Paschal Donohoe: Why the 31st Dáil Should Not be the Default Dáil

Drawing on the international literature on the costs of default, newly elected Fine Gael TD Paschal Donohoe has written an interesting pamphlet on the option of a unilateral default (see here).   Whether you agree with his conclusion or not, it is great to see people of Paschal’s calibre in the new Dáil.

The pamphlet is referenced in Daniel McConnell’s article today in the Sunday Independent (see here).    Daniel comes out strongly for a default-now position.    He draws heavily on the Prime Time programme on default in supporting this position.   One of those quoted is Philip Lane.   Not too surprisingly, the short snippets that could be used in the report do not do justice to Philip’s nuanced position.   If you haven’t had the opportunity to view Philip’s interview, I think it is well worthwhile to view in full.   While recognising the seriousness of the situation, I think he gets the balance just about right (full interview here).  

72 thoughts on “Paschal Donohoe: Why the 31st Dáil Should Not be the Default Dáil”

  1. Restructure banking system debt now_ish or full sovereign default in short_ish term are ONLY options …

    Not great options are they? WAKE UP! Sane citizien-serfs have been banging the dust-bin lids now for more than long enough.

    @BL

    Sindo has just reported that ‘collatoral damage’ to Irish serfs is manageable, and that all dissidents will be ‘taken out’ by the ‘true blue upper-echelon coalition’ most of whom have moved off-shore for the safety of tax-purposes but whose private jets are available to enforce the no-default zone over Hibernia. Those in vicinity of certain blogs are legitimate targets, apparently – and the first to be ‘taken out’. Nicky Malvinas has promised an aircraft carrier which is presently cruising off Skibbereen, and Angie is supply_ing the stocks, whips, chains and other tripleA austerity paraphenalia for the Irish serfs at the knock down rate of 5.7%, to be paid by descendents of present serfs in fullness of time. Happy days in Delusional_Land …

    Blind Biddy is off to Bahrain – she reckons the serfs there need a hand – ‘there are none so blind as those who will not see’ says she ………

  2. Philip Lane will not be pleased to learn that everything he said in that interview made perfect sense to me. He might have ducked the “what’s the worst that can happen?” question but I suppose that was out of concern for the sensibilities of his audience.

    DMcC’s statement that Ireland has the EU and the ECB by the b*lls, is so, so off the mark. The silly aphorism “you owe the bank 40K, their problem etc.” is in a similar vein and is a blind denial of the fact that we need the IMF/EU simply to get through another day and not just on the fiscal side but on the banking side, as without their continuing support, our banking, financial, social and economic systems stop dead.

    The populists want to portray this as a debate between the macho defaulters and the cissy non defaulters. Very few are ideological non-defaulters. The questions are “if, when and how”. PL makes it very clear that these questions can only be answered with the co-operation and agreement of the EU/ECB.

    I really can’t understand how any serious economist or financial journalist can argue for a uniteral approach to default. The FG manifesto argued for a uni-def but a couple of weeks in office and they have accepted reality.

    Of course, the likes of David McWilliams, Prof Lucey, Comrade Gurdiev etc. have the luxury of being able to ignore reality and peddle their populist delusions.

  3. @ John McHale

    An outstanding interview with Philip Lane. Thank you for the link. It is such a pity that it was not broadcast in full instead of the Prime Time programme.

    The only thing that is missing from his assessment of the elements to be addressed in the context of “financial diplomacy” is the fact that the rates agreed for the EFSF were made punitive on German insistence on the basis of a mistaken analysis of how it would work. The risk of moral hazard is clearly much more limited than the presumption.

    This error need not be faced up to directly as long as there is only one country – Ireland – enmeshed in the EFSF machinery. It will have to be if Portugal is forced by the markets to seek assistance, a fact of which the markets are fully aware. This is the one element that could change the timeline envisaged by Philip Lane.

    Among the many pearls of wisdom in the interview I would mention the statement “making policy by analogy is not the way to go”. This is a message that should be taken to heart. He also succeeds in explaining the interlinked nature of the banking problem but at the same time not exaggerating Ireland’s negotiating leverage. We have a choice between bad, very bad and disastrous. The new government is hovering at the mid-point at this stage.

    The domestic political question is whether the aura of contradictory hysteria in the pages of the Sunday Independent will have a real impact. Arguing for default and at the same time decrying the payment of increments – with borrowed money – to public servants may make sense to the editorial team of the paper but it is to be hoped that it will not make sense to the average voter. It certainly will not make any sense to the leaders of other countries.

  4. Ah and there we were all worried youd left Brian Trees r us. good to see your still there urging the hardworking taxpayer to keep digging deep for bankers.

    “the likes of David McWilliams, Prof Lucey, Comrade Gurdiev etc. have the luxury of being able to ignore reality and peddle their populist delusions.”
    Extraordinary populist delusions and the madness of crowds I think you mean…?
    Do love the ad hom swipe at Dr C G. Im sure he gives a damn somewhere… And btw : peddle, as in sell for eurobucks or peddle as in something else? Just want to be clear…?

  5. I lost a long post there earlier. I don’t have time to rewrite it. Main points were as follows:

    – Ireland’s duties to preserve stability of the international financial system are arguably more important than its relationship with the EU.
    – It takes two to tango. If we go up a blind alley with the EZ/EFSF then history and other countries will hold it against us.
    – If debt is unsustainable, the longer you leave it the worse it becomes.
    – The EFSF loan and other bilateral loans have allowed the lenders to get a veto on drawdonw IMF loans under the principle of assurance of finance.
    – Persisting with a plan which plainly will not restore stability is arguably ultra vires the IMF. We should not partidipate in such a plan.
    – FF should commit now to support any initiative by the Govt to unilaterally initiate restructuring which the Govt may decide to follow on foot of advice it has received.
    – Any such restructuring should involve creditors in a transparent framework to mitigate against accusations of debt aversion.

