Richard Portes on Ireland’s debt

What next for Ireland? This column by CEPR President Richard Portes makes the case that the country should restructure its debt.

61 thoughts on “Richard Portes on Ireland’s debt”

  1. “The right solution is to reprivitise the debt”
    And what do we do – we privitise another 620 million of private debt via an insurance levy.
    Listening to Ruadhri we are in for a long haul of meeting targets set by others for a very long time.
    As Mr Portes says our best chance is when Greece defaults – 2 year today at 24% – so it looks like we will not have to wait too long.

  2. Greece will default this summer and this should put the pressure on our spinless govt. Pure Politics now.

  3. Reasonable analysis from Portes. Just one small point. He counterposes the sale of state assets with re-privatisation of bank debt. It is best surely to pursue all practical debt reduction options, including of course these two, as well as early deficit reduction.

  4. We’re coming up to the first anniversary for Greece. Disbelief has been suspended for long enough. But I wouldn’t put it past the EU Grand Panjandrums to try to suspend disbelief for a bit longer in Ireland’s case. It took Ireland 5 months to succumb after Greece tumbled into the arms of the EU/IMF. They don’t want the bond market to get the impression that it can get the dominoes to fall too easily or too quickly.

  5. “Of course, there is a way for Ireland to escape responsibility. Just wait for Greece to restructure its debt, at which point there will be general confusion and the markets will shun Ireland anyway. Then restructure, when it will be widely accepted as unavoidable. Maybe that is the unspoken strategy. If so, there may not be long to wait.”

    At least there may be some coherent rationale to apparently irrational cowardice. What will trigger a Greek default? The activism of its citizens or the mechanics of the market?

  6. ‘Advised by Merrill Lynch and pressured by Eurozone authorities, Ireland gambled that its banks were fundamentally sound. A state guarantee would turn markets around, restore liquidity, and give them time to show they could deal with their problems. Not so. Merrill Lynch should at least return its fee’

    I hold no brief for Wall St players, who are likely to be on both sides of any deal, but Nyborg leaves the main responsibility where it belongs, namely our rotten and complacent establishment.

    ‘As late as September 29 itself (and indeed for quite some time afterwards), the position of the CB and the FR seems to have been that Irish banks all remained solvent in the sense that they had to date met all prudential ratios, and that there was therefore little immediate cause for concern. The possibility that they might experience catastrophic losses in asset values into the future does not appear to have been given serious consideration even from a contingency policy point of view.

    ‘ The Government and its several advisors now had to chart a crisis management policy, in principle balancing short-term and long-term risks. The main short-term risk was that measures to be announced by morning would not be sufficient, clear or credible enough to renew flagging market confidence in the Irish banking system. The long-term risk was that losses in the banks would prove much worse than foreseen and, simultaneously, have direct and severe consequences for government finances. This long-term risk, unfortunately, was not appropriately assessed because of issues earlier discussed’

  7. Irish ten-year yielding about 10.40 today, higher than before the bank stress test announcements.

  8. “A reasonable target would be a debt reduction of €40-50 billion, in present value. That is on the order of 30% of GDP and would bring the debt ratio down to a sustainable 80% or so. The required haircuts would be in line with current market valuations of Irish sovereign debt.”

    Sounds just right, so embarrassing our spineless government is not campaigning for such a deal.

    Bottomline is we should simply declare our bankruptcy to the world, drop the lies the bailout band aid will work, we restructure either within the EU, or outside the EU.

    Currently we’re a raft heading over the waterfall with all the best spots taken by blind white elephants …

  9. As H.L. Mencken said, “for every problem there is a solution that is simple, elegant and wrong”.

    To take just some of the Portes propositions that are neither elegant nor simple and are also wrong.

    “Should Delaware be responsible for Citibank’s liabilities?”

    In a federal state, the answer is, of course, no. But the EU is not a federal state. What the crisis of the euro has demonstrated over and over again is that – as the system is presently established – banks are the responsibility of their national supervisory authorities and ultimately the governments to which the latter are responsible. The one exception was probably the funds provided by the TARP to international banks, such were the dimensions of the post Lehmans international financial crisis, such payments finding their parallel in the emergency liquidity being provided by the ECB to the Irish banking system.

    “According to Ireland’s new Minister of Finance, “the ECB says you can’t”. With great respect, where in the world can the central bank tell the government what it can or cannot do in fiscal matters? And what authority has the ECB to do this under the treaties?”

    See above! The ECB is not a central bank that is responsible to the Irish government. The Irish Central Bank is responsible to the Irish government. The latter is also part of the European System of Central Banks. To my knowledge, the ECB is not in the habit of breaking the rules of the treaties. The issue is not a fiscal one but of how the legal obligations in respect of senior bondholders are met having regard to the status of their holdings.

