What Irish Bond Prices are Saying

John McHale has kindly posted an article I wrote for today’s Sunday Independent below. I would like to expand here on what secondary market Irish bond prices are actually saying.

The benign outcome expected, publicly at least, by our European partners is that, if Ireland ‘sticks to the programme’, things will work out OK. Working out OK needs to be defined. Here’s a working definition.

1. Ireland is able to return to the sovereign market in about eighteeen months.

2. This means the bond market, not just bills or CP.

3. It must be able to sell bonds, in large quantities, at medium duration. That means five-year at minimum, ideally ten-year and longer.

4. Yields don’t have to be as comfortable as Germany or even France, but can be no worse than say Spain.

5. Ten-year bonds at 5% would be, to coin a phrase, manageable, with five-year at say 4.5%.

If you believe that sticking to the programme, plus an average run of luck, will do the trick, without any compromise with bank creditors or sovereign default, you must also believe that bond market re-entry, on something like the above basis, is on the cards before the end of 2012.

The bond market does not believe that this outcome is likely at all. Both five- and ten-year bonds were yielding over 10% on Friday. Conveniently, the coupon on the five-year is 4.60. If the price is to exceed 100 in eighteen months time, the total return offered for the period is a capital gain of at least 23 plus about 8 in accrued coupons, total at least 31 versus Friday’s price of 77. The five-year will be a 3.5-year by then, target yield even lower on a normal curve, and the required return even higher. If you sincerely believe that this outcome is likely, buy while stocks last.

Note that a return to the bond market which takes this jaundiced view is a part of the programme, as Karl Whelan repeatedly points out. When sovereign debt gets junked by the market, it does not recover over short horizons like eighteen months. You go down in the elevator and come back up the stairs.

None of this suggests that we should not stick to the programme. The fiscal adjustment makes sense in any scenario and there is a case for doing it faster. What it suggests is that preparations need to be made for a long-haul, including sovereign re-structuring or re-scheduling, just in case the markets might have it right this time.

59 thoughts on “What Irish Bond Prices are Saying”

  1. @Colm McCarthy

    Realism is refreshing.

    Citizens, hopefully, will wake up … and not only here – if ECB ‘plan’ is to socialize throughout Europe as well.

  2. @ Colm McCarthy

    ‘None of this suggests that we should not stick to the programme. The fiscal adjustment makes sense in any scenario and there is a case for doing it faster. What it suggests is that preparations need to be made for a long-haul, including sovereign re-structuring or re-scheduling, just in case the markets might have it right this time.’

    So basically you don’t trust the Europe to back us for the long haul (post 2013) and the sooner we get into surplus the better as we are going to be left hanging after that but at least we will be self supporting – sounds like a prudent plan to me.

  3. There are other variables also. GDP is linked to global and European GDP and if these are helpful over the next couple of years its worth bearing in mind that the whole EZ curve will move higher – or likely the short to medium part will. This makes the yields Ireland sells at higher and is unhelpful in itself.

    Alternatively for yields to remain low global GDP will probably remain subdued – which is unhelpful.

    There is also the possibility that US and Chinese QE remain in place for long enough to turn a commodity spike into core inflation. The effect on Ireland’s market funding 2 yrs out would be significant.

    The market is saying it is destination ESM and the EZ will put up with rescheduling or restructuring of sov and bank bonds then – in exchange for a bit more can kicking and no trouble over the next few months for the EZ banks from Ireland.

  4. @ Colm McCarthy

    QUOTE If you believe that sticking to the programme, plus an average run of luck, will do the trick, without any compromise with bank creditors or sovereign default, you must also believe that bond market re-entry, on something like the above basis, is on the cards before the end of 2012.UNQUOTE.

    I do not believe that it will be possible except in the unlikely event that the new government takes truly dramatic action in relation to correcting the budget deficit (like McSharry did, although some will argue, not without justification, that we have already done so).

    But the game is also one of chicken between the countries funding the EFSF (and the Greek bailout) and the recipients of what they perceive as their largesse. There is no way that the former are going to ease up on the pressure on the latter to stick to the programme in the meantime. How can they when the result would be an even longer period of loan assistance and/or restructuring?

    QUOTE None of this suggests that we should not stick to the programme. The fiscal adjustment makes sense in any scenario and there is a case for doing it faster. What it suggests is that preparations need to be made for a long-haul, including sovereign re-structuring or re-scheduling, just in case the markets might have it right this time. UNQUOTE.

    We do not know what the reaction of the markets will be to the country sticking to the programme because the country has not yet shown that it is going to stick to it. Trying to deal with an opponent out on his feet but still staggering around the ring throwing shapes must be a puzzling experience for the creditor countries. If their opponent accepts that certain things have to be done and then explains the political difficulties associated with particular options, then there would be a basis for negotiation. We are, I think, getting there.

    In the meantime, Europe moves on and the ECB, in all likelihood, will start a gradual raising of interest rates. Whether this will be the right or the wrong decision, I have no idea. But I imagine, from my limited knowledge of finance, that a world of credit at 1% cannot go on forever. While increased rates will create additional difficulties for Irish homeowners, it should ease the problem of tracker mortgages for the banks. And why not move to establish a National House Price Register as a matter of urgency instead of waiting until private interests in distressed property auctions put the floor at a level – and probably incorrectly – that neither property owners or the government may dare to contemplate?

  5. @ Colm McCarthy

    I agree with David that your contributions bring a sense of realism to the serious challenges.