  6. That PL Interview made a few things ‘certaintly certain’. The Euro crowd know exactly what is going to happen to the global financial market system – its going to go ‘meltown’ – in carefully, fully scripted, syncronized SloMo.

    This is what some contrarian commentators have been banging on about since about 2004. The extradordinary levels of credit then being created (and with little letup up to the present day)on global spreadsheets would morp into such a massive level of an incrementally increasing debt burden, that no economic ‘growth’ pattern could conceivably keep pace. In effect, the Marginal Product of Credit has gone negative!

    So the ‘global financial firemen’ – like their counterparts in Fukushima who trashed the reactors by cooling them with saline, are pouring liquid money into an overheated, unstable, global financial reactor. They are trashing it. What would Milton have said, I wonder?

    If oil price had stayed below $70/bl we might have managed. If it hangs above $90/bl for an extended time frame…..! At this latter level the ‘feed-thru’ into essential commodities is guaranteed and will significantly and negatively impact economic activity. Modern economies feed on a diet of credit and energy. Credit has gone sour. Energy is looking a tad iffy also.

    BpW

  7. Thanks John, seems like rational and measured analysis by Philip Lane. It appears to me that there’s an important point that isn’t addressed or asked. That is that by continuing down the ‘lets tease this out with all the stakeholders’ road, the worse our hand becomes and more we have to tease this out with all stakeholders.

    Perhaps that’s where the powers that be want us, with just sovereign/ guaranteed bank debt and state guaranteed liquidity. aka at our weakest.

    On analogies and Dave McWilliams, his article today was the most labored yet, moats and castles, such rubbish. While I’m venting, the cheek of him on Prime time the last night, harping on about reneging on the guarantee without even acknowledging his involvement in and/or championing of its inception. At least we could vote FF out, I wish we could do the same with him and a few others.

  8. @zhou

    “Any such restructuring should involve creditors in a transparent framework to mitigate against accusations of debt aversion.”

    would you default first on:

    a guarantee that “provides for an unconditional and irrevocable State guarantee for certain eligible liabilities”

    or

    an agreement which shall “not apply should there be any unforeseen budgetary deterioration”

    There is lots of popular support for the first, less so for the second. One is banged on about in the mainstream media constantly, the other hardly at all.

    I find the argument that the unguaranteed senior debt should be effectively given, gratis, now while the country is bust, a state guarantee one of the most laughable propositions I have heard.

    The ELG stuff is another thing entirely. If it is defaulted on – and maybe it should be – then you have to be aware that the market reaction will be unambiguous if it is done while trying to persuade the market it is OK to Keep CP, have extremely highly paid elements of the domestic and state economy, keep the national minimum wage, leave Bertie’s pension largely in tact…and all the rest of it.

    It would tell foreigners a story about Ireland and Irish attitudes that may not surprise the Irish, but will surprise many that fell for the guff of the celtic tiger years – and will be reflected in risk premia on subsequent borrowing. David McW is in my view wrong about this – the idea that “the markets have no memory”. Maybe it applies to the HFT servers at the Squid but not to most investors.

    The straight way to play it is the internal adjustment / “default” first, get rid of the (frankly a bit embarrassing apart from tactically ludicrous) primary deficit – and then default. No real complaints follow that.

  9. @ Prof Lucey

    Taxpayers haven’t paid a cent to anybody in this banking crisis. Plenty of guarantees and promissory notes. Maybe when it comes to honouring these we should seek agreemnet form the EU/ECB to welch on them. Are you listening to Pl? Now is most definitely not the time to unilaterally default, do you agree?

    I apologise if Comrade Gurdiev takes offence at the allusion to his national origins, no offence intended.

  10. @grumpy

    I was mostly with you until the end. Having done the very difficult lifting to produce a primary surplus, and hopefully having stabilised the debt ratio, I can’t see that it would be wise to trash our reputation at that stage. I know we have been over the “rational default” arguments before, but the fact is that industrialised countries with high debt ratios and primary surpluses do not default.

    On your point about the unguaranteed bank debt. I know I have somehow managed to become a poster boy for not defaulting. Yet I was arguing early on for being prepared to impose losses on unguaranteed seniors after the original guaranteed expired last September, with a focus on the practicalities — notably a proper resolution regime — of making it actually happen.

    We now have to face a couple of realities. We are almost unimaginably dependent on the ECB to prevent a banking system collapse. And not just on the actuality of that support, but reasonable confidence that the support will remain in place. On a straightforward cost-benefit calculation, is it worthwhile at this stage to risk the perception of reliable ECB support being undermined?

    Now that Anglo and INBS are in wind-down and without depositors, I think there is a good chance that the ECB will alter their stance on these two former banks, and we should be diplomatically encouraging them to do so; but I think the risks are too great in forcing the issue at this stage with unilateral action.

    For the two main banks, it is possible that the stress tests will reveal losses that will eliminate all their capital (including the State capital), with this being more likely for AIB. It is a pity that we still do not have a proper resolution regime in place. With all its overreaching in some respects, the emergency Credit Institutions (Stabilistation) Act is not, as far as I can see, equipped to impose losses on seniors. Any special resolution is a balance between protecting the taxpayer and depositors on one side, and respecting property rights on the other. I don’t expect that an issue such as respecting property rights will get much of a hearing from the defaultinistas that prodominate in comments on this blog — with some very honourable exceptions, yourself included. But these are the things that real world policy makers (and responsible commentators) must grapple with.

  11. DOCM, Celtic Phoenix, Brian Woods and Zhou

    Thanks for taking the time to view Philip’s interview; I hope others will follow your lead so that some perspective can be gained in a debate that I fear is slipping away.

