A four-part banking support plan

Arthur Beesley provides a helpful report on the government’s emerging four-part support request for the banking system (see article here; related front-page article here).   I think the plan is based on a broadly correct diagnosis of the challenge of restoring the creditworthiness of both the banks and the State; it is also realistic in not demanding policies that involve large expected net transfers.

 1.   A slower pace of deleveraging

First, Dublin wants the EU-IMF troika to agree a slower pace of bank deleveraging than could be read as a condition of EU-IMF deal in November. The objective is to avoid the immediate crystallisation of losses, which in turn would lead to a heavier upfront requirement for capital. There is some confidence that the troika accepts the argument that very rapid deleveraging at fire-sale prices would be a bad thing.

For a good analysis of the concept of fire sale losses, about which I know some readers have doubts, see this recent paper by Andrei Shleifer and Robert Vishny.

2.   Provision of medium-term liquidity support from the ECB

But the full benefit from slower deleveraging would not be realised without some success on the second front of the Government’s campaign on the banks, the commitment it wants from the ECB to extend to the medium term the emergency short-term liquidity for Ireland’s banks. Shut out from private markets, the banks are now required to replenish their emergency liquidity very frequently. This is because the ECB has been trying to wean “addicted” banks off its emergency support by closing the tap of medium-term support.

This dims the benefit the banks derive from recapitalisation and higher solvency ratios because large corporate depositors are less inclined to trust banks that need emergency funding.

The ECB, however, remains wedded to a swift exit strategy from all forms of exceptional bank support. There is no evidence yet that the bank will reverse course to suit Ireland’s banks.

If it forces fire sales, a “swift exit strategy” could further undermine the creditworthiness of the State.   It is hard to see the banks regaining creditworthiness without the State regaining creditworthiness, and forcing losses on the State could make it hard for the ECB to find the exit they are seeking.   I would be surprised if the ECB doesn’t understand this.

3.  Impose losses on unguaranteed bondholders

The third element of the campaign is to compel holders of unguaranteed senior bank bonds to bear investment losses. This is on top of compulsory losses on subordinated or second-class bonds worth €7 billion, which have yet to be touched in the bank rescue.

The senior bond question is highly sensitive, given fear of market contagion and the argument that large banks in countries such as Germany would have to take losses as a result of such a move.

However, public statements this week by Minister for Energy Pat Rabbitte in favour of senior bond burden-sharing suggest the Government remains determined to pursue this line. In part at least, this reflects the view in Dublin that some of the European opposition to senior bank bond default may be weakening.

The argument is made that recent moves to force losses on senior bonds in a Danish lender had no appreciable impact on funding conditions for other Danish banks. Still, the fact remains that Denmark is not a euro country. Unlike Irish institutions, its banks are not closely tied to the banks of 16 other countries.

Worth noting also is the argument that most senior unsecured Irish bank bonds have been sold by their original purchasers and are now held by “risk-based” hedge fund investors in New York, Britain and Luxembourg. This is at variance with the findings of European research only weeks ago which gave credence to the suggestion that the bonds were mostly held in Ireland.

Either way, the case is made that compulsory senior bond losses would not prompt a major requirement for fresh capital in other European banks. Yet whatever the merits of the theoretical argument, the ECB and other EU institutions have shown no willingness to test it in practice.

There is reasonably broad agreement that we should not jeopardise ECB support with a unilateral move to impose losses on unguaranteed senior bondholders.   The interesting question is whether the ECB could be brought to accept such losses being imposed.   Many commentators appear to assume that the ECB’s objection is primarily the fear of balance sheet contagion across the European banking system.  I think the contagion concern is more to do with the undermining of  implicit guarantees to senior bondholders, on which European banks depend to raise term funding.   Unlike other policy makers, the ECB is acutely aware of the connection between bank resoltuion regimes and market access, and does not see now as the time to be ramping up market discipline. 

Our focus should be on separating Anglo and INBS from the others on the basis that they are no longer “banks” and do not have depositors.  It should be possible to impose losses without setting a broader precedent.   The money involved is not enormous in the scheme of our debts – about €4.5 billion – but would have additional benefits in terms of shoring up political support for the adjustment effort. 

4.  EFSF participation in bank recapitalisations.

The fourth prong of the Government campaign is to persuade its euro zone partners to empower the temporary European Financial Stability Facility (EFSF) bailout fund to participate in bank recapitalisations as a provider of last-resort capital.

Although this would offer clear benefits to the Government, most of Kenny’s counterparts have adopted an ultra-cautious stance on EFSF reforms.

This will be a hard sell.   However, EFSF capital injections need not involve an expected net transfer, but they would allow the sharing of the downside risk that is crippling the State’s broader creditworthiness.   Any constructive approach to resolving the crisis must start with the creditworthiness challenge – though there does not seem too much evidence of this at the European level to date. 

The government appear to be doing a good job pulling together a realistic package of measures that get at the root of the banking challenge.   Now if only our European partners would listen.

75 thoughts on “A four-part banking support plan”

  1. It seems they may be beginning to listen cf. link which I have just posted on the other thread.

    cf. http://www.reuters.com/article/2011/03/26/us-ecb-liquidity-idUSTRE72P0U320110326

    Items 1 and 2 are already, it seems, acquis (if the source for the Reuters story is the ECB itself).

    The partners might agree to 3 when the circumstances are right which is not now.

    Regarding 4:

    “However, EFSF capital injections need not involve an expected net transfer, but they would allow the sharing of the downside risk that is crippling the State’s broader creditworthiness”.

    How would this work?

    Lastly, there can be no deal without a counterparty offer. An undertaking to just stick to the fiscal targets – already given – is hardly going to be enough. To be found in the area of collateral provided, perhaps?

  2. The four part strategy would appear to be a really difficult ask. Perhaps there shoul be a concentration on the emergency liquidity situation rather than trying to pull all these elements together. How will 60b of medium term liquidity plug the 180b short term hole

  3. I presume Beesley’s reporting mostly reflects the Irish spin on things. It may be just wishful thinking. But, taking it at face value, there is some good news and some bad.

    The good news is that we will not have to default outright, because the EU will bend over backwards to provide a more appealing alternative.

    The bad news is that we will be left with a make-believe banking system, propped up by “liquidity” facilities which fool nobody. It will be a bit like Israel’s debt to the US, which reflects the fiction that, one of these days, they are going to send the US Treasury a cheque for all those F-16s and whatnot. But I wouldn’t push that analogy too far. Israel’s relationship with Washington is a lot stronger than Ireland’s relationship with Brussels.

  4. @all

    ‘THE EUROPEAN Central Bank (ECB) is working on an emergency plan to deepen its support for Ireland’s ailing financial system with a new scheme to provide banks with more than €60 billion in medium-term “liquidity” loans.’

    This has a whiff of further dumping on the state …. more socialization ….

    Last Nov I hoped for a €50 billion write down on banking system debt – for ‘saving the euro’ – as these debts if defaulted on would have stressed certain providers of such dodgy captial flows from Fr, De & UK – & on which ECB did not keep eyes on ball ….

    Now, after next Thurs, methinks, a €60 billion in medium-term investment “equity/capital” from the ECB, backed by the EZ might be more appropriate as a gesture of goodwill to the Irish for ‘saving the Euro’, enhancing debt dynamics sustainability, and perhaps increasing the presently nil possibility of going anywhere near the sovereign bond market in 2012.

    Then again, I’m only a scalded & toasted & slow_burning Irish citizen-serf who retains the nuclear option ….. so blatantly ignored by Dr. Fitzgerald (snr.) in today’s IT as he glibly dismissed the many sane economists around here and globally who regard Ireland’s present positon as totally unsustainable ….. immoral, and where its citizenry is taken to be a complete fool.