    Rescheduling seems the most likely option in the medium term but in the meantime, we have to get the day-to-day finances under control.

  6. “Note that a return to the bond market which takes this jaundiced view is a part of the programme, as Karl Whelan repeatedly points out.”

    Now why should we stick to a programme (or plan) which has an identified inherent flaw?

    The EU/ECB are clearly can kicking to get us within the ESM while the European banking system is repaired. They know that the debt is unsustainable. Not only our own respected economists appear to be of this view, but the biggest international bond traders (Pimco) and leading international (celebrity) economists such as Stiglitz, Krugman, Buiter, Manchu have all arrived at this conclusion.

    When the previous administration discovered that the then plan was not working they stuck to it regardless. Are we about to see a repeat?

    With bond yields where they are it is delusional thinking to believe we can go back to the same markets at a rate 50% below current with debt mounting by the day.

    I think I will pass on that juicy yield for 5 and 10 year. As the fella said… if it looks too good to be etc…..

  7. How can anyone take issue with such clear common sense and sound analysis, unless, of course, wholely different, political factors are subvening.

    (And it really does seem extraordinary to me the depth and duration of pain that can be inflicted on the Irish people to protect German and Britsh banks from their reckless behaviour — this was not just about Irish banks and their supervison.)

  8. Question: Does this mean Colm is a celebrity economist?

    If he won’t tow the party line and support the current orthodoxy, then he will be labelled a rouge/celebrity/maverick/etc economist. In this instance, since he has committed the mortal sin of calling a spade a spade, of saying that the governments position on debt restructuring is unsustainable, it looks like Mr McCarthy may have to join the likes of McWilliams on the MC circuit.

    Unless of course, the current orthodoxy changes.

  9. @ Colm Mc

    An board snip trí?

    Let’s hear it – you have united more dissenters with one post than Wolf Tone !

  10. @Colm

    I am surprised you haven’t mentioned the design of the ESM itself as a key factor explaining current yields. PSI ca

  11. @Colm

    Sorry about that. Intended post: I am surprised you haven’t mentioned the design of the ESM itself as a key factor explaining current yields. PSI can be welcome when working retrospectively, but it can make it harder to raise funds at affordable yields going forward.

  12. Good post Colm. I noted that the value of bank bonds jumped by around 10% last Friday after it became clear that most holders of these securities (senior and sub bank debt, not guaranteed) will not suffer losses are likely to be reimbursed in full. The value of these securities might have been some 16bn euros on Wednesday but by Friday they had risen to some 17.5bn euros, while the face value of those securities – what investors get in the end – would be around 23bn euro if reimbursed in fall (some of the sub debt – a very modest part of the total – still should be haircutted).

    It is interesting to compare that to the value of Irish government debt traded on the markets. It might have been valued at some 73bn euros (remember bid asks are very wide many are not really quoted). It is supposed to be redeemed at some 90bn euros over the coming year. Its value was roughly stable over the week. That was despite the surprise on the bank debt, indicating that the key worries are elsewhere.

    It’s also interesting to note that the discount on today’s value of government debt equals more or less (and coincidentally) the value of the bank bonds that now might be redeemed at full face value (90bn les 73bn equals the some 17bn valuation of bank debt).
    Holders of government debt abroad generally find this situation paradoxical (the excerpt from a Bloomberg interview with Pimco’s El Erian on Marian Finucane made that patently clear). They still don’t understand why their holdings are under threat and yet bank bond investors might well get all their cash back (but I note this perspective is still no written in stone yet).

    S&P – after the news on banks broke on banks – downgraded Ireland to BBB+, mainly justified on the back of the risk of restructuring of government debt from 2013 onwards for reasons related to the EU’s institutional governance (aka John McHale’s reference to design of ESM etc) . And indeed the discount on government bonds suggests that investors agree, as Colm pointed out.

    The EU’s politicians – some at least – understood the situation very well already last October at Deauville. Very important decisions were taken at that time which will dictate public policies over the next three years (CACs, ESM, treaty and legal changes etc). The previous Irish government signed up for this programme of action. Whether it understood what it was signing is another matter. Certainly when I look back at blog posts back in October, there was no awareness on these pages.

    Eamon Gilmore now has promised a “diplomatic onslaught” to sell Ireland’s case. Good on him. Hopefully he is well briefed – like all of Irish diplomatic staff – on the numbers, and a long term bargaining goals have been set. A realistic appraisal; not another cloud cuckoo view of prospects (which would be highly counterproductive).

    Any “diplomatic onslaught” will be more credible if Ireland can show it is really serious on getting its budget deficit down – down very sharply, now. Huge pain, but less I think if the public deficit (ex banks!) is allowed to fester for yet a fifth year. The European Semester requires substantial progress on the 2012 budget right now. We know the figures for some countries already for next year.

    If the Irish government goes around Europe’s capitals today with no strong commitment to cutting the budget deficit a few percentage points (horribly painful, I know) next year, credibility already will take a hit (remember Ireland still has the biggest budget of any eurozone country – ex banks). If you go around with Europe’s capitals with just a vague promise to meet the targets as set with the EC-IMF for 2012, I’m not sure that it is worth buying the plane tickets.