    @DOCM

    You raise an important point about German concerns over moral hazard and its implications for the interest rate. In another good article, Colm McCarthy made the important argument today that we should be willing to credibly embrace regulatory discipline (my term) in return for what Germany would see as a weakening for market discipline (and also the “desuasive” effect of higher interest rates). While I am very sceptical about going down the constitutional route — can you just imagine the referendum debates? — introducing a debt brake or other forms of regulatory discipline should be embraced as part of the quid pro quo of a set of measures that give us a fighting chance of regaining market access.

    http://www.independent.ie/opinion/analysis/bailout-has-fallen-at-first-hurdle-2586461.html

  12. @ John.

    I live in the mighty Dublin Central constituency. I went for a cup of coffee with Paschal Donohoe a little while before the election campaign. I asked him why he was a FG member and he was very interesting on the subject. He talked about how he was not born into the party, about reading Adam Smith (not the Wealth – an earlier work I think) as a teenager, the integrity of FG party members in the 80s, and a sense of getting involved with something for the betterment of society. He knew, I think, that he was very unlikely to get a vote from me for political reasons, and we were meeting about other matters.

    The point is that it was an unusually high-minded and thoughtful, if self-effacingly phrased, answer to what was a pretty basic question.

    We then talked a bit about economic comentators worth listening to and Karl Whelan came out well. I was intruiged to note Paschal charing the meeting at which Karl give an over-view of the calculation of the loan rates and what might prove flexible. I would say that now Pashal has set out his stall, he will have an open door to further engagement.

  13. @BWII
    “Taxpayers haven’t paid a cent to anybody in this banking crisis. Plenty of guarantees and promissory notes.”
    You’re 11 billion euro short of a dollar…

  14. @John McH

    “Having done the very difficult lifting to produce a primary surplus, and hopefully having stabilised the debt ratio, I can’t see that it would be wise to trash our reputation at that stage.”

    This bit:

    “The straight way to play it is the internal adjustment / “default” first, get rid of the (frankly a bit embarrassing apart from tactically ludicrous) primary deficit – and then default. No real complaints follow that.”

    was meant to read that if you do all that and then it is apparent to objective observers that the debt burden is unsustainable – then default, restructure, reschedule or whatever.

    I suppose its the contrast between “default out of necessity” as against what Penfold, er sorry – Osbourne, might call “default as a lifestyle choice” or “default because we are cleverer than you and can work out it would be inevitable anyway even if we really gave this austerity mumbo jumbo a go”.

  15. @grumpy

    I get you now. Clever.

    There is an important paper in the default literature by Grossman and Van Huyck (AER, 1988) that makes a distinction between excusable and strategic defaults, with an emphasis on the very different impacts they have on reputation.

    http://www.jstor.org/pss/1807168

  16. There seems to be at least one common thread to the ‘no default argument’, namely that we need to be good EU citizens. The other common argument is that the consequences of default will be awful: in particular, we will have to run a primary surplus (involving even bigger budget cuts) and ‘be shut out of the markets for 5 years’. So, be good boys, and we will see private sector lending resume within 5 years. OMG.

    Nowhere do I see the argument that we should not default because there is, in fact, a reasonable projection of fiscal capacity to repay the debt.

    Of course, the default option will be exercised simply because there is no fiscal capacity to repay. As Dario Fo put it: ‘can’t pay, won’t pay’.

    We are currently shut out of debt markets precisely because those same markets know all this. And that’s the way it stays until our debts are forgiven or restructured.

    Why oh why do we keep worrying about a ‘potential collapse of our banking system’. What is it about our current system that does not equate to collapse? Some of you professors may have brains the size of planets but I sure don’t recognise which planet that is.

  17. @simpleton

    +1 for the n-1th time …

    p.s. most Hibernian professors take breakfast on pluto … check it out … unusually, they dine ‘under’ the tables, and silently (a tiny few around here excepted) …

  18. @simpleton

    “We are currently shut out of debt markets precisely because those same markets know all this. And that’s the way it stays until our debts are forgiven or restructured.”

    I don’t think that is entirely true, they don’t KNOW that, they don’t have to be that clever. There was a view in the markets that the country was deluding itself about both its banking losses and its structural deficit. In the summer Irish bonds looked a raging sell (CP had confirmed one delusion and the banking one which had started with the ridiculed blanket guarantee became more and more evident).

    It is now deluding itself only about the structural deficit. I think it is on the way to having markets understand that it is simply not willing to do much more to try to honour its debts. Nobody really knows whether very substantial further efforts would work fully or partly or not at all, but the market doesn’t need to be able to work this out to make a decision. It just needs to observe the popular national attitude.

  19. @ Hog

    Who did they pay 11B to? I understand they have injected some capital. Are you saying that capital is worthless?

  20. Anyone watching the week in politics? Roisin Shortall is talking ‘burden sharing’ and ‘canvasing support from America’. In fact the FF/FG/SF panel are having a total love in. All are agreed that the bank debt can’t be paid.

  21. @Celtic Phoenix

    Indeed. It had looked like the government were using a clever strategy: state a strong commitment not to default (implicitly acknowledging the costs of default are large) but also creating some doubts that things might spiral out of control given debt unsustainability, with echoes of the trembling hand idea from game theory.

    Listening to Roisin Shortall I am not so sure. Grumpy’s closing line above warning of the “popular national attitude [to default]” — and markets’ perception of it — is apt. Minister Shortall and colleagues may reap what they sow.

  22. @Celtic Phoenix

    Last week she said something to the effect that we hold a good hand -IT breaking news – cannot find it again.
    But she is going further now=”DUBLIN (Dow Jones)–Ireland’s minister for Europe said Saturday the new Irish coalition government will seek to secure a better deal on its international bailout loans and also negotiate measures to lessen the country’s “unsustainable” debt burden at the summit of European Union leaders next week.”