    I await enlightenment from those more savvy than the ignorant Irish citizen-serfs …

  5. “In part at least, this reflects the view in Dublin that some of the European opposition to senior bank bond default may be weakening.”

    Much easier to sell this to the German public than the idea that Ireland’s costs / salaries must not or cannot be reduced. This, combined with putting pressure on for proper methodologies to be used in the next few weeks regarding EZ bank liquidity, is where the PR effort should focus. It shouldn’t matter who owns the bonds – they are corporate bonds and if buyers bought who shouldn’t have taken that risk, it is not Ireland’s problem.

    I’m not sure too many readers have a difficulty with the concept of fire sales. There is a problem with its over-use. There is no absence of liquidity among global real estate buyers these days and there are carry trades going on right, left and centre. The “high-value purchasers” are not temporarily absent – they were themselves a temporary phenomenon, they have largely just been replaced by more realistic investors or retail buyers who are making an informed conscious decision that houses are still too expensive and prices will fall further.

    The objection I have to the widespread use of the term is that it is wheeled out to justify continued speculative hoarding to try to starve supply compared to its natural level – rather than simply prevent rapid, price insensitive liquidation of large amounts of stock. I know there is money that would go into Irish real estate – it is there waiting – just not at prices that are convenient for credibility of the Nama valuations, or for the throng of vendors of million euro plus houses for sale, or the banks that lent some of the money.

  6. Here is today’s FT on the quality of leadership at European level.

    http://www.ft.com/cms/s/0/2754c528-5721-11e0-9035-00144feab49a.html#ixzz1HkAbsE1z

    “The biggest flaw in the grand bargain that wasn’t was the parties’ utter lack of attention to the most insidious problem: a banking system where the stench of the living dead keeps contaminating the prospects of healthy institutions. European leaders show no attempt to grasp that states and economies – not senior bondholders – must be kept safe from teetering banks, nor to forge a political consensus on how to achieve this. Instead they are strong-arming the periphery into bailing out savers in the core and the reckless banks they entrusted their savings to.

    To make good on their promises to do “whatever it takes”, Europe’s politicians should be debating pan-European policies for letting banks fail safely and forcing losses on creditors rather than taxpayers. (The Commission is, to its credit, exploring this – but only for after the crisis.) This they cannot do while clinging to their worship of creditor sanctity. At the very least, they could tell regulators preparing bank stress tests not to shy away from politically sensitive scenarios such as a sovereign default.
    These would be grand bargains more worthy of the name than the petty fudges we continue to get.”

    And here is a great burst from Garrison Keillor :

    http://mobile.salon.com/opinion/feature/2006/01/18/keillor_lie/index.html

    But who tells the truth to the man who is driving straight into the setting sun and thinks he’s heading due east? His wife murmurs that, uh, maybe we should look at a map, and he accuses her of being a defeatist who tries to tear him down any way she can in order to conceal her own lack of ideas. The man is heading the wrong way and speeding and the idiot light is flashing — low oil pressure — and the idiot is trying to be manly and authoritative but everyone can see he’s faking it, hoping for G-d to rearrange the landscape for his convenience. Someone ought to speak up, and yet he is fascinating. As the administration is these days, so resonant and believable. The Arctic icecap melts and the Chinese finance our tax cuts and someday we will have spent six years and trillions of dollars to bring democracy to Iraq, whatever that may mean, and the SUV of state turns toward the setting sun, driven by cocker spaniels. And there is so much intensity there, and they are so much in the moment.

  7. @grumpy

    I suppose I did have you in mind on the fire sales, but wasn’t having a go — you provide an important challenge, and we shouldn’t just assume it is a fire sale because we don’t like the prices. I am surprised to see you focus here on the underlying real estate, however. Isn’t the real issue with the market value of the loans themselves? The natural alternative buyers are the other Irish banks. I would imagine that potential outside buyers would find Irish bank loans (which would require active management of borrower relationships) to be quite unattractive. This does strike me as natural fire sale territory in circumstances where all the Irish banks are distressed.

  8. Agree with what grumpy says about “fire-sale” prices. Also, wasn’t NAMA supposed to take care of that? I really don’t like all this fire-sale rhetoric as it is closely associated with those who promised a soft-landing.

  9. @John McH

    I don’t think it is so easy to divorce the loans from the underlying – these days, in this market. The problem is finding a yield, impairment profile etc that you can convince yourself you can rely on. Because there is no bottom for the underlying market established, people don’t trust metrics for the loans that might be sold.

    The smart way round to do this is to address the problem with the “offered, no bid” pricing in physical real estate first. Sell some stuff, liquidate some loans.

    If you do it the other way round you it is a bit like asking bond dealers (OK, I exaggerate, it won’t actually be bond dealers) to guess the realistic level of clearing prices for property. They don’t see why they should have to add on the risk of being wrong about that in addition to working out how to price the loans based in part on that. They are going to be “conservative”.

    Regarding the market for the loans, I think other players would put up with the admin hassle if there was more certainty about the underlying market – and they could work out what to pay to compensate for it. What happens about Irish bankruptcy law wrt the mortgage books, would they ever be able to repossess property etc. These make people rationally bid low, if at all.

  10. It’s an interesting paper on firesales which was referenced in the blog. I did not come away with any particular idea of why fire sales of housing assets is a bad thing. The paper mainly seemed to introduce how fire sales of assets which produce stuff or offer services (like the specifically mentioned airplanes) can be bad.

    I’m not sure houses are the same as most producing/service-offering assets except where they are rented and I have it in my head that By-To-Let owers of houses are a minor part of the housing market.

    I also have the idea in my head that the reason Ireland had gotten into such a precarious position as it currently finds itself economically is that we Irish sold our own non-producing/service-offering assets (houses) to each other for higher and higher prices.

    Might be my ludite nature but surely then this avoidance of allowing the housing market to correct itself via fire sales is only delaying the correction. Sounds like the avoidance of fire sales is itself something that is further contributing to the current problems of the Irish economy.

    ED.

  11. @ Grumpy and all

    “Because there is no bottom for the underlying market established” Wowsers! I was impressed by the suggestion elsewhere that some of the prices might even be negative.

    I was chattering last night with, umm, members of the chattering classes, and the issue came up of whether the Allsops sale on April 15th might give a useful snapshot. Will this be any use?

    http://www.irishtimes.com/newspaper/frontpage/2011/0304/1224291283180.html

  12. These IT pieces seem to be a direct transcription of the Government’s spin to convey the impression of quiet competence and of a determination to deal calmly and firmly with our EU partners. But the politics in the key EU countries are poisonous at the moment – key land elections in Germany, the rise of Marine le Pen in France, no government in Belgium, the impact of Gert Wilders on the Dutch government, a strong tinge of xenophobic, hard-right populism rising in Finland and something similar not very far away in Austria.

    As a result, it appears the can is being kicked along to the less politically charged – and slightly more technocratic – ECOFIN and the Finance ministers. But Ireland will find it difficult to fully draw the political sting while it remains in denial about the reasons why the price level of household consumption is 20% above the EZ average – with pay in the sheltered sectors and social transfer rates correspondingly high to generate the required disposable incomes to pay these prices. We would be fooling ourselves if we were to believe that officials in the finance and economics ministries – and the economics think-tanks – in these countries are not aware of these issues – and why they arise. Or that they are unaware of the impact of gross inefficiency in the structuring and financing of much of the state-owned business sector.

    It is 2 1/2 years since the wheels came off and there is precious little evidence that any of these issues are being tackled seriously. Though the continuing delay in the publication of the report of the group on state assets, etc suggests something is afoot in this area (also supported by the imminent departure of the ESB chief). But something serious will also need to be done in the private sheltered sectors – if only for ‘political balance’.