    If ever the budget deficit ex coupon payments were to be cut to zero by 2013, I think there’d be demand for Irish public debt at attractive rates. Also the EU would be far more amenable to giving meaningful aid (for one, the capacity for threat from countries with zero budget balances is far greater). Ireland therefore would be in a far stronger bargaining position if it can possibly get its public deficit ex banks down sharply right now. Whether the extraordinarily tough measures needed to make this goal a reality would ever be politically feasible is of course another matter.

    At the end of the day, restructuring for a sovereign is a choice (unlike many corporates that go bust). Countries like Ireland, even Greece and Portugal, have the wherewithal to avoid reneging on debt if the government is of that mind, if at the price of real, deep austerity (not hysterity as seen now). It was remarked on Marian Finucane that visitors to Ireland are surprised by the apparent high standard of living in Ireland, still. I can confirm that there is much surprise at the elevated level of conspicuous consumption in particular, still (remember the last government actually CUT taxes on alcohol, beggaring belief). That’s maybe fine if you can afford it. But like David Drumm, you don’t want to be buying a $69000 Range Rover when you are pleading bankruptcy.

    The bigger issue is how financial reform is carried out in Europe. Unfortunately the model of reform it is adopting is more like Japan – that means putting all the financial rotten eggs into cold storage and hoping they all come out fine in a few years. Contrast with the US where a spade is called a spade; and insolvency problems are dealt with upfront, as we saw with Lehman and Bear Stearns and hundreds of other banks. Such costs only rarely find the find their way into the public purse. In Europe though, costs are spreads more widely around, either because of design or because of ineptitude, or in a vain attempt to preserve jobs etc. Something that Eamon Gilmore might meditate on in his “diplomatic onslaught”.

  13. There is a broader political point here which is also worth considering and it is the transmogrification of the Competitiveness Pact into the Euro Plus Pact cf. the details of the Grand Bargain contained in the conclusions of the last European Council and available at http://www.european-council.europa.eu/home-page.aspx?lang=EN

    Why the change in name?

    I would suggest that it was intended to underline the fact that it is the euro area countries that are providing the “plus” and there is no longer any attempt to maintain even a semblance of unity across the 27 in relation to a key concept which affects them all: that of competitiveness.

    This has particular implications for the UK. As matters stand, the UK is contributing only through the EU budget to a relatively small element of the Greek and Irish packages. It has insisted that this element cease to exist from 2013, a course of action which is probably not viewed with any disfavour by other countries as the legal base used (Article 122.2 TFEU “natural disasters”) is dubious but more particularly because it eats into the available funds that can be raised in the market through the EU budget, including that required for balance of payments assistance to non-euro states (Article 143).

    As matters stand, as far as I can see, no country has put up any cash other than possibly in the form of the bilateral loans to Greece (other countries of the euro area) and Ireland (UK) which are probably also being funded on the markets. Indeed, what is happening is that “creditor” countries, with a AAA rating in particular, are raising cash on the markets, lending it on and getting a tidy return. So much for European solidarity!

    This will change with the ESM as actual capital will have to be subscribed (about Germany’s share of which Merkel made a considerable fuss, pulling the carpet from under her finance minister in the process).

    We come then to the duelling economic banjos about the role of the euro in all of this.

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

    http://www.irishtimes.com/newspaper/finance/2011/0401/1224293530327.html

    I would suggest that the debate, although interesting, misses the point. The key question is not what happened to other countries but whether Ireland should have joined the euro in the first place given her close economic ties with the UK. I would suggest that the answer is probably no but it is now too late to do much about it because the choice is that of jumping out of the frying pan into the fire.

    The question then becomes the attitude that Ireland should take to the economic policies that should be followed within the euro area. The Euro Plus Pact leaves little doubt about the majority view and it is not good news for Europe as a whole. However, if the experience of the Lisbon Strategy is any guide, action plans such as the Euro Plus Pact which have no binding force will amount to very little.

    To have influence in the debate within the euro area Ireland would have to be in the same position as Finland i.e. a balanced budget with an adequate cushion to meet unexpected events, or asymmetric shocks as I believe they are know in the jargon, a matter in which Finland has some experience, whether the collapse of the Soviet Union or the threatened collapse of her banks.

    How do we get that cushion? That is the question!

  14. Returning to the bond markets anytime soon looks highly unlikely given headlines like that of Der Spiegel online-

    New Euro Threat Emerges
    Irish Banks Fail Stress Tests

    By Carsten Volkery

    “Ireland’s banks performed so badly in the latest EU stress tests that the country’s last remaining major independent financial institutions will likely be nationalized. The entire banking sector is set to radically shrink, but that might carry significant risks for Ireland’s European partners.

    Many had thought that Dublin’s banks had already hit bottom. But, after the release Thursday of the results of the latest European Union banking stress tests in Ireland, Dublin’s financial industry looks more like it has fallen into a bottomless pit. ”

    @Ciaran O”Hagan

    With the kind of negative publicity quoted above, is it likely that your compatriots will shun our bonds for some considerable time? I note you say we could return to the bond markets if we bring the deficit to zero. But the chances of that happening are slim.
    It seems increasingly inevitable that we will have to borrow under ESM from mid 2013 either to roll over existing debt or the current EU/IMF facility (and the Brits, Sweden?). In addition Mr.Trichet won’t wait for his 200 billion. The reality is we have a 300billion debt pile to sort out and as Colm McCarthy pointed out recently this is finger in the dyke solution.

  15. @Colm McCarthy.

    The fiscal adjustment makes sense in any scenario and there is a case for doing it faster. What it suggests is that preparations need to be made for a long-haul, including sovereign re-structuring or re-scheduling, just in case the markets might have it right this time.