    Is she the stalking horse?

  23. @ John McHale

    Yeah maybe it’s a game of cabinet Chinese whispers gone/going bad, but things seem to be getting so definite that one would have to wonder what will be left to talk about with our European partners.

  24. @BWII
    “Are you saying that capital is worthless?”
    😀
    You jest, surely?

    Yes, it is totally worthless. Let’s value it on a few bases:
    1. For preference shares, coupon payments…. eh, nil.
    2. For equity, price and dividend. Price for BoI shares, bought at, what, 1.80? Current price, 22 cent. Dividends? Nil.
    3. Anglo, INBS, EBS cash payments, ownership with liabilities…

  25. @grumpy/John McHale

    I suppose its the contrast between “default out of necessity” as against what Penfold, er sorry – Osbourne, might call “default as a lifestyle choice” or “default because we are cleverer than you and can work out it would be inevitable anyway even if we really gave this austerity mumbo jumbo a go”.

    We recently heard from Velasco of Chile that countries that default earlier once it becomes clear that debt is unsustainable do better in the long run than countries that tough it out to the very end and are forced into default. A senior official from the IMF made the same point off the record recently. I am getting the impression that this is not a matter of controversy. The timing of restructuring is a big point to be debated.

    Commentary from the IMF to Willem Buiter to Martin Wolf says our debt is unsustainable under the current deal. As Colm McCarthy points out, the unanimity on this point amongst respected commentators is almost unprecedented. The markets agree.

    On top of this there are important legal and financial considerations in dealing with this now rather than later insofar as most of our debt is still currently governed by domestic law and we have some cash.

    It seems entirely reasonable to me for us to say to the EU that we have come to a point where either the deal is restructured immediately or we will have to force the issue. The fact that we might face into the difficulties and uncertainty that forcing the issue will cause shows that we are not looking for an easy ride but making a really tough decision.

    The EU/ECB has plenty of weapons in its armory to stop this – supporting restructuring of unguaranteed senior debt, buying bonds on the secondary market, restructuring their loans to Ireland, converting portion of ECB loans into equity and so on and so forth.

    @grumpy

    I agree re differences between unguaranteed debt and guaranteed debt. I dealt with it in the post I lost!

    CP has the capacity to deliver. Unions are more worried that management are not puching it and it will fail than that it will be implemented in full. CP is not a problem imho. If we do restructure then all bets will be off in any event.

  26. Colm McCarthy in his article has focussed on things we can give in negotiations and in the EX reform debates as well as things we can get. This is a worthwhile exercise. For the right deal we should be willing to give quite a lot. The real alternative is to go it alone and to be forced to pay by the markets.

  27. @Ceteris

    I think Lucinda is barking up the least advisable tree. Too direct.

    The tree up which the fake EU stress tests are hiding is the appropriate one.

  28. @Zhou

    I cannot agree that a preemptive, unilateral forcing of issue is the way to go.

    There is, of course, one major argument for doing so: The unguaranteed bank debt is maturing over time. Once paid it is gone; leaving the bill with the tax payer or possibly forcing a more reputationally damaging sovereign default (state bonds or ELG) down the line.

    But there are a number of arguments for not forcing things now.

    First, there is the real conditionality of the international assistance we are receiving. We are currently running a budget deficit of about one-tenth of GDP and are borrowing roughly the equivalent of GDP from the ECB/CBI. Simpleton might not see a difference between the banking system we currently have and a completely collapased system following a full-scale depositor run and an uncommitted lender of last resort; I think he would be in for a rude shock.

    Second, following grumpy’s point, there is a big difference between the reputational costs (both narrowly in terms of bond market access and broadly in terms of our trade and direct investment relationships) of a “strategic” default and of an “excusable” default. Given our levels of public sector pay, our tax take, etc., any pre-emptive action now would almost certainly be seen as strategic. (It is possible that real bank losses of Dukesian proportions could change that calculation.)

    Third, as Philip emphasises, we are still in early days of the troika programme, and there is real uncertainty about how things will work out on growth, bank losses, etc. I have put this more technically before by appealing to the option value of waiting before commiting to a default course given high uncertainty and irreversible costs.

    The Velasco/Munchau argument for pre-emptive action seems to be that a later default is likely to be more disorderly. I think they have this backwards. It is a pre-emptive, unsupported default that will be disorderly. EU-IMF-ECB support mechanisms will probably evolve with the crisis, possibly driven by Greek precedents. It could be possible to have a restructing along with continued offiical support down the line. As I have argued before, this is a double-edged sword, as expectations of a later lower-cost restructuring is scaring away private investors, and making the bailout mechanisms something of a black hole: they both drag you in and make it impossible to get out. There is certainly room for mutually advantageous improvement to the design. I agree with Colm’s approach of looking for for better substitutes that meet the legitimate concerns of the other side.

  29. @ Zhou
    “Commentary from the IMF to Willem Buiter to Martin Wolf says our debt is unsustainable under the current deal. As Colm McCarthy points out, the unanimity on this point amongst respected commentators is almost unprecedented. The markets agree.”

    But unfortunately the government and a few domestic economists and government advisors still believe that we are merely coming close to a point where it may become unsustainable.

    Pascal O Donohues article seems to suggest that we shouldn’t default because the consequences are large and unknown.
    But he makes one large mistake.
    He assumes that we have a choice.

  30. @zhou

    “It seems entirely reasonable to me for us to say to the EU that we have come to a point where either the deal is restructured immediately or we will have to force the issue. The fact that we might face into the difficulties and uncertainty that forcing the issue will cause shows that we are not looking for an easy ride but making a really tough decision.”

    What difficulties consequent to that have been outlined to the Irish public that you think they would be willing to accept? Did I blink and miss those debates?