    We have the continuation of the same process of governance that got us into this mess. Policy proposals are cobbled together out of sight and away from scrutiny by ministers, their special advisers, senior officials and consultants, drafted in almost final legislative form, spun furiously in the media, subjected to some to totally ineffectual ‘debate’ in the Dail – and some noise in the media and the blogs – and rammed through the Oireachtas.

    Yes, I know this government is chockfull of ‘good intentions’, is determined to put the interests of the country and the people before party interest and is going to be ‘oh so different’ from the bad old ways of previous administrations, but I want to see what they’re doing, to have them explain and justify why they’re doing it, to have their proposals subjected to scrutiny and adversarial contest, to force them to convince and persuade on the basis of evidence – and not prejudice or hypocritically concealed factional advantage.

    Until we get this – and a requirement that all senior government appointees reapply for their jobs – nothing really will have changed; and those who conspired to get us into this mess – either by sins of commission or omission – will remain ensconced desiring to return to ‘business as usual’ as soon as possible.

  13. The government faces 3 major problems:

    (a) How to convince the EU/IMF that the economy is going bust, when it is moving into balance-of-payments surplus.

    (b) How to convince the EU/IMF that the economy is so weighed down with debt that it can not grow, when it has just grown by 4% in 3 quarters. I realise that this is on the GNP measure. But, that is the one nearly all economists have been saying for 30 years is the one that matters.

    (c) How to convince the the EU/IMF that the ‘adjustment’ program is pushing Ireland to the brink of anarchy, when every mass demonstration against it attracts a crowd of about a dozen people, a few dogs, and a couple of cats. How Dublin 4’s fake armchair revolutionaries must envy their counterparts in London this morning. where there has been an all-night riot. That is where I am posting from, near Piccadilly Circus. Hundreds of windows are smashed and the area around is covered glass. I hope to find a refugee network trail to make it to Belfast safely later today.

  14. On the four points.

    1. We can’t continue to talk about fire sales for years. It was an excuse for NAMA. It can’t still be an excuse two years later. I commented on it in the Indo a long time ago. http://goo.gl/p6Opn The Harvard paper doesn’t change my feeling on this. There is no panic reason to sell and these are not complex assets.

    2. On removing short term support. This is essentially the same question as point 4. If the Irish banks need liquidity support, you need to ask why? If it’s because they are insolvent then they need new capital. Why could this not be private? Well, probably because the deal offered by govt would be a lousy one. If it’s supposedly because they are illiquid then how can a need for liquidity continue for years if there’s no real problem with their assets. See 1. The ECB is probably right to push on this, from their POV at least.

    3. If the European opposition to this imposing losses on bondholders goes away, great.

    4. See 1 and 2, with the caveat that even if the ECB shouldn’t be providing capital that’s not automatically a reason for some other EU fund not to provide it. I’d ask why it shouldn’t be private money, but that’s a secondary issue.

    While firesales may be bad, when does it stop being a firesale context? We’re years into this thing. Similarly, when short term liquidity support lasts for years it’s valid for the liquidity provider to question the assets and solvency – and to look for an exit themselves.

    So, the 4 points are really one long question. Who’s going to recapitalise the Irish banks, how much is it going to cost and who’s going to pay?

  15. @ John McHale

    Many thanks for the ref to the excellent and very readable paper on fires sales The latter part is much more relevant to the global scene, than to Ireland. In addition, it seems to me the authors have smuggled in a couple of highly dubious assertions.

    ‘The financial crisis appears to have been a liquidity crisis, not just a solvency crisis’

    Bernanke has done his best to present it as a liquidity issue, but the wheels are coming off. The blurb on the back of John Mauldin’s Endgame (John Wiley 2011) was written by PIMCO’s CEO, Mohammed el-Erian. A recommendation from that ‘market oriented’ quarter is interesting.

    Mauldin takes Reinhardt and Rogoff ‘s This Time is Different as a starting point for an analysis of the decades-long deleveraging which we have entered at a global level. It would appear that’s the new normal.

    ‘Presumably, it is in everyone’s interest to avoid a fire sale’

    Why should one presume that ? In the real world, people like to buy cheap and sell dear, so falling process means opportunity for some. Schumpeter’s creative destruction may not be much fun to live through, but it is one of the engines of economic development.

    Alex Preda’s ‘Framing Finance’ shows that speculators plays an essential ‘scavenging’ role in renewal, and extract tribute from other market participants. Yves Smith’s Econned provides a very detailed analysis of the way in which speculation via toxic financial derivatives became so central to the financial service s sector doing the Noughties. Prudential standards went into the bin.

    The following quotes seem relevant to the Irish situation:

    ‘Although liquidation value can be low for a highly idiosyncratic asset with no alternative use (Williamson, 1988), there is no reason in these models why liquidation value should be especially low for a generic asset such as a commercial airplane or a financial security’

    It remains to be seen whether Irish commercial property assets, such as those in NAMA, are idiosyncratic or generic. Either they will be put to profitable use eventually, or they will be recognized as white elephants. The developing world is littered with abandoned ‘prestige’ facilities, and the state has no monopoly on capital misallocation.

    ‘The key observation is that the specialist industry buyer, who would be the natural candidate for buying the assets, might itself be financially encumbered, and hence unable to bid, at precisely the time when the assets are being liquidated’

    Exactly as you say, John. All the banks are up the same gum tree. No funds for ‘old natural’ buyers at the ‘old natural’ price.

    ‘When, in contrast, market participants—and in particular specialists in
    using or holding the asset—are financially encumbered, liquidation leads to sale of assets to outsiders at lower prices, and markets are said to be illiquid’
    …During fire sales, many key financial institutions such as banks are
    sidelined due to their inability to access capital. In this setting, two distinct ways to increase bank lending and real investment have been proposed: 1) the government can lend to banks against risky collateral; 2) the government can purchase assets directly or provide subsidies targeted at the purchasers of certain assets’

    The NAMA exercise forestalled catastrophic losses to key stakeholders, but caused huge negative externalities, in the form of damage to the banks balance sheets. By way of the guarantee, the balance sheet of its sponsoring state was hammered too.
    The NAMA-crystallized losses were way in excess of the planned state capital injections, and the outflow of deposits and the need for ECB life support were predictable. NAMA developed its own agenda, which his not the agenda of the government or the banks.
    Too-clever-by-half financial engineering is useless in the face of entrenched conflicts of interest. Our institutions are rigid and Balkanised.
    ‘Things fall apart, the centre cannot hold’.

    ‘To avoid overpaying for assets, government purchases could target potentially less-toxic asset classes, with greater prospects of reviving new lending in the short run and a lower chance of government losses’

    The quality of the assets in the Irish banks was highly dubious, but all the leading players conspired to avoid facing that fact. ‘An appalling vista’. Extend and pretend was the motto.

    ‘Holmstrom and Tirole (1998) describe liquidity hoarding as a precaution firms or banks use against future liquidity needs’

    That’s pretty much where we are at, and will be for the foreseeable, I think. People are waiting for the property deflation to run its ‘natural’ course. We might strike oil yet.

    ‘Although the choice is a controversial one, we think there is a case for the government supporting purchases of dislocated securities by market participants, or even buying them directly, rather than supporting weak or poorly run financial institutions’

    Our former MoH was inveigled, by intrerests which probably included the ECB, into doing the latter. Even if the government had somehow done the right thing, it’s very doubtful if the state would have been able to carry the restructuring burden. Too many years of short term thinking and misgovernance. Not just in Dublin.

  16. Three posts with which I would be in entire agreement. The answer to the final question posed above is, in my view, the Irish taxpayer – and unavoidably so whether deservedly or not – either through taxation, cuts in expenditure or sale of state assets with some alleviation of the losses by (i) burden-sharing with bondholders who just want to cut their losses and get on with business (i.e. “voluntary”) and (ii) realisation of bank assets in the most cost efficient manner.