    There are many other points with which one could take issue but, in general, one can describe the article as the usual “Anglo-Saxon view” to which the Continent has become well-accustomed. What they major players in the euroarea are, of course, referring to is the Anglo-American view of the world which finds expression daily in the columns of the Wall Street Journal. Uncritical subscription to that view is not advisable because it does not correspond to what is actually happening. For a more accurate account, I post again the link to the recent article by the head of CEPS, Karl Lannoo.

    http://www.ceps.eu/book/eu%E2%80%99s-response-financial-crisis-%E2%80%93-mid-term-review

    The euroarea has not become a transfer union because this is not what Germany signed up to. Solidarity has nothing to do with it. Ireland is borrowing money from the only people that will lend it in order to keep the protected and pampered sectors of her society in the manner to which they have become accustomed and has a new government which, being charitable, is hesitant in confronting them. There is no obvious reason why other governments should cough up money to rescue any government, be it Greek, Portuguese or Irish, from such a dilemma.

    There is, however, one and it lies in the view one takes of whether or not there is a systemic weakness in the very construction of the euro and the three governments are the victims of it. It will take some time to find out.

  10. It sounded very sensible to me. Except that he says the current account deficit is now down to 2%??.

    And even if foreign financing were completely cut off, the current-account deficit is now only 2%, so adjustment should not be too difficult

    @Colm McCarthy

    He counterposes the sale of state assets with re-privatisation of bank debt. It is best surely to pursue all practical debt reduction options…

    It does not make sense to sell income producing assets to pay down debts.
    This is not to deny the need for huge cost/ salary/benefit reductions in all semi states. Nor to excuse them from reasonable dividend payments. Nor the absolute necessity for firing of boards / chief executives that believed that they entitled to such a huge portion of public income.

  11. This is the same Portes who featured in the documentary ‘Inside Job’. Was his opinion ‘herd-mentality’, or was he influenced by something else?

    “Recently, Portes was featured in Inside Job (film) for a 2007 paper he co-authored (The Internationalisation of Iceland’s Financial Sector) with Fridrik Mar Baldursson where he bullishly praised Icelandic deregulation and the stability of the banking system prior to its catastrophic collapse. Portes was paid by the Icelandic Chamber of Commerce to write the paper. Portes is compared unfalteringly to Frederic Mishkin for his financial conflict of interest and lack of adequate research diligence into the true state of the Icelandic financial system.” http://en.wikipedia.org/wiki/Richard_Portes

  12. Erm, am I mistaken in my belief that the following statements of Mr. Portes are wrong or at the very least debatable?:
    “Advised by Merrill Lynch and pressured by Eurozone authorities, Ireland gambled that its banks were fundamentally sound. A state guarantee would turn markets around, restore liquidity, and give them time to show they could deal with their problems. Not so. Merrill Lynch should at least return its fee.”
    – Merrill Lynch advised against the blanket guarantee?

    “the latest actions have led the ratings agencies to downgrade the sovereign (while upgrading the banks). ”
    – Did the upgrade on the banks pass me by? I thought their deposit ratings had been downgraded to junk recently?

    “A reasonable target would be a debt reduction of €40-50 billion, in present value. That is on the order of 30% of GDP and would bring the debt ratio down to a sustainable 80%”
    – 120% debt-to-GDP – 30% of GDP (where the 30% is 50 bn, i.e. GDP of 166.7 bn) = 90% debt-to-GDP – this is still too much to be borrowing. At least 70 bn in writeoff is required to get to 80% and don’t mention the deficit… so if a deficit is to continue for a couple of years, we’d better write that bit off too… another 10 bn should do it, you’ll lend it to us lads, won’t you? We’ll just do a Charlie on it and not pay it back.

    “We can ignore threats of trade sanctions, long-term loss of market access, or a significant increase in Ireland’s borrowing costs. Extensive experience shows that well-managed sovereign debt restructuring simply does not bring such consequences. This would not be Argentina.”
    – Um, are we Russia? Or Mexico then? Who else has restructured their sovereign debt successfully? Banana republics? Iceland! Iceland! Iceland!? It seems to me an assertion that is not backed by examples either in size or in scope (supposedly mature western country with a rule of contract law).

    “Debt restructuring would impose significant costs on German and British banks, as well as others. ”
    – This is an assertion that is frequently made, but without supporting evidence. If it is based on BIS stats, then it is BS…

    “Anglo-Irish Bank was not in practice a domestic bank, and the other banks also channelled huge lending from elsewhere in Europe. ”
    – I’m not sure where to start with this. It appears to confuse borrowing and lending to a degree that I can only conclude is polemical.

    “even if foreign financing were completely cut off, the current-account deficit is now only 2%, so adjustment should not be too difficult, and no more public servants need be sacked (or go unpaid) than currently planned. ”
    – Not sure how the current account deficit of 2% (of GDP I assume?) matches up the with a structural budget deficit of 9% and a real deficit of close to 12%. If it is so “not too difficult”, why hasn’t it been done? It sounds ‘manageable’ to me…

    “Unlike some countries, Ireland did not get