    Argentina was generally viewed as dodgy – for all sorts of reasons. You didn’t buy Argentinian debt unless you didn’t know about Argentina, were a bit dim, naively believed in spread compression as an inevitability of globalisation, or LTCM-like – had a computer programme you didn’t realise you had coded up to believe in it for you.

    Greece was the same. Some bright spark would occasionally start going on about what great value the higher yields offered, but seasoned investors would generally expect that sooner or later they would either default or inflate. That was based on reputation.

    If your frame of reference is Argentina, it may appear that there is not that much to loose reputationally, and that defaulting early is the smart thing to do. The financial consequences of doing so – coincidentally at an excellent time to export your vast natural resources into a worldwide boom of historic proportions – might not weigh too heavily against a reputation that barely existed to start with.

    I don’t share the fairly view that most foreigners have about Ireland. They usually think it has quite a high reputation. Surveys say it isn’t corrupt. A contact in the building business recently contrasted some observations about different nationalities in his employ. They were humourous and not to be taken literally, but his only comment about the Irish ones was along the lines that as soon as they start a project the first thing they seem to think is “now what shortcut could I take here?”.

    I wouldn’t be surprised if Ireland decides to default on unconditional, irrevocable obligations. I know a lot of foreign investors would be though. I also know the Irish public have been sold a lie – that they have done all they possibly could or should to balance the deficit and that they can just default and carry on regardless. Their politicians have been woeful in this regard and most economic commentators ave been too shy of unpopularity to throw a bucket of cold water over everyone.

  31. @John McHale

    There seems to be a big judgment call as to when one can determine that restructuring is excusable. This seems to be at the root of the debate in relation to restructuring.

    This is a particular question which needs to be addressed. I am not convinced that cuts to expenditure must come before restructuring. I would expect them to be contemporaneous. I am also not convinced that public sector reform and redundancies must happen before restructuring. Restructuring and reform happen at different speeds and the formed shoud spur on the latter rather than the other way around.

    To my mind, we have already defaulted insofar as we gave a guarantee which we could not fund and the ECB stepped in and provided funds. This rescue mechanism was restructured to our detriment with the deal with the Troika. We are now looking for a further restructuring that makes our deal work as an IMF rescue deal should, i.e. it convinces the market to provide private funding.

    Unilateral action is not optimal and is to be avoided until it is the least worst option. However, where the domestic politics of other countries is blocking a multilateral deal, which should not happen with the IMF dealing with a respectable democracy in trouble, unilateral action may be all that is left open to us. Also, we should not value our sovereignty and autonomy too lightly.

  32. @grumpy

    I am not an expert as to when is the best time to default. However, it is clear that timing is everything in our current position.

    Is it valid to say that the net point raised by yourself and John McHale is whether the restructuring will be seem as excusable or as strategic?

    Whether or not investors will be angry is moot. The question is what will be the effect of their attitude will be to us afterwards.

    You seem to say that any restructuring now will be seen as strategic because we can do more to cut our deficit. That is one perspective. I am not convinced by it because if our Govt opts to go alone then it will be showing a willingness to implement all such cuts as they will become automatic.

    There are many reasons to think that a restructuring may be seen as excusable. For one thing, the IMF have all but said we are heading for disaster. Also, how we manage any restructuring, including the cuts we make domestically, will also impact on how we are perceived.

    Either way, I don’t think we should get to caught up in navel gazing or in focussing on negatives in our national character or in the way certain vested interest groups seek to serve themselves. It isn’t about what we think of ourselves or of the small businessmen adding the halfpence ot the pence. It is about how this matter is framed internationally.

    Also, we should consider the fact that the USA and others are desperate for the EZ sov debt crisis to be resolved quickly and convincingly before it spreads to them. If we are seen to act responsibly and to achieve a resolution, unilateral or otherwise, which puts the matter to bed and shows our bone fides then the markets and other investors might hold us in higher regard than they do now.

  33. There is also the argument that our fiscal situation is being undermind by not acting sooner. The more certainty brought to the country, the less people will bother reading Dave McWilliams and the more they’ll spend. In fact he’ll become redundant, that’ll be a good day.

    It really comes down to:

    When is default honourable?
    Do we trust our EU colleagues? Do we deserve their trust?
    How much will it cost us in long term funding and further reputational damage? vs. How much will we gain?
    How will these factors change with time?

  34. @zhou

    “Whether or not investors will be angry is moot. The question is what will be the effect of their attitude will be to us afterwards. ”

    Yield required. It will be made up of inflation expectations for whatever the currency is and a risk premium that reflects the uncertainty of the first item and the perceived likelihood of default on coupon or principal.

    “You seem to say that any restructuring now will be seen as strategic because we can do more to cut our deficit. That is one perspective. I am not convinced by it because if our Govt opts to go alone then it will be showing a willingness to implement all such cuts as they will become automatic.”

    Not really. I don’t think the politicians or the public think it will be necessary to eliminate the primary deficit. I think they both believe they can just say “look, lots of people think the debt burden is unsustainable. We have decided not to repay this and that. We need you to lend us more money, or for longer by the way – and you can forget about asking us to pay those kind of interest rates”

    They are clueless.

    “It is about how this matter is framed internationally”

    Yes. The banks are full of what exactly? That question is relevant if you want to go simply to the IMF – who are not very impressed with the “programme for government” as it is typical of slippage in these programmes. If you think the EZ are going to be involved then the question of domestic pay scales and the like is an inevitability of say, German agreement. The interest rates were set to try to persuade countries to get on with cutting primary deficits. Tell them to charge less and that you don’t see much point in austerity and they may be the ones telling you to go to the IMF.

    “Also, we should consider the fact that the USA and others are desperate for the EZ sov debt crisis to be resolved quickly and convincingly before it spreads to them.”