    A good point that need reinforcing all the time.

    With the prospect of sovereign default on the horizon, immediate fiscal balance is now an imperative. There should be an immediate 20% surtax on all incomes over €50,000 plus a serious structured reduction of all public sector salaries in excess of €50,000.
    Only when fiscal balance is achieved can Ireland give its answer to an ECB that has rated investors who lost, over innocent third parties.

    As for Interbank lending or the bank bond market or indeed peripheral State bond markets, these are all finished. And they are not coming back except for the largest countries and largest banks. Its about time the ECB recognised this and threw Bini Smaghi scattergraphs into the nearest rubbish bin.

    Any bank or country that cannot finance its own lending or expenditure from its own deposit base or citizens savings will never recover its independence or sovereignty. The world of finance has changed for the foreseeable future.

  16. We might also begin to question the quality of the governments “revenue book” in the sense that it is easy to increase rates or introduce new taxes, but tis a little harder to increase actual revenue….
    Bad time to be a p.a.y.e.r

  17. Colm McCarthy says,

    When sovereign debt gets junked by the market, it does not recover over short horizons like eighteen months. You go down in the elevator and come back up the stairs.

    What ‘the market’ has really done since 2008 in regards to Europe, is to establish a new kind of debt classification, and one that superceeds all earlier classifications which were based upon sovereignty and private-ization. If ‘the markets’ can claim any intelligence of any sort, it is for this and nothing else. It also suggests that the old classification system for debt based upon sovereignty or private-ization, were out-moded, inappropriate and mis-applied in regards to the Eurozone project.

    The new debt classification system, which ‘the markets’ have managed to force us all to examine and consider as a permanent part of our landscape in doing business in Europe for the foreseeable future – is of course, this new concept of EU peripheral debt. I am not experienced enough in Economics history or otherwise to cite examples of this, or parallels in other parts of the world. But one thing does spring to my mind, which may be considered a parallel of sorts.

    It is the case, when the north American economy was growing in the 1800s and trying to set itself up financially in order to expand westward into new territories, establishing whole new infrastructure, towns, communities and so forth. It is unreasonable to use the analogy of the wild west, as appropriate to compare with the Eurozone in 2011 I admit. But in fairness, they did print a lot of money in that north American expansion, and it was a bit of a risk to the whole currency system then. Because the wealth had not yet been created, the contracts, rights and property systems had not yet been established, to underpin the monetary expansion which was used to fuel the drive westward.

    What has happened in the peripheral nations in the Eurozone in the 2000’s was akin to the monetary supply expansion of the 1800s in north America. But the wealth that should have been created to justify such a policy never materialized, but instead ended up in ghost estates in the middle of places like Laois and Offaly. We like to think we are more sophisticated and more advanced in 2011 than we were in terms of economics in the 1800s. But really, are we? BOH.

  18. @ All,

    What I am saying is that a ‘split’ in the dollar never occured in the 1800s in north America. Even though both sides of that land mass were operating separately from one another. Because, somehow, the westward drive managed to create enough real collateral to underpin the wild monetary expansionism. My question is, what would have happened in 1800s north America and to the dollar system, if the west wasn’t won? BOH.

  19. @ Ciaran O’Hagan

    There is no particular ineptitude in Europe. You know fine well, as the saying goes, that the EZ has an entirely different constitutional structure from the US. Apples ought not to be compared with pears. You also know that the ECB has, unlike the FED, no remit beyond the preservation of the monetary system.

    The Lehman debacle was an experiment which is unlikely to be repeated. Plenty of US financial sector problems have ended up on the taxpayer’s bill, but the cost is well hidden. If it weren’t for QE, and the fact that Uncle Sam’s paper serves critical global functions, the lid would have blown off long ago.

    ‘In 2008, the US government loaned AIG more than $120 billion from the Federal Reserve Bank of New York and $49 billion from the Treasury’s Troubled Asset Relief Program (TARP). These debts still remain outstanding and many taxpayers are skeptical whether AIG would be able to repay the debts’

    http://www.financialfeed.net/aig-schemes-exit-from-federal-support/85141/.

    I trust the remainder of your argument is more soundly based.

  20. @Ciaran O Hagan
    “Contrast with the US where a spade is called a spade; and insolvency problems are dealt with upfront, as we saw with Lehman and Bear Stearns and hundreds of other banks. Such costs only rarely find the find their way into the public purse. ”

    You are kidding – right? What about the multi-billion dollar bailout of GS (12.5 bn via AIG) and Merrill Lynch (6.8bn via AIG). It never ceases to amaze me that people think that finance industry on the other side of the pond is squeaky clean. The truth is that the US subprime was the source of all the cheap money which fuelled the excesses throughout the globe including Ireland.

  21. The Irish State is insolvent and headed for sovereign default. This is not my opinion, it is the opinion of the credit markets…

    A back-of-the-envelope calculation shows that Irish sovereign default is less than 50% likely in the next 10 years.

    Here’s my spreadsheet: http://bit.ly/g2zIuC

    This isn’t my area so perhaps I’m missing something.

  22. @ Paul Quigley

    I think that the argument advanced by Ciarán O’Hagan is well founded except on the point you raise. The problem is that there is little widespread knowledge of the entirely different constitutional structures that apply in the US and the EU and, in particular, of the limit on the remit of the ECB.