    Complaints, however justified, about the historic errors of the past such as the decision to join the euro or the inadequacies of the decision-making at a European level, are not cashable at any bank.

    Denmark, it may also be remarked, is in the ERM II and its currency is in lock-step with the euro.

  17. The assertion that ‘liquidation value can be low for a highly idiosyncratic asset with no alternative use (Williamson, 1988), there is no reason in these models why liquidation value should be especially low for a generic asset such as a commercial airplane or a financial security’ is a highly dubious one.

    To take commercial airplanes as the example asset class used in lock-step to financial securities. History is littered with the collapse of leveraged aircraft leasing companies and airlines. The cost of their leverage didn’t increase, the value of their assets declined. The reasons for the decline were and are simple – nobody wanted the aircraft in question.

    Companies mark assets at a notional purchase price and depreciate their book value. Where the market price of the assets is higher than the book value, they give themselves a pat on the back and increase their enterprise book value. When market value falls below book value, they decry irrationality and a firesale mentality.

    In the case of aircraft and the airline industry in general, aircraft assets are worth only what passengers can be carried on them which is a function of capacity and seat revenue. Various factors can influence these things – the price of aviation fuel, the general economy or specific flight related factors. In the wake of the start of the first Gulf war, demand collapsed. Aircraft, with fixed maintenance and ownership costs, had negative book values (sometimes negative values in total as there were no buyers). Vast quantities were parked in the desert in the US waiting for the return of better conditions. Some airlines went bust, others nearly so.

    9/11 provided another example of a major bust in the airline industry. In its wake, several major airlines collapsed, among them Swissair. It’s subsidiary, Crossair, bought Swissair for a proportion of the debt it held, including all aircraft. Others were smarter – Mr. O’Leary went on a shopping spree and bought aircraft and options at a price that meant that up to a couple of years ago, he could take delivery of the aircraft and sell nearly new from his fleet at a profit – the second-hand planes were worth more than the cost of the new planes.

    Changes in oil prices, noise and pollution emission standards etc. have resulted in whole classes of aircraft being rendered redundant. You don’t see MD-11s in general use or various Tupelovs, because they are noisy and inefficient. Classes of financial instruments are, I believe, similarly redundant. Not the class per se, but the contents. The encapsulated assets are noisy and inefficient and essentially worthless.

    So while I agree (in a very long-winded way) that you can equate financial instruments and aircraft as assets, it is incorrect to say that aircraft become worthless and it is therefore also incorrect to draw the inference that financial assets likewise cannot be worthless.

  18. In terms of any PR battle in my view the Government must get two messages across

    1 The current plan forces the Irish state to bail out unguaranteed bond holders – this increases the amount we need to borrow from our EU partners. Furthermore I would suggest most European voters do not support bank bailouts.

    In the court of public opinion this ought to be an easy argument to win.

    2. Our corporation tax rate has nothing to do with our fiscal crisis – we are open to suggestion and persuasion on how quickly and by what method we will close the fiscal deficit – this could include higher taxes – but raising our corporation tax rate will not help our fiscal position – it will make it worse

  19. @ JTO
    You raise a very good point.
    We are still rich. We need to be poorer.
    Now what was it Parnell said: No man has the right to set the boundary to the march of a nation.
    We are not only inviting people to set a boundary to the march of this nation but we are asking others to come in and put that march in reverse.
    I don’t doubt your commitment to your beliefs but any system that extracts the wealth of a people for the enrichment of foreigners is colonialism in all but name.
    The statistics you so capably quote show that the nation is creating wealth. The 14.5% employment shows us just where that wealth is going.

  20. @christy
    “2. Our corporation tax rate has nothing to do with our fiscal crisis – we are open to suggestion and persuasion on how quickly and by what method we will close the fiscal deficit – this could include higher taxes – but raising our corporation tax rate will not help our fiscal position – it will make it worse”

    According to this logic, Ireland should in fact propose to other EZ countries to lower its corporate tax rate further to solve its budget problems.

    How many people in other EZ countries do you think you are going to convince? You are really taking them for complete idiots. And I think that they are increasingly getting the message loud and clear.

  21. @The Alchemist

    Todays papers are littered with strange “entitlements” that Irish bank staff / retirees and council workers have and a pattern seems to be emerging that pay rates, “empire days”, extra leave to go to the races or retied staff’s golf club memberships will be stuck to, limpet-like, and arbitration or the Labour court will say they cannot be touched without compensation.

    David McW describes Ireland as a rich country, getting poorer but still behaving like a rich country.

    Your suggestion for point 5 isn’t really for the banks unless you count the employees as civil servants – which maybe they are. Given that the employment contracts and pension entitlements, which for quite a few employees and retirees are very generous, were not “defaulted” on only because they were bailed out by taxpayers I would assume they are not flavour of the month with the public.

    Maybe more reasonable expectations would be forthcoming from both senior bondholders and other people to whom the banks have “obligations” if a speedy resolution regime allowed new banks to take on the depositors after compensation, and replace these culturally and financially dysfunctional companies. Seems like the depositors are being held hostage and the Swat team are playing cards in their van outside.

    If accurate that article you linked to, this one:
    http://www.independent.ie/opinion/columnists/john-drennan/john-drennan-imf-slams-outrageous-public-pay-rates-2596280.html

    suggests the days of lecturing other EZ states is over. Who’d ‘a thunk they’d ‘a come to those conclusions, don’t they get it?

    @John McH

    One trap in thinking about the fire sale definition is that if you consider that the high-value purchasers of the CRE and Resi backed financial assets are essentially limited to Irish banking institutions, you are then able to argue that there is no point selling to outsiders because that by definition is a fire sale. So what do you do – not sell until after recapitalisation of Irish banking – to Irish banks?

    That would just perpetuate the fantasy valuation theme. To outsiders it translates into – keep the assets until were are in a position to organise some Irish players to overpay, because we think only the Irish can appreciate or realise the true value. Its something to watch out for.

  22. On rereading the Reuters report on the provision of longer term liquidity support for the banks, it seems that they are only contemplating taking out the Irish Central bank – hence the 60b figure.
    It would appear that they are trying to solve an ECB legal problem.

    Can anyone tell me how this is going to solve the liquidity crisis. We need another 100b in liquidity medium term to avoid the fire sales.

    @ Paul Hunt
    Your sins of commission etc. Reminded me of something I read yesterday where Angela said something to the effect -we have to pay for our sins.
    Lutheran?

  23. @ Paul Hunt

    A bit of Sunday speculation. In a whole different world, would it be preferable for the EZ states to harmonise their electoral cycles, such that we didn’t get this never-ending stop-start business?

  24. Colm McCarthy writes in today’s Sindo: The State’s debt will increase by over €18bn during 2011 without any banking costs and by further enormous sums over the next several years.

    The most disappointing feature in the new Government’s programme was the relaxed attitude to eliminating the budget deficit. This weakens our negotiating position with Europe and leaves us fatally exposed, in Morgan Kelly’s resonant phrase, to the kindness of strangers.

    http://bit.ly/dLCown

  25. The view from Germany.

    Feld, independent economic adviser to the government.

    http://www.spiegel.de/international/europe/0,1518,753023,00.html

    Issing (who needs no introduction).

    http://www.spiegel.de/international/spiegel/0,1518,752591-2,00.html

    The crux of the political issue is in the following extract from the first interview.

    “SPIEGEL ONLINE: Still, in the early phases of the crisis, politicians reacted every time the markets exerted enough pressure. Won’t that be the case this time as well?

