fact that huge sums were sunk into developments that were never going to be occupied because of the greed of some, facilitated by an incompetent government. Perhaps your lack of understanding is explained tby he fact that you live in another jurisdiction.
In fairness to Comical Ali (the hapless Iraqi PR man) he should never be confused with Chemical Ali, who wasn’t at all funny.
The Governor says
‘But when it becomes clear that banks have made substantial underwriting errors across a wide range of their portfolio to the extent that began to become evident in late 2008 and early 2009, the range of uncertainty balloons out. Standard valuation practices that work for properly underwritten loans in normal times are ineffective in such an environment in predicting the enormous systemic losses that can occur’
Indeed. But those ‘errors’ were systematic, cumulative and in many ways deliberate. They reflected a process in which professional standards were remoreslessly eroded. The looting, an that is what it was, was conducted by a burgeoning network of respected profesionals within and without the banks.It wasn’t the only looting going on, but it set the standard for conduct more generally.
Paddy advised Mickey on a deal, but he wanted a slice for himself. Johnny did the paperwork, but he wanted in as well. Tommy and Stewie were needed to put a professional look on it, so they had to get a get a slice of equity too. Corners were cut, and conflicts of interest abounded. Business was flying.
The dead whales are really fouling up the beach now. The Governor’s problem is how to get the carcasses buried without the public ever finding out how widespread was the rot, and how many of our leafy suburbs were rotted by it.
Kidney calls up Ajai to fill the risky full-back position for the Kroke .. er .. Aviva match this weekend.
‘Very sound under the high ball’, noted Kidney, ‘and very experienced in handling stress-filled situations’. The Department of Foreign Affairs has issued a communique, via Rioters, that the new passport will be delivered on time, and under budget, by kick-off time.
“ie a UK/US-style residential mortgage loss model. This will actually go beyond even a worse-case-scenario.”
If FG alter the bankruptcy laws and the extend and pretend strategy gets interrupted, it might just be being sensible.
Honohan has now accepted he was too sanguine about the CRE valuation story he was told wrt nama by people at the CBI. I wonder to what extent this plus the legislation to allow downwards rent reviews is going to be realistically factored in?
We don’t have to believe anything whatsoever malign about our EU partners to want to protect ourselves from them. All we have to believe is that they will generally behave as if their interests are more important than ours.
Agreed. But this is the challenge. That the EZ banking crisis will be resolved only when there is a recognition of shared interests.
The Irish sovereign is out of the bond market, but everyone else in Ireland who needs access to the international capital market is also being shut out.
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