    The debate, in fact, boils down to two schools of thought (i) the “organic” school which postulates that the demands of a single currency will lead eventually to federal integration, which still has widespread support, especially in France and (ii) what I would call the “realistic” school which does not enjoy a similar level of support because it implies that the EU has reached a high-water mark level of institutional integration.

    The euro has to be seen in the context of the second school of thought because it is supported by the facts, notably the course of action that Germany has insisted upon; the involvement of the IMF, action largely outside the context of the treaties to date and insistence on an international treaty based on public international law as the foundation of the ESM.

    I happen to think that this is the right approach because the EU is not a federation such as the US and, given the disparate nature of the member states that make it up, should not even aim, in my view, for such an outcome. Indeed, its unique achievement has been to succeed in creating an international organisation which is neither a federation nor an international organisation but to arrive at a situation under the Lisbon Treaty which combines both forms, the key difference being that the states that make up the “federation” also implement its decisions. This is quite unique and explains why Europe does not need an army of federal employees.

    Furthermore, the European (Federal) Court of Justice and the national courts (with difficulty in regard to the constitutional courts of certain countries, notably Germany) must cooperate to implement EU law.

    The question then is whether one needs a federal system of transfers to operate a successful single currency. I think that the answer is no provided the states carrying the biggest risks i.e. those that ignore the need to remain solvent; not necessarily the poorest, take the necessary precautionary action (as the euro members from the new member states have demonstrated).

    It may be too late for Greece, Ireland and Portugal, a situation that Germany and France are well aware was also a failed responsibility of their banks. Hence the ESM!

    The leaders of Greece and Portugal appear to understand the issues of national sovereignty and status that are at stake. It remains to be seen whther this will also be the case in Ireland.

    As to the Deauville Declaration and the subsequent Euro Plus Pact, an examination of these texts will show that France has ended with some of the form in respect of economic governance (supposed increased institutional integration) but Germany with the substance.

    The question of increased economic and social integration is a different issue. The history of the EU in this respect has always been two steps forward and one step back. The new institutional framework under the Lisbon Treaty might make it three steps forward and only one step back, as the successful conclusion of the package of legal measures in relation to financial supervision has demonstrated and which should shortly be matched by the “six-pack” of legislative measures to tighten the Stability and Growth Pact which still, luckily, applies to all 27 and not just the chosen few.

  23. @ Ciaran O’Hagan

    “real, deep austerity (not hysterity as seen now)”

    How does the biggest annual adjustment the IMF could find (for 2009) followed up by more of the same for 2011 and 2012 not count as genuine austerity or deserve your term indicating that those who believe these are large adjustments are somehow being hysterical?

    http://dl.dropbox.com/u/6326317/IMFWEO.PNG

  24. @ Paul Quigley, AMcGrath
    It is interesting to see that there are people who Ireland who still defend throwing public money at private bankruptcy. I’m not saying it doesn’t happen in the US (AIG lives on and GSE problems etc will return one day). Just that it didn’t in key instances, and that’s one reason (among many) why the US is still AAA and Ireland isn’t.
    TARP was actually reported as making a profit during the week. But that is not the issue. Rather losses are less likely to be socialised in the US, and companies that are uncompetitive or industries with defunct business models are more likely to get their come-uppance, with few tears.
    In Europe, we just saw one bank go bust in the eurozone in 4 years. How many in the US? Free entry and exit? Defence of state champions and addressing the TBTF issue? Why did/does Irish banking have to remain exclusively Irish owned and operated?
    Sure Europe bears some responsibility for having tolerated such actions from Ireland in violation of EU principles. But the European politicians you refer to see a small county with small banks that went on an unregulated lending rampage. Anglo in continental money markets was virtually unknown (Irish securities always sold far better within the British Isles or to the US for obvious linguistic reasons and familiarity). Pretending that Ireland’s problems are somebody’s else’s fault we will hear again and again. Abroad it doesn’t cut any ice for anyone with knowledge of developments.
    Anyway even if Irish bank debt could be wiped off the face of the universe, the budget deficit hole is enough of a worry. That gets us back to the themes of Colm’s piece. The US may have a budget deficit approaching Ireland’s, but its inherent balance sheet flexibility (mainly from dollar as reserve currency) is without parallel, making it the envy of sovereign debtors. For now.
    .

    @ ceteris paribus
    I hope Ireland can avoid ever having to call on the ESM, for its sake. It is just a hope, not a forecast.
    On the other hand, if ESM was seen as a likelihood, the 3-year strategy might want to be comepletely different to what I suggested above.
    Hopefully too, the advisors and excutants of Mr Gilmore’s “diplomatic onslaught” have a thoroughly realistic appraisal of the numbers, with a long term strategy to back it.
    Else it will be like sending the troops over the trenches at the Somme.
    .

    @ Ossian Marks for trying But I don’t think anyone would take the ratio of German to Irish yields to calculate a repayment prob and default prob; nor should probs, if accurate, be cumulated like this. You’d also need better yield data (eg 4 y is seriously off). Good luck!

  25. The late American historian Daniel Boorstin, wrote in an essay, “The Amateur Spirit and its Enemies,” published in his book “Hidden History”: “In the United States today there is hardly an institution or a daily activity where we are not ruled by the bureaucratic frame of mind — caution, concern for regularity of procedures, avoidance of the need for decision” — all of which, Boorstin suggested, was best summed up – – “on a sign over the desk of a French civil servant: ‘Never do anything for the first time’.”