    Feld: Not if we minimize the risk of infection. To do that, we in the financial sector must achieve a sensible consolidation. Our current problems stem from the fact that banks — particularly those in Germany and France — wouldn’t be able to cope with a massive restructuring of state debt. That’s why we are rescuing heavily indebted countries. Restructuring the banking sector is just as urgent.

    SPIEGEL ONLINE: How should that happen? Some people think that the second round of stress tests for European banks won’t be strict enough.

    Feld: They won’t be strict enough. If we were realistic about the risks associated with sovereign bonds, some banks would have serious problems after the tests. From the point of view of governments, it thus makes sense not to have the stress tests be reasonable. There’s a series of major players that simply cannot be allowed to fall. They know they can take on risk-free debt and make bad investments because, in the end, the government will bail them out”.

    In short, if losses are imposed on bondholders in order to ease the burden on Irish taxpayers, it increases the burden on the taxpayers where the banks affected are domiciled.

    There is no way around this political conundrum until the new system providing for private sectors bail-ins comes into existence and certainly not against an unstable political background in the two countries particularly affected, Germany and France. It cannot be anticipated upon simply because the “principle” has been established.

  26. @MH

    Thanks for the link.

    Colm McC continues:

    “The strangers, or at least the European ones, have not chosen to exhibit any notable kindness and a rapid elimination of reliance on their goodwill is the one appropriate response entirely within our own control. This means higher taxes and more cuts in public spending. Since these measures are inevitable in any plausible scenario, the onus of proof rests with those, in the Labour Party and elsewhere, who see virtue in the postponement of policy actions which cannot be avoided. Combined with a renegotiated deal with the IMF/EU, a faster reduction in the deficit is the best that can be done. The Government must at some stage find a strategy which decisively restores the creditworthiness of the State. ”

    Principle contributors apparently not taking turns anymore to link to Colm’s stuff for the mo.

  27. Yet again hit the school teacher, the Garda, the nurse before hitting the sacrosanct bondholders.
    It’s sickening.
    A nurse paying a fixed (or increasing) mortgage cannot survive when their pay is further cut. Cuts without debt reduction are just stupid.
    And Merkel has just lost Baden-Wurttemburg. No more leniency from that quarter.
    So here we go. Welcome to the tough times. Ye’ll miss your public service when it’s gone!!

  28. The view from Germany.

    Feld, independent economic adviser to the government.

    http://www.spiegel.de/international/europe/0,1518,753023,00.html

    Issing (who needs no introduction).

    http://www.spiegel.de/international/spiegel/0,1518,752591-2,00.html

    The crux of the political issue is in the following extract from the first interview.

    “SPIEGEL ONLINE: Still, in the early phases of the crisis, politicians reacted every time the markets exerted enough pressure. Won’t that be the case this time as well?

    Feld: Not if we minimize the risk of infection. To do that, we in the financial sector must achieve a sensible consolidation. Our current problems stem from the fact that banks — particularly those in Germany and France — wouldn’t be able to cope with a massive restructuring of state debt. That’s why we are rescuing heavily indebted countries. Restructuring the banking sector is just as urgent.

    SPIEGEL ONLINE: How should that happen? Some people think that the second round of stress tests for European banks won’t be strict enough.

    Feld: They won’t be strict enough. If we were realistic about the risks associated with sovereign bonds, some banks would have serious problems after the tests. From the point of view of governments, it thus makes sense not to have the stress tests be reasonable. There’s a series of major players that simply cannot be allowed to fall. They know they can take on risk-free debt and make bad investments because, in the end, the government will bail them out”.

    In short, if losses are imposed on bondholders in order to ease the burden on Irish taxpayers, it increases the burden on the taxpayers where the banks affected are domiciled.

    There is no way around this political conundrum until the new system providing for private sectors bail-ins comes into existence and certainly not against an unstable political background in the two countries particularly affected, Germany and France. It cannot be anticipated upon simply because the “principle” has been established.

  29. Colm McCarthy:

    Small EU member states which had the foresight or good fortune to stay out of the Eurozone have been left in a superior position to those who went along with this ill-designed instalment of the Great European Project. Denmark and Sweden also had the option of abolishing their independent currencies. They thoughtfully declined the opportunity. There will come a time to reflect on how Irish policymakers got the country into this punitive currency union in the first place. The great architect of Germany’s post-war recovery and leader of Angela Merkel’s CDU party, Konrad Adenauer, remarked once that, “History is the sum total of things that could have been avoided.”

    As Walter Burns would say, you’re beautiful when you’re angry.

  30. Avoiding a loss of a fire-sale comes at a cost -> A fire-sale would generates liquidity and banks have to have liquidity. The cost of raising liquidity is currently very low as ECB is providing it cheaply. Remove the ECB support and it might be more attractive to raise liquidity by fire-sales but that might cause some problems with solvency.

    For large loans, NAMA is the chosen way to minimise losses (maintain solvency). It seems to have first kept property off the sales market so that the ones wishing to buy has no other option than to buy at an inflated level. Now it seems that as people are comparing the value in use (renting) with the cost of buying, another part needs to be added to the strategy: Properties are also kept off the rental market.

    If the market would be flooded with rental properties the cost of renting would decline – > Lower cost for the renter – > Lower return on investment for the buyer- > Prices would fall further….

    How to minimise fire-sale losses? Lower the ratio of the LTV and the lender minimises the risk of a fire-sale loss.
    How to minimise bank losses in asset bubbles? Introduce bank regulation forbidding high LTV ratios.

  31. So this is how you sum it up:
    The Euro is a rubbish currency
    The ECB is a rubbish central bank
    The unchecked flow of capital lead Ireland to have the worst of all double whammies – inflated property prices and inflated exchequer returns as a result of stamp duty (which was just a tax on this unchecked credit)
    And Irish people can sit idly by and watch as their country will get slaughtered beause of these failures.
    Cut yes, but cut without debt restructuring – no.
    We have to be the world’s worst fighters – no wonder we haven’t won a war since 1014!

  32. @all

    Re my point on ‘further socialization’ above on the €60 billion ..

    Colm McCarthy in Today’s Sindo:

    ‘Presumably any longer-term ECB financing to the banks would be on the basis of government guarantee, thus adding to the already excessive mountain of State liabilities and involving another formal conversion of bank into State (taxpayer) liabilities. Of course the State is already on the hook, but this type of deal would crystallise yet more sovereign exposure.’

    On Friday, Irish 10-year bonds were yielding over 10 per cent. At some stage, hopefully before the end of 2012, Ireland must seek to fund again in this market and at no more than half the rate on offer on Friday. There is little prospect of this benign outcome without some substantial measure of debt relief.

    Unless this problem is acknowledged and addressed at European level, the Government’s strategy buys time, which is never without value, but does not bring ultimate resolution of the Irish dilemma any closer. Attainment of a lower interest rate, some relief from repaying all bank bondholders and longer-term funds from the ECB would be a desirable interim outcome. Immediate liquidity pressures would be eased. But a clear exit strategy from the debt crisis requires an unambiguous restoration of solvency and a return of both State and banks to normal funding on sustainable terms. ‘

    http://www.independent.ie/opinion/analysis/key-to-restoring-states-credibility-is-the-elimination-of-our-budget-deficit-2596197.html

  33. @DOCM
    Thanks for the links …Issing is interesting… Irish better off than Germans.

    Default/Restructuring inevitable.?

    Colm McCarthy-
    “At some stage, hopefully before the end of 2012, Ireland must seek to fund again in this market and at no more than half the rate on offer on Friday. There is little prospect of this benign outcome without some substantial measure of debt relief. ”

    Shane Ross-
    “The whispered monster is about to be spoken in the corridors of Brussels. The “default” word is no longer confined to the deaf and the dumb. Excuses — such as Thursday’s results of further banking stress tests — for postponing decisions are hardly convincing. Political crises and markets are moving far faster than the official pace of change in Europe. We will soon have to face up to reality: default in Ireland is inevitable.”