    If you tell them the way to solve it is by writing off large debts – then that is more or less the conclusion they don’t want to spread to them. They want more can kicking and they won’t be thanking you.

    Having said all that – don’t forget that I have consistently said the unguaranteed repayments were indefensible, the ELG from the start was foolish bravado and should probably be defaulted in part on after the deposits have been moved to new banks etc etc. I would ask you to bear in mind that if someone like me is now forced to effectively talk the other side of the argument, it just might be an idea for people to stop for a minute and think about whether the place really is prepared for the reality of what it appears to be drifting (in my view unprepared) into.

  35. @ Grumpy: “I also know the Irish public have been sold a lie – that they have done all they possibly could or should to balance the deficit and that they can just default and carry on regardless. Their politicians have been woeful in this regard and most economic commentators have been too shy of unpopularity to throw a bucket of cold water over everyone.”

    Thank you for this confirmation. And the new crowd have barely got their boots under their desks!

    What we have here is a hazardous, unstable financial system. Any engineer (financial or civil) will recommend shoring-up if this is feasible. This has being done. Next you bring up the SkyLifts and start to manually dismantle the overhanging bits: good progress is reported. Then you engineer a controlled demolition -minding the adjoining properties of course (wouldn’t want to much collateral (freudian slip) damage, now would we?. This needs real careful planning. Work in progress as they say.

    BpW

  36. @grumpy

    Obviously the tree where the lesser spotted stress test hides (perched precariously above the first tier of fruit laden branches) is a very good one to sit under and bark incessantly at but we have many dogs so more than one tree can be covered.

    Since rules based financial policy making is all the rage now it would be the most delicious irony if Ireland announced that it would have to default without a large amount of debt restructuring in a set timeframe as otherwise our important and utterly rigid national requirements for budgetary stress testing could not be met. If only the larger economies in the EU were as committed to transparency as we are they would understand. Tell me it does not bring a smile to your face?

    If you live by the sword fiscal hawks, expect to die by it.

  37. I’m with John McHale on this one.

    IF the full €35 billion available for the banks under the EU/IMF deal is used then the full cost of the bank bailout will be €81 billion. It is still only an “if”, I know, but it is the “worst-case” scenario under the current EU/IMF deal. We await the stress tests.

    Anyway, of this €81 billion it is likely that €53 billion will be funded from increased borrowings, €21 billion from the decimation of the NPRF, with the remainder coming from the running down some of our cash reserves.

    Even with a €53 billion debt from this banking fiasco I think that default is still an option rather than a necessity.

  38. @ Seamus Coffee
    “Even with a €53 billion debt from this banking fiasco I think that default is still an option rather than a necessity.”

    Just because we had some cash reserves doesn’t mean the extent of the banking fiasco is smaller.

    Language is important.

    So if someone says that the banking fiasco has lead to 53 billion of debt
    and another says that the cost of the bank bailout is 81 billion they would both be factually correct in the context you lay out but I would suggest that people who are against default are more likely to use the former and people who are arguing that default is unavoidable would use the later.
    I think wording it the way you did could be misleading to the public.

  39. @ Seamus Coffee
    “Why is this €53 billion of debt sustainable? If we assume an interest rate of 5.7% this would require €3 billion a year just to pay the interest – about 1/12 of Exchequer tax revenue.”
    Hi Seamus are you assuming that we will be able to access funding in 2013(when the 67billion runs out) at 5.7%? and also that we will not have to pay back the capital as agreed on the EU IMF deal?
    The current IMF/EU bailout deal says we must pay back 10 billion a year of the principle for 6 years starting in 2014.

  40. Question for Seamus Coffey, John McHale or indeed anyone who wants to address it: at what point does default become a necessity rather than an option? If the €35 billion becomes €50 billion does that tip the scales? If not, just what does it take? Th’auld camel is fairly heavily laden already.

  41. The following are the links to the two FT articles.

    http://www.ft.com/cms/s/0/27181784-53b3-11e0-a01c-00144feab49a.html#axzz1HEM2mVIZ

    http://www.ft.com/cms/s/0/32b76182-5343-11e0-86e6-00144feab49a.html#axzz1HEM2mVIZ

    Soros is absolutely right when he says that the issue is a political one but the risk of a two-speed Europe with Greece, Portugal and Ireland on one side of the fence and all the other countries on the other is not going to cause anyone in the main capitals to lose much sleep.

    As Philip Lane has pointed out, the markets hate uncertainty and the new Irish government has done its bit to contribute to that uncertainty by (i) the parties involved making totally unnecessary pledges during the election campaign and (ii) fudging the differences between them in the programme for government.

    As to what will happen next as far as Ireland is concerned! Very little in my opinion unless Portugal is forced into the EFSF. It may also be noted that the sale of state assets has finally made its entry on stage. These need not, of course, be sold overnight. Indeed, the might simply be used to provide an appropriate level of collateral for the bond purchases which John McManus and George Soros think a possibility but which Wolfgang Munchau dismisses.

  42. @KD:

    Good question. Answer lies with that chap, Einstein, I believe. All things are relative – just make sure you are taking your medication on a regular basis.

    Actually, the default count-down sequence HAS begun. Current progress is just a tad glacial, but will increase to above speed-of-light at the Event Horizon. You won’t even notice it 😉

    BpW

  43. German Finance Minister says he is “curious” as to what the Irish have to offer
    while Noonan says he is waiting for colleagues to come up with alternative proposal in terms of some kind of quid pro quo away from the area of CT – breaking news NYT.

  44. @ Eamonn Moran

    Wording is important but so too are facts. If a family buys a 200k house with a 20% deposit, I think most people would be able to distinguish between the 200k purchase price and the 160k mortgage. The sustainability of that decision will be based on whether the family can afford the repayments on the mortgage. The price will be something the neighbours will gossip about.