    Karl Whelan has correctly pointed out that there has been significant consolidation so far. It is not enough though and many relics of the bubble times still exist.

    There is of course a problem with cutting public sector costs as severance packages and a shift from employment to a high cost pension can leave very little net benefit.

    Last month I referred to the Bord Snip report, which is a singular piece of work that lifted rocks that had been encrusted for decades.

    How many of the proposals, valued in 2009 at over €5bn have been implemented?

    A focus on growth is also important.

    IMF economists, Olivier Blanchard and Carlo Cottarelli, have pointed out that strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved.

    However, they also add: “Increases in pension and health care spending represented over 80 percent of the increase in primary public spending to GDP ratio observed in the G-7 countries in the last decades. The net present value of future increases in health care and pension spending is more than ten times larger than the increase in public debt due to the crisis.”

    http://bit.ly/bvIjB7

    The Irish situation appears surreal; the economy is bankrupt but there isn’t a sense of an economic emergency.

    On March 4, 1933, FDR called on Congress to give him wartime powers to deal with the emergency.

    The VHI says it has cut consultants’ fees by 15% but after deflation, this is just baby stuff. Meanwhile, the number of medical procedures rise by 10% annually.

    What better illustration is there of a small country that has lost its way is the almost €10m paid to individual public lawyer contractors in 1998-2010 and there was no record of their actual attendance?

    There has been a pay cut, a contribution to an expensive pension system and tax increases but there has been no serious reform thus far.

    The featherbedding built up over decades is still intact.

    Life may have been simpler on Jan 20, 1953 when Harry Truman drove himself and his wife back to Independence, Missouri, after the inauguration of Eisenhower.

    The country is living beyond it means as Haughey said in 1980.

    We can put off the evil day but it will come; there is going to be no boom among the advanced economies to make the path easier.

  26. No sunshine either in the US:

    The Wall Street Journal reports that the recovery seems to be going hand-in-hand with workers taking lower-paying jobs. More than half of those full-time workers who lost jobs between 2007 and 2009 and then found full-time work by early last year said their new jobs came with lower wages. Some 36% saw a pay cut of 20% or more.

    Economists at the Brookings Institution said on Friday that if the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until June 2023 – – another 12 years – – to close the job gap of 12.2m: the number of jobs that the US economy needs to create in order to return to pre-recession employment levels while absorbing the 125,000 people who enter the labour force each month.

    Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by June 2016 – – not for another five years.

  27. @MH
    The logic of globalization is a convergence of wages of ‘developed’ economies. Its a long process but that is where it is headed.

  28. @all

    Here are three different questions:

    1. What ought our pace of adjustment to be if we were in a normal, sane (or no-madder-than-normal) IMF program including senior-burnings, or if through senior-burnings we had managed to avoid external assistance?

    2. Given the EU/IMF deal we actually have, what should our pace of adjustment be if we rule out unilateral action and hope for the best from ESM or whatever turns up?

    3. Given the EU/IMF deal we actually have, what should our pace of adjustment be if we are serious about using or being able to use unilateral action, or the credible threat of it, to improve our position?

    Obviously these questions could all have different correct answers. Here are two more questions which are different from each other:

    i. Does our pace of adjustment demonstrate a relatively strong moral fibre and stomach for austerity, by the standards of a fallen world?

    ii. Is our pace of adjustment optimal for the situation we’re in?

    Clearly these questions can have different correct answers too, because we are living in real life, not a Victorian moral fable. The scale of our deficit doesn’t (necessarily) imply that we’re being extraordinarily slack about making adjustments, let alone that if only we were really trying then everything would be under control. But it cuts both ways: even if our commitment to austerity is respectable, or actually sterling, by normal international standards, it doesn’t follow that we don’t need to do more, especially in light of our unusually bad circumstances. When you’re being chased by an angry bear, you can bet that the bear is following its own agenda, and isn’t pacing itself in the interests of fairness. (Of course that means that the bear may actually be inescapable, but so it goes.)

  29. @KW, wrt the size of the adjustment: in the same way as switching from Clos du Mesnil to Dom Perignon represents a swingeing cut, but you’re still living large. Levels are more important than rates of change.

  30. @ Michael H

    ‘The Irish situation appears surreal; the economy is bankrupt but there isn’t a sense of an economic emergency’

    A few reasons for that I think.

    1 The economic challenges are coming in fast and from number of quarters, but our government and people are rather attached to old certainties.

    2 The old certainties underpin a lot of comfortable institutional arrangements, in both public and private sectors. The ancien regime.

    3 The current attempt to restore confidence amounts in many cases to a simple denial of reality, while attempting to preserve continuity with the past. As demonstrated daily on this board, and elsewhere, such a hidebound approach is bound to fail.

    4 Effective approaches will require a grasp of a very complex set of economic, political and social dynamics within and without Europe.

    5 They will also require, in my view, a very infomed analysis of our economic and institutional history as set out by Joe Lee and others. Know thyself.

    @ anonym
    +1

    @ Ciaran O’H

    Much to debate in what you say, but ars longa vita brevis..

    ‘Irish securities always sold far better within the British Isles or to the US for obvious linguistic reasons and familiarity’.

    It seems that Keynes’ animal spirits take a variety of forms. There has to be a PhD or two around the legacy of our Boston v Berlin dance. It has become part of what we are.