    Are we moving swiftly towards end game

  34. Having read the various posts above, I venture to recommend a reading of the interviews with Feld and Issing. The conclusion that I draw from these influential sources is that there is really no point in Ireland rushing all her fences at the same time. The key immediate consideration is to get the banks functioning and parking the bondholder issue seems to be an important element in that context.

    There are seventeen member countries of the euroarea and, although the policy of the main decision-makers is clearly to kick the can down the road, this is working well for all but three: Greece, Ireland and Portugal. It may also be noted that Issing does not see Portugal necessarily falling into the black hole of the EFSF cf. comment of FT in its editorial of 24 March.

    “It is still not a foregone conclusion that Portugal will come cup in hand to the European financial stability facility. A caretaker government may not have the authority to agree to the required conditions. And despite the widespread mystical belief that yields over 7 per cent must lead to a rescue, a few expensive debt auctions will not force Portugal to default. The extra interest expenses will, however, worsen the pain of austerity once the country’s leaders find courage to do what they must”.

    As Ruairi Quinn has stated publicly, Ireland (unlike Portugal) is in receivership and in such circumstances the government (board) has, in my view, little choice but to follow what the receiver (troika) decides. It is quite simply too early to come to any conclusion as to whether or not the country (company) can trade out of its difficulties.

  35. I figure there are four groups that can pay, and it is useful to look at any proposal in terms of how it allocates payment among these groups

    (1) Creditor/bondholder (via haircuts)
    (2) Irish taxpayer (via Irish government taxation/expenditure cuts)
    (3) EU taxpayer (via each national government tax/cuts)
    (4) Euro currency holder (via QE/inflation ‘tax’)

    For the banking portion of the debt (say €75bn) it could be
    (1) 5% (assuming an eventual haircut for Anglo/INBS bondholders)
    (2) 95%
    (3) 0%
    (4) 0% (ECB is supposed to be sterilizing the Irish liquidity support)

    For the rest of the debt (at peak levels, say €150bn) it could be

    (1) 30% (assuming ESM mandated restructuring in 2013, to include existing debt)
    (2) 70%
    (3) 0%
    (4) 0%

    The fact that last week’s ESM announcement implied that existing debt will be subject to mandatory haircuts seems to me to point to the direction that things are going, since there are no moves to improve the chances of Ireland being able to borrow in the markets H2 2012 or H1 2013, and the need for recourse to the ESM looks likely (hence the >10% 2 yr yield). CMcC calls for negotiated debt relief before this, which would make a lot of sense, and perhaps the EFSF could morph into an ESM-clone in June, with restructuring to follow, but I think this unlikely. I see no chance that groups (3) and (4) will take any hit under any plausible scenario.

    As to making a greater effort to reduce the budget deficit, well the Irish electorate had a chance to elect a party that in single-party government might have made some more efforts here, but in the last week of the election turned against the idea, in favour of a more ‘balanced’ government. The Irish electorate does not want to see a quick reduction in the deficit. It needs to be pointed out that under the current plan that total annual Irish government spending won’t really reduce at all from the 2008 level through 2015, and will remain in the mid-70bn range per year. An ever increasing proportion of this spending will be allocated to debt servicing (interest and promissory note repayments), so that while primary expenditure will drop significantly (though only back to 2006 levels), total expenditure won’t.

  36. @DOCM

    We have commented on Issing before – and I also read Feld.

    Following his stint on ECB, Issing had a sojourn with Deutsche Bank …. backgrounds matter (note the 2 PD commenter on this evening’s RTE1 six o clock newz e.g.) …. Weber is following suit … Whose interests count in all of this ….

    Feld prob has more independence at the mo – but rem the unmentionable on under and un capitalised Landesbanken, and the smaller local community banks in Germany …. and their attempts to ‘wriggle’ BaselIII.

    These guys ain’t fools – and fully aware of fact that irish citizen-serfs being taken for fools. All is political … yet why oh why has it taken so many moons for some of the irish mainstreamers to wake up ………?

  37. @DOCM

    The big boys in de banks in De Fr & UK have had 30 months to cover their asses or to sell on dodgy assets to hedge funds …… or to make alternative arrangements … and we – citizen-serfs – have paid out on most of dodgiest bleed1n bondholders in our most toxic institutions ….

    They’ve had enough of our present and future TIME – nuclear option remains on table and we are still capable of Kicking all their Asses, as distinct from cans, down the bleed1n road to no-where in the EuroZone. If the centre cannot hold sense – time for us to cease eating non-sense.

  38. Those big German and French banks are not going to be saved if Ireland or Portugal are fed to the wolves.

    It brings me back to German history and the fall of Koenisberg. It didn’t save Berlin.

  39. I would add just one point which I omitted from my earlier post and that is in relation to the overall question of timing which is, I think, what all this is about. The big boys cannot be certain at which point kicking the can down the road is seen by the markets as definitely successful. What happens in Portugal and Spain in the coming months is clearly crucial. The Spanish, being also big boys, have understood the issues and have taken the necessary steps (most recently by the announcement of additional austerity measures being taken which they made at the European Council). They collectively – including London – also understand that keeping Portugal out of the EFSF is a most desirable objective.

    If we do not wish to continue to be dependent on the kindness of strangers, we have to face political and economic reality with the same rigour.

    I take the point about the speculative nature of those now holding Irish sovereign bonds. This could prove to be a major asset in the right context and at the right time. Which is not now.

    These are purely politically based comments. I am no expert in the intricacies of bond markets but it is clear that it must be like shooting fish in a barrel for them when they are up against politicians (or, dare I say it, economists).

  40. What time izzit? Nietzsche returns – deja vu eternally – recurring again – are we on time, in time, behind time, holodeck time, …. or are the Irish incapable of getting a handle on time ….. (-;

    testing

  41. Bloomberg-

    “There are many people in Europe who want Ireland to give a guarantee to all of its bank creditors including senior bondholders and everybody else,” Coveney said. “The reality is if that guarantee undermines the very creditworthiness of the Irish state, then our government can’t sign up that.”

    I thought we were beyond this point.

  42. If CMcC is proven correct and public expenditure cutting is the only viable solution to ensure the long term credibility of the Irish sovereign and Brian Gs analysis is also accurate in terms of cost allocation then Eureka’s statement above by implication is a given i.e. domestic household debt restructuring simply has to happen.

    It makes no logical sense with incomes of ordinary working people (inflated as they are against equivalent European benchmarks) likely to experience another round of savage cuts when debt (particularly mortgage debt) remains at bubble levels.

    Surely it’s only a matter of time before stress testing round III is considered in this context (As far as I can see the PCAR base or otherwise cases makes no allowance for this)

    Given the above outcomes does anyone have any real plan as to how one restructures a 2005 tracker mortgage for instance where main earner (family with one earner) works in the public service at Grade 5 level (of which there are thousands) and is likely as far as I can see to experience an additional c25% paycut/increase taxes (Croke Park and Program for Govt binned) who is already in negative equity to the tune of +€100k and is barely ‘affording’ (definition of which is anyone’s guess) to get by.

    I’m pretty sure a decision to finance a house worth c20% of its original value or feed the children, or to put the heat on or not or pay the next ESB bill etc etc are the current ongoing juggling acts that are already causing enormous financial stress. In my view the mortgage goes unpaid because bondholder-restructuring means in plain mans terms – ‘if the Govt and the banks can’t afford to pay their creditors then why should I bother’ – this will likely become the norm in society unless a workable solution is found that caters for such household scenarios.

    As is often stated on this site before debt forgiveness/restructuring really needs to begin at home – keep a good eye on that elephant in the corner because rumour has it he can get very agitated when provoked.