    The bank bailout has a cost and also has a debt. Neither can be used to forward one argument or the other. They are facts and should be used in the appropriate context. To explore the sustainability issue it is the debt that matters as we can only default on debt.

    If we use cash to cover some of the costs (€10.7 billion so far with another €17.5 billion projected) default is not an option as the money is gone and there is no creditor to take the hit. This also has little immediate impact on sustainability as there is no interest to service or principal to repay. This might be a little different when the P in NPRF begins to bite in a decade or two’s time.

  45. @ Ceterus Paribus

    “debt brake” + sale of state assets would be my guess. The Germans really want the debt brake, its a far more genuine concern of theirs than Sarko and his CT nonsense.

  46. @Eoin Bond

    Yes that would seem a sensible strategy – I see another report that MN is looking to resolve the ECB liquidity money problem on a medium term basis.
    It looks like we might get the reduction in interest rate but the ECB situation would be some coup if he can achieve resolution of this.

  47. @EB

    He may also concede on a faster pace of fiscal adjustment but not as fast as Grumpy would like. I think that might cause a kiniption among the Labour ministers and their bearded allies. Imagine having to stand over an emergency budget with further cuts in PS wages, employment levels and transfers.

  48. @tull mcadoo

    He may also concede on a faster pace of fiscal adjustment but not as fast as Grumpy would like. I think that might cause a kiniption among the Labour ministers and their bearded allies. Imagine having to stand over an emergency budget with further cuts in PS wages, employment levels and transfers.

    Transfers Tull?

    Is it not more likely that he will manage the adjustment by raising taxes? Not everyone revels in punishing the undeserving poor for the mistakes of capital.

  49. @ John

    “It is possible that real bank losses of Dukesian proportions could change that calculation.”

    Dukes is right and knows he’s right or he would never have intervened in a General Election. He has looked inside the cupboards and seen the skeletons. Handily the proof of the pudding is easy here. I predict that the bank loses are same or worse than Alan Dukes has indicated. The stress tests will come out, as heavily trailed, worse than could be possibly imagined – ie about where Mr Dukes said they’d be. Then after a bit we’ll find out they are worse again.

    I’m reminded of Hopkins – “No worst, there is none. Pitched past pitch of grief.””

  50. Munchau makes it clear that the buffoonery isn’t just confined to Dublin.

    http://www.ft.com/cms/s/0/32b76182-5343-11e0-86e6-00144feab49a.html#ixzz1HE9IU4D3

    “The second phantom giant is the renamed “pact for the euro”. It was supposed to change the fundamental operating rules of the eurozone by accepting the need for policy co-ordination in a number of new areas of macroeconomic policy. It took only a few days for this promise to be exposed.”

    “The fourth phantom giant is the promise of a comprehensive bank resolution strategy. The bank stress tests that are taking place this year have the same weaknesses as last year’s discredited ones. There will be no sovereign default assumptions for the banking book and, to underline the cynicism of the entire exercise, Germany has not even prepared for a new restructuring fund to deal with possible recapitalisation. Since Germany refuses to apply the capital adequacy rules of the new Basel III agreement, the banks are all very likely to pass the tests with flying colours. The readiness to keep repeating the same mistakes is astonishing. “

  51. Shay,
    Not every transfer is to the “undeserving poor”. According to joan Burton as recently as today, we have the highest Child Benefit rates in Europe. Of course there is a perfectly logical reason for that. We have the highest public service pay rates in Europe-again perfectly logical. We have.the highest..insert as appropriate..and again it is logical.

    None of these can ever be touched as i) they will reduce social cohesion ii) destroy vital public services iii) deflate the economy. Choose your reason.

  52. On the subject of debt brakes, as is often the case with Merkel (and Sarkozy) it is more smoke and mirrors than reality.

    http://www.msnbc.msn.com/id/41457818/ns/world_news-europe/

    Noonan, when doorstepped in Brussels today, stated that the stress test figures would not be as bad as the figures hinted at, the results would be available at the end of March and this was soon enough, or words to that effect, for the government.

    The Mexican standoff continues. But which side has no bullets in its gun?

  53. @Gavin

    Not sure I would draw as strong an inference from the fact he said it. Or, more weakly, the fact that he knows he’s right doesn’t mean he is.

    Even so, it does seem we are being prepared for some sticker shock (though I take a bit of encouragement from DOCM above). I have tried to make the point that we need to distinguish between news on real additional expected losses and injections needed to “overcapitalise” the banks. I don’t sense too many are listening.

  54. @Tull McAdoo

    According to joan Burton as recently as today, we have the highest Child Benefit rates in Europe. Of course there is a perfectly logical reason for that.

    Every time I think of much we value our children I too feel sick. Smother the little blighters before they ruin our competitiveness completely. Or perhaps eat them?

    There are some numbers here (and in the referenced OECD report) on child poverty in Ireland and Europe and the effects of Ireland’s generous child benefits system.

    http://www.irishleftreview.org/2011/03/01/irelands-child-povertyshort-term-thinking-long-term-consequences/

    Without child benefit child poverty in Ireland would be among the highest in the developed world. With it we do quite well, something we can all be proud of, unlike our bank guarantee.

    You might also have a quick google to see what austerity loving Germany has got for its devotion to social welfare reductions, competitiveness and part time work – child poverty that has increased even as Germany’s wealth has. Shameful.

    The pay of some of the public service is of course excessive and there should be collective losses from downturns as well as collective benefits from booms. However far more of the adjustment should come from the upper half of income brackets to help social cohesion, the Spirit Level and all that.