  31. @Karl Whelan
    “How does the biggest annual adjustment the IMF could find (for 2009) followed up by more of the same for 2010 and 2011 not count as genuine austerity [corrected]”
    It does, particularly for 2009 where real cuts were made to PS salaries (including the pension levy). 2010 has some tax raises in it.

    But what were inflation rates like for the other periods in the picture? In this case, I think a picture is saying rather less than 1000 words. My understanding is that inflation in the 1990s did most of the heavy lifting, combined with a currency devaluation. There are many arguments as to whether that is an accurate reflection of events, though.

  32. I’ve updated the spreadsheet for Irish sovereign bonds cumulative probability of default with recovery rate taken into account. http://bit.ly/g2zIuC

    Can anyone suggest an improvement to this method of calculating CPD?

  33. @ Michael Hennigan ‘ there is going to be no boom among the advanced economies to make the path easier.’

    This is apposite. I believe that Ireland was rescued because of the long boom from the late 1980s until 2007. Despite McSharry and the cuts..etc… the fundamental nature of government in Ireland was never reformed. The beast was simply starved when, in fact, it needed to be both starved and genetically modified.

    There most telling thing for any foreigner living in this country who has spent time in an advanced market-based economy – i.e. parts of Asia, the US or EU – is the complete absence not just of determination or ability but of simple CURIOSITY amongst government leaders (elected or otherwise) about reforming government or the daily practice of government. Slicing into it at any point of its existence – whether chronological, geographical or hierarchical – government in Ireland presents, in a fractal pattern, vested interests, incompetence and waste – an overall ineffectualness. Brendan Drumm being interviewed about the health service and the slush fund for SIPTU talked as if he was a shopper at a bus stop who’d been asked his opinion by a broadcaster doing a vox pop. Most senior public officials, elected or otherwise, seem to think that their job is about bearing witness to something. I mean isn’t this literally what the €200m + spent on Moriarity is about? We have evidence of corruption so let’s spent the guts of a quarter of a billion ‘bearing witness’ and not really finding out anything – or finding out anything that we can do anything with.

    It’s as if an aboriginal pre-industrial people have put on suits, ties…western clothes..and then set about constructing an outward appearance of government / governance..which to their eyes works as a sort of government-impressionism. What is blurred and fuzzy up close becomes a nice picture if you stand well back.

  34. I 2 am a fan of Mr Snip’s realism but this piece rather overplays the Karl Whelan hypothesis i.e. that this nightmare is supposed to have all blown over in 18 months. In theory ECB 200bn funding is also only for 2 weeks but nobody believes that either. As Prof Honey said we are likely to be engaging with the IMF for 10 years. J McH’s point about a potential change to the rules is possibly more behind the double digit bond yields.

  35. @Ciaran O’Hagan

    It is interesting to see that there are people who Ireland who still defend throwing public money at private bankruptcy.

    Now that the banking losses have been socialised, its good to see people in that industry rediscover their moxy for free enterprise.

    In Europe, we just saw one bank go bust in the eurozone in 4 years. How many in the US? Free entry and exit? Defence of state champions and addressing the TBTF issue? Why did/does Irish banking have to remain exclusively Irish owned and operated?

    We saw several banks go bust in Ireland but Ireland first bailed them out and afterwards was forced to bail them out again.
    There is no need for “Irish banks” as long as whichever banks that take over pay back the €70 billion if full and with interest.
    ….’If it takes a thousand years’…

  36. Suggest messrs. O’Hagan/McGrath/Quigley etc read and absorb ‘Griftopia’ by Matt Taibbi……….will put you all out of your academic reveries…..
    As regards a Bord Snip 3 as suggested earlier – whatever happened to BS 2?
    It must be interesting for EU people to meet with Irish Officials and their various minions who are paid salaries at least 26% higher on average and in some cases – medical consultants,gp’s,senior execs semi-states,county councils,HSE ec,etc, far higher – not to forget to mention the outrageous salary/bonus levels at executive levels in the private sector…
    And this is an Island of 4m population….!
    The penny is far from dropping in relation to getting our fiscal and competitive acts together……..

  37. @Michael Hennigan
    “It has been argued that Bertie Ahern’s 10% devaluation in 1993 triggered an export boom.

    — conveniently ignoring the impact of big MNC operations such as Intel, Dell etc coming on stream.”
    But the 10% devaluation resulted in those MNC operations generating more activity in punt terms while at the same time reducing the effect of pay demands (when internationally benchmarked). So punt GDP increased, punt costs decreased, imported inflation increased etc.

    I don’t really believe the “devalue to stimulate exports” story, as ramping up export capacity takes time, so unless you have overcapacity of product that there is demand for at a lower price (possibly agricultural product?), what you do is reduce effective earnings (through imported inflation) and thereby reduce costs to exporting businesses. Unless the devaluation is sustained by lower than inflation pay rises (maybe possible in a large self-supplying economy?) the benefits to exports are not realised, IMO.

  38. @ Paul McDonnell

    ‘It’s as if an aboriginal pre-industrial people have put on suits, ties…western clothes..and then set about constructing an outward appearance of government / governance..which to their eyes works as a sort of government-impressionism. What is blurred and fuzzy up close becomes a nice picture if you stand well back’

    The disorder is an old one. Listen.

    ‘Through the jungle of Pembroke Road
    I have dragged myself in terror
    Listing ot the lions of Frustration roar
    the anguish of beasts that have had their dinner
    And found there was something inside
    Gnawing away unsatisfied.