  43. @Edgar Morgenroth

    You win the bet.

    http://www.rte.ie/news/2011/0327/germany.html

    Chancellor Angela Merkel’s conservatives have lost power in a regional stronghold , with early poll results showing the Greens, buoyed by Japan’s nuclear crisis, surging to their first state premiership.

    @ceteris

    Simon who? Simple Simon … Where’s Leo?

  44. Does anybody really get this?
    The Land League formed so that Irish people could have fixity of tenure, fair rent and free sale.
    Fixity of tenure = security in the dwelling
    Fair rent= a mortgage repayment that is affordable relative to ones income
    Free sale = no negative equity
    Here we are and what have we got – none of the above!
    Thank you bankers for flooding our markets with your cheap credit!
    You’re bringing not only Ireland to its knees but Portugal and Greece too.
    The problem with bringing populations to their knees is that they can give you a headbutt where it really hurts!!!

  45. @Bryan G,

    Thank you for providing some focus on the likely allocation of the future fiscal burden. Apart from some minor concessions (e.g., on the cost of the offical sovereign funding support), some medium-term bank liquidity support and a bit more can-kicking, it appears clear that there will be no formal and explicit burden-sharing by our EU partners or consent to impose any losses on bank bondholders. For the latter the fear of contagion remains and the political situation is changing rapidly to close out any possibility of the former.

    As Colm McCarthy points out, the resolution – how ever painful – remains largely in our own hands. Colm, quite rightly, focuses on the primary fiscal deficit, but I suspect he is well aware that tackling this in isolation is not a runner politically. The pay cuts and reductions in social welfare rates required to have any meaningful impact on the primary fiscal deficit will have to be accompanied by cuts in the costs and prices that drive these levels of pay and transfers. This is the hard part and I also suspect he knows more about what is going on in this area – and in relation to the restructuring of state assets – than he is officially permitted to communicate.

    This government – similar to all of its predecessors – is using the ‘mushroom method’. The Dail and its Cttees are unwilling and unable to operate as the proper forum for the scrutiny, investigation and consideration of public policy options. And the Government fears allowing it to be empowered in this manner lest it cast some light on, and reveal the stink of bullshit in, what is planning in the dark.

    So all we are left with is spin and wittering in the media and blogosphere – occasionaly seasoned by some informed and knowledgeable inputs (even if those who provide these are often compromised or conflicted in some way).

  46. Is there any source for the 60bn medium-term funding idea? Did anyone important mention it at all? (from Europe)

  47. @Rob S

    First response of 53 above – Rioters and an informed source … Lorenzo is indisposed as probably advising Silvio at the mo …. both have great faith in screw1n the serfs … albeit from somewhat different perspectives …

  48. @Rob S
    The original story from Reuters attributed it to an unnamed official from EU but then went on to quote the Indo.

    I have raised the question a number of times but got no response – how does 60 b solve the liquidity crisis when Bloomberg today quote 116.9b from the ECB and 70b from in emergency liquidity for the banks.

    I don’t get it.

  49. Yeah, I would have thought that if the 60bn was going to to replace anything it would be the ECB (rather than ICB) funds which are banks are hooked on.

    Thanks.

  50. @ CP

    the real liquidity problem for the Irish banks is 93bn (ECB) and 70bn (ICB). So the 60bn pretty much clears the ICB part, as well as giving them some tenor which will help with the PLAR exercise, as well as provide some small level of assurance for depositors. Then, over the next 3 years or so the task it to raise deposits by 10-20bn or so, and reduce assets by 70-80bn, bringing the total ECB funding down by 100bn.

  51. @ Gavin Kostick

    Impressive that Prof Krugman argues that austerity doesn’t work; infinite funding of a structural deficit of about 40% of revenues is also unlikely to have a happy ending.

    Of course there is a lot of support for Krugman’s argument.

    The lawyers collecting €500m from the State and all the other dependents of course want the existing cosy scenario to continue.

  52. @Bond. Eoin Bond

    Thanks for that explanation. It is as I suspected. Its the small level of assurance for depositors that is worrying. The media have been trumpeting this as some sort of a concession. My own view is it is being done to remove a wholly unprecedented situation which the ECB engineered and now find could create a very messy future precedent.
    This is not going to cure the liquidity problem of the banks in the immediate future.

  53. @Mr. Bond,

    I could be wrong, but my reading is that the 60 bn would allow segmentation of the ECB’s 93 bn into a short and medium term liquidity facility with the ICB at the end of the queue.

  54. Bought my Anglo Shares @ €15.
    Bought my PTSB Shares @ €16.
    Bought my BoI Shares @ €17.
    Bought my AIB Shares @ €18.

    I’m with the smart Economists.

    NO FIRESALES!

  55. @Michael H

    Final bill for tribunals is likely to exceed €500 million once all 3rd party costs are factored in. At a time of unprecedented economic collapse, the silence from the government on the scale of legal fees is an indication of the pace of public expenditure reform that the country can look forward to. I wonder how many ‘reviews’ will ministers have to rack up before making sensible decisions?

    Memo to Dr A. Merkel someone.

  56. Really, I think CmcC is outlining the road forward. Expecting Europe to cover our spoilt civil servants to avoid political discomfort is silly and ignorant as well as dangerous. Regardless of the fallout of draconian deficit cutting, no matter the social fall out, no sharing or co-responsibility of debt burden can be reasonably expected by Europe until we reduce our costs to the cheapest quartile of countries in Europe – that means living within our tax take, probably €27Bn a year so effective a 50% cut in government spend, preferably leaving a surplus. This may not be a course to recovery but recovery cannot begin without debt forgiveness. The arrogance to expect moderately paid European tax payers to help us maintain our ego driven salaries is embarassing and really makes me ashamed to be Irish, lets face the problem head on and at least go down with some courage of having done the right thing

  57. @ Paul H

    you could, indeed, be right, but i believe the ECB has started to get a bit miffed at all the undue attention our, in relative terms, no-so-secret secret liquidity (ie the ELA) is causing. I suspect it may end up being a bit of both – Anglo/IRNW funded via ELA, the rest moving back onto term facility from ECB. That would leave us at ELA 35bn, TLF 60bn and regular ECB 70bn. Certainly, i don’t think they can leave the ELA dangling at 70bn (and indeed, they may not have to, some of it may be temporary in nature).

  58. @ Michael

    “Impressive that Prof Krugman argues that austerity doesn’t work” – Why? You sound sneery without foundation.

    “infinite funding of a structural deficit of about 40% of revenues is also unlikely to have a happy ending.” Neither of us, I would think, believe in infinity. Neither is that what Heather Stewart is arguing.

    “Of course there is a lot of support for Krugman’s argument.” He doesn’t need a lot of support. Like Einstein in his famous response to that letter – he just needs to be right.

    “The lawyers collecting €500m from the State and all the other dependents of course want the existing cosy scenario to continue.” You are confusing two arguments, and you are impressive enough to know it. If you want to know what the lawyers and dependents think: ask them. You are eliding a dubious populist stand that the state has been wasteful in the past with the general point that austerity is not the answer.

  59. @Yield or Bust

    Given the above outcomes does anyone have any real plan as to how one restructures a 2005 tracker mortgage for instance where main earner (family with one earner) works in the public service at Grade 5 level (of which there are thousands) and is likely as far as I can see to experience an additional c25% paycut/increase taxes (Croke Park and Program for Govt binned) who is already in negative equity to the tune of +€100k and is barely ‘affording’ (definition of which is anyone’s guess) to get by.

    Interesting question. But of course there was a solution. It is called shared ownership or indeed full State ownership. The problem is that the big boys have got bailed out first and now there is no money left.

    The commercial assets underlying banks loans had imploded so they were passed on at knock down prices to the State with the taxpayers picking up the tab.