    Finally when you compare the damage done to Ireland by the astonishing payment levels of hospital consultants versus the damage done by slavish devotion to a low taxation, low regulation economy and an out of control financial sector I do not have much anger left for the consultants. In the end I would rather have overpaid doctors than bankers.

  55. @DOCM
    Thats easy. We have none. Mr Trichet has all the bullets and he is merely kicking the can so that it does not blow up on his watch which ends October.

  56. @ ceteris paribus

    That sounds about right. It seemed from Philip Lane’s interview that, notwithstanding the complexity, he anticipates another major crisis this Autumn.

    I doubt that the government have the will or the focus to ‘hit the numbers’, and the required growth rate seems a very long shot.

    @ zhou said something profound, I think.

    ‘To my mind, we have already defaulted, insofar as we gave a guarantee which we could not fund and the ECB stepped in and provided funds’

    Some catastrophes are silent and unnoticed at the time they occur. We are looking at the emergency services arriving now, but one can’t help but get the feeling that the damage to our state may be irreparable.

  57. After watching the full length RTE interview I am impressed with the intelligence, judgement and overall sense of competence exhibited by Philip Lane. I never dreamt that we could produce somebody like him.

    The elephant in the room is the will of our new Gov’t to raise taxes and reduce spending to the extent that it is clear to the world that our national debt does not continue to increase. They will already be working on the re-election campaign and as each month goes by their backbone will weaken. The public is looking forward to a Charlie or Bertie like scam which will allow us a painless exit from our obligations. Enda does not look to me like the type with enough imagination to indulge in the convoluted machinations that the Public expects. I see some political posturing but the end result will be that reasonable effort has to be made to live up to the agreement that is now in place with the ECB and IMF. If in six to twelve months it is clear that the Irish Gov’t has made reasonable effort to balance the budget and the economy is still deteriorating then our Gov’t can attempt to reopen negotiations.
    Everything is now riding on our Gov’ts behaviour over the next year. Easy way out blocked, a public clamouring for an easy way out, taxes rising, benefits declining. We are still sucking on our LCTR soother but even that may be snatched away from us on the basis that it is making our teeth crooked. The banks can be pushed into receivership relatively painlessly if we coopt the ECB to fund an orderly restructuring. We cannot default on Sovereign Debt without causing immense long term damage to ourselves as a country and as a people. Our membership in the EU and the EuroZone is serving us well. We have had the luxury of procrastination while we criticize the institutions that prop us up, ungrateful wretches is probably the most apt description.

  58. No Adam Smith prize for Donohoe. Conflation of bank related debt with sovereign? Followed by spurious table banging about the immorality of “unilateral” default. Who on earth in the government is advocating that we not try to renegotiate first? Also, if we don’t renegotiate the bank debt we will end up defaulting on the sovereign, a point missed entirely. Finally, no mention of the fact that the EU/ECB have deliberately subverted the IMF’s desire to negotiate a workable package. This performance justly earns Donohue the Order of Lenihan.

  59. @Shay Begorrah

    “Without child benefit child poverty in Ireland would be among the highest in the developed world. With it we do quite well, something we can all be proud of, unlike our bank guarantee.”

    What about the inhabitants of very posh houses (protected from creditors don’t forget) who fund the nanny / taxi driver / wife’s PA with the numerous child Benefits they collect?

    You might, rightly, point out that that is a comparatively unusual situation, but I know that it happens.

    The question is though,why should that continue, and how can the idea that the country is doing what it can to repay its debts, be consistent with it continuing?

    Safety nets should be valued by society and protected. When they go beyond that role, they start to make themselves targets and in the end the only winner is right wing politics, which doesn’t want safety nets.

  60. @grumpy

    The question is though,why should that continue, and how can the idea that the country is doing what it can to repay its debts, be consistent with it continuing?

    Well, it is about the “its” in the “repay its debts”, is it not? Whether you accept that the socialization of private debts is a bigger (more morally pressing even) priority for the state than pensions, education or new infrastructure. The thieving middle classes, distasteful and disgraceful as their unselfconscious avarice is, do not represent the same threat to Ireland, or to the idea of democracy, that crash austerity and the still inevitable default does. You can, and do, make a strong case for trying to eliminate the primary budget deficit and for living within our means but it will all be for nothing if we continue with our kamikaze commitment to defending a fundamentally broken European financial system.

    As for the right, or that portion of it will a real disdain for the idea of a larger common good, they would always find some reason to argue that social welfare is a greater evil than growing inequality and that tax is a greater wrong than tax evasion. The more you give the sociopathic right, the more it takes – it can smell fear and all it knows is self interest.

  61. The Order of Lenihan?

    Neat touch …. adds to the ‘Aesthetic Turn’ honours list … and the X-The Minister made more turns around corners than most …..

    Do I detect a whiff of reality in the main_steam_osphere ….. eventually?

  62. @Shay Begorrah And Grumpy.

    “As for the right, or that portion of it will a real disdain for the idea of a larger common good, they would always find some reason to argue that social welfare is a greater evil than growing inequality and that tax is a greater wrong than tax evasion. The more you give the sociopathic right, the more it takes – it can smell fear and all it knows is self interest.”

    While there is some truth in what you say we need to recogise the gravity and size of the situation we are in.
    If you want to argue for large default on bank debt you have to be honest enough to accept that will mean that we will have to balance the books almost immediately afterwards. This will require large progressive tax increases and deep cuts.

  63. @Eamonn Moran

    If you want to argue for large default on bank debt you have to be honest enough to accept that will mean that we will have to balance the books almost immediately afterwards. This will require large progressive tax increases and deep cuts.

    Accepted to a large extent, we would need simultaneous action to try and drive down the cost of living (which means more pain for the banks and asset values as well as the public service and those in receipt of social welfare).

    I would feel considerably better if there was some evidence that the government had this undoubtedly painful plan B ready.

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