    As far as Ballsbridge I walked in wonder,
    Down Clyde to Waterloo
    Watching the natives pulling the jungle
    Grass of Convention to cover the nude
    Barbaric buttock where tails-stumps showed
    When reason lit up the road.

    On Baggot Street Bridge they screeched
    Then dived out of my sight
    Into the pools of blackest porter
    till half-past ten of the jungle night
    The bubbles came up with toxic smell
    From Frustration’s holy well.’

    Patrick Kavanagh Collected Poems, 1964, 1968, p.96.

    Frustration may have changed its form, but it is still with us. Ireland 1912-85 Politics and Society by Joe Lee provides an excellent diagnosis if you have time .

  39. @ vinny

    ‘Suggest messrs. O’Hagan/McGrath/Quigley etc read and absorb ‘Griftopia’ by Matt Taibbi……….will put you all out of your academic reveries…..’

    I’m no academic, but there are plenty of academics I respect. The ones on this board are certainly no dozers, as they say up north.

    Taibbi has good bit of the truth, but like all popularisers, he has to join up a lot of dots. I recall the story about the man who jumped on his horse and galloped off in all directions….

  40. @Brendan Walsh

    Interesting. Last week I was working out what Irish Govt bonds would do to a small pension in the next 6 years. They would almost double it. And even with a 25% default day one, they would do as well as investing in 3% German bonds over the same period.
    It was all rough calculation on an excel spreadsheet but it gave me food for thought.

  41. ‘Ms Bartsch wrote. “We continue to believe that Ireland is fundamentally different from the other peripheral countries in that it is a fully deregulated, fully liberalised market economy.” ‘

    Of course it is. What can possibly go wrong?

  42. @Paul MacDonnell,

    I noticed this quote as well. ‘Fully deregulated, fully liberalsed market economy…my a**e’. What planet are these people on? Still if it encourage some investors to pile in and bring down the spread over bunds, perhaps it would be churlish to criticise. But again, what would happen to yields if they were to pile in and their eyes were opened to reality?

  43. @Brendan Walsh

    Is the tide about to turn?

    http://www.irishtimes.com/newspaper/breaking/2011/0404/breaking22.html

    JTO:

    I have been saying for 2 years on this site that I was putting my savings in these and advising others to do the same. The last such occasion was on 25th March in this link:

    http://www.irisheconomy.ie/index.php/2011/03/25/upcoming-investment-opportunity/

    I was simply weeks, or even months, ahead of Morgan Stanley. It is now becoming increasingly likely that I am going to be rich, rich, rich. My commiserations to all those economists who have been sneering at my investment advice, and instead have been investing in the UK at 1% interest rate and 5% inflation. They needn’t say that I didn’t warn them, but the truth is that they are going to lose lots and lots of money. However, I’m not the vindictive type and, next time I order a pizza from Domino’s, I will make sure to leave them a large tip.

    The doom pornographers had pencilled in 31st March as the day on which they would claim victory. That was the day on which the stress tests were going to sink the Irish economy once and for all. The day on which default would become inevitable. It isn’t turning out at all like they hoped. It is they who are now sinking.

    Is there any market in shares in Irish economists? Time to buy shares in John McHale and Seamus Coffey, and dump those in Messrs WcWilliams, Kelly and Gugdiev, quickly before they become worthless.

  44. @Joseph Ryan

    Dangerous. The probability of default/restructering is rising. Remember the 200 billion time bomb when doing the calculations.

    @Paul MacDonnell

    Fully deregulated. Definite. That why we are in the fertilizer business.

  45. I was wondering which investments banks Garret FitzGerald was writing about in Saturday’s Irish Times. So Morgan Stanley is one……..

  46. “But the biggest change by far for Morgan Stanley comes from the acquisition of the Salomon Smith Barney brokerage division. The deal, which was announced in January, has boosted the number of brokers at Morgan Stanley to just over 20,000. That makes Morgan the largest brokerage house in the country. Brad Hintz, an analyst at Sanford C. Bernstein & Co., estimates that after the acquisition is complete Morgan will get 42% of its revenue from its brokerage division, up from 20% a year ago.”

    Now would they be pushing this great investment through their 20,000 brokers? Surely they are not motivated by profit from its brokerage division. I wonder did they buy any for their own account.

  47. @Colm

    “….preparations need to br made for a long haul, including soverign restructuring or re-scheduling”.

    So if the markets “have it right this time”, a possible scenario could be that Ireland prepares for the “long haul” by:

    1)leaving the Euro,
    2)devaluing to the appropriate level (probably 10-12%),
    3) Refinancing soveriegn debt over a longer period with or without the IMF together with bi-lateral loans from certain EU states, the UK and US.

    Looking at it this way these potential policy actions do not look very scary.

    In the process we may find out that the price of Irish bonds had “Euro risk” penalty points built in all along. We may even find that membership of the EU, without the increasingly dubious benefits of monetary union, will be quite comfortable once again.

  48. Whatever they were saying last week, bond prices have changed a bit this week.

    After peaking at around 10.3% last Thursday, 10-year government bond yields have fallen since then and are now at 9.3%. The market’s expectations of default is falling. Two-year yields have been following a similar pattern.

  49. Irish 10-yr yields now (April 12th) down to 9.0% and Germans up to 3.4%.
    Irish 2-yr yields now down to 8.7% from a peak of 10.7%.
    Doesn’t seem to merit much attention on this site.

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