    Now if that solution was ok for commercial loans and assets, why is it not being considered for domestic loans in difficulty. Moral hazard perhaps!!

    But it will happen. Either because people will throw the keys back and leave or stay in the house and don’t pay. The practical implications of chasing 50,000 families around the globe for money they don’t have and evicting another 50,000 onto the side of the road, while the houses they have been evicted from remain empty are pretty daunting. Of course the State could resort to the battering rams of history and burn the houses following the departure of the evicted families.

    Alternatively modern Ireland could begin to recognise reality and start to deal with it. But the prospects of that happening are not too good either.

  60. The Gov. Bond yields are through the roof this evening with the IT reporting 2014 4% yielding 11.012% as of 5.30 pm. Is this reflecting weekend media coverage relating to default?

  61. @ ceteris paribus
    I’m far from being an economist but this has always been inevitable. Personally I hope it happens sooner rather than later.
    Conservative treatment has not worked – we need surgery! It’s going to be painful but this is very probably the only way that we can survive. Let’s do it while there is still something worth saving.

  62. @ Garo

    Talking about Krugman and the 500m lawyers in the same point is just cheap and unworthy argumentation.

    I would have no problem in responding reasonably to negativity, pomposity and pedantry, if you had the decency to use your full name.

    Thanks for pointing to the chart; you must have had lots of education.

    It’s petty to over-analyse a blog post made while completing a news report at the end of a long day.

    The truth is often bitter and the reaction was likely motivated by inconvenient ones.

    @ Gavin Kostick

    The figure of €500m came from a Public Accounts Committee report in which it was said that the State as the biggest customer of the legal profession, has significant power to influence this market where change was been resisted for decades.

    Citing it here was to provide just one example where the State can achieve savings which shouldn’t be simply tagged ‘austerity.’

    It’s no big revelation that groups fight to protect even small modification in privileges.

    The pharmacists threatened strike action and warned of 5,000 job losses when changes were proposed in a system where the State was paying €1.6bn annually for drugs that had a factory gate price of €1bn.

    In Greece, doctors returning annual taxable income of €10k while funding their children at US universities, likely also oppose ‘austerity.’

    eliding a dubious populist stand that the state has been wasteful in the past with the general point that austerity is not the answer.

    Austerity was named the word of the year by Merriam-Webster in 2010 – ‘enforced or extreme economy’ / ‘a situation in which there is not much money and it is spent only on things that are necessary.’

    Can ‘austerity’ in the US where the real median wage has been almost unchanged in recent decades be compared with Ireland where bubble era costs/payments are not only out of line with most of Europe but have to be funded by foreign borrowing?

    As with the word ‘socialism,’ people have different interpretations as to what ‘austerity’ is and it maybe applied both in Ireland and the UK but in the latter, public servants have no choice when it comes to staff cuts.

    As for the State being wasteful in the past ?

    We have hardly started with reform and in the National Recovery Plan in the 4 years, 2011-2014, current gross expenditure will fall 12% from the 2010 base.

    The public pay bill will fall 8%; there is no provision for a fall in the €2.8bn staff pensions bill — it will likely rise; social protection falls 14% to €18bn.

    The social welfare bill had increased 160% to €18bn in period 2000-2008 compared with the CPI at 34.8%.

    Health jumped 186%.

    A fall in nominal current spending of 3% per year maybe draconian or maybe not.

  63. @Michael H.:
    An argument should stand on its own merit regardless of whether made anonymously or not, whether made by a high school dropout or by a PhD. I’m surprised that you who is always sneering at ‘a lot of education’ do not see that. Ah but you you only use ‘education’ as a stick to beat those who have a lot of it. And your excuse of ‘a blog post at the end of the day’ does not wash for reasons I detail below.
    Your conflating Krugman with rich lawyers and senior public servants in Ireland is dishonest but we have come to expect that of you. You chose not to respond to Gavin’s arguments about the differences in the situation that Ireland and the US find themselves in and instead went on another – now familiar to regular readers of the blog – rant about the overpaid Irish public and protected sectors (which by the way I agree with at least in terms of those at the upper levels).

    You are like a band that knows only one tune and plays it regardless of whether at a funeral or at a wedding.

  64. @ Michael Hennigan

    Petty point first: have you ever complained of anonymity to John the Optimist, or only to people with whom you disagree?

    More generally.

    If I take it right from previous comments, you think the best way to proceed is in line with the IMF/EU programme for the next couple of years, which broadly, subject to negotiation, is looking to close the deficit by 9bn over the next three years. This has the democratic advantage of being in line with the National Recovery Plan and the new Programme for Government.

    The idea is to get into surplus, or close to it, without destroying the economy along the way. The image of goose-plucking comes to mind. Whether in the long term permanent growth is desirable or sustainable is parked for the moment.

    As a seperate issue, some here seem to be arguing for instant surplus this year – I assume this is not your case?

    The question though, as raised by Stewart, talking about European countries and quoting Krugman in support, is whether even year-on-year cuts to close the deficit can work at all.

    “Adopting the harsh deflationary policies imposed by international lenders, and meeting punitive interest payments, sucks the life out of already fragile economies, and that makes repayment even tougher.”

    Both the Central Bank and the Bank of England have revised downwards their GDP forecasts citing the ‘austerity’ measures of their respective governments.

    “Jan. 31 (Bloomberg) — Ireland’s central bank cut its forecast for economic growth this year by more than half as the government steps up budget cuts and consumers trim spending.”

    I also note from memory that Q1 outcomes were not as good as the predictions made at the end of last year, though I would have to go off and find the references.

    I’m all for public money being used effectively and transparently, but that is a case-by-case issue, rather than the general point which I’m raising above.

    The cost of ongoing developments in the banking sector is of course deeply connected to all of this, and may change the landscape once again.

  65. @ Gavin Kostick

    Petty point first: have you ever complained of anonymity to John the Optimist, or only to people with whom you disagree?

    I have disagreed with JTO more than agreed, sometimes very sharply and Prof. Honohan had to intervene on one occassion.

    I don’t mind you thinking I’m a hypocricite!; I would if it was an anonymous poster who may well be an embittered loser.

    As I said above, ‘austerity’ has different meanings and the US situation with a limited saftety net (Michigan cut the number of weeks jobless benefits are paid from 26 to 20 yesterday.)

    As often happens in these arguments, people pick the examples that suit; The Baltic republics endured a tough 2 years of cutbacks; in Estonia, the governing coalition won relelction this month even though Estonia has 14% unemployment and the government has pushed through some of the harshest spending cuts of almost 9% of GDP.

    Its the first governing coalition to be relected since re-independence in 1991; it was the same in Lithuania last year.

    I”m not saying Ireland should do the same, but these are credible examples following big booms.

    Spain and Italy can fund half their public borrowings domestically; Japan can fund 97% (ignoring its fx reserves).

    Greece and Ireland are dependent on the kindness of strangers.

    We don’t have to have any austerity or reform and we can risk chaos by exiting the euro.

    Our situation is very much comparable with a struggling company that needs to cut product lines and staff to survive, to convince lenders to advance fresh funds.

    There is little evidence of solidarity within the country and similarly between the peoples of the EU. At times like this, we need to take steps ourselves.

    There is the overhang of the banks and the conflation with the sovereign; we initiated that ourselves.

    For Greece it would be a good thing for its own citizens to have reforms implemented and an end to the massive tax evasion by the well off. What is Krugman suggesting?

    We have the highest paid medical consultants in Europe — much higher than Norway, Europe’s richest country. The reason an issue like this is important is that it has a cascading effect and we are bankrupt.

    Debt relief could come but politicians in other countries need to show their citizens that we have reformed before they will open their wallets.

    It would likely be IMF mandated and be tough if by 2013, we are still a high-paying basket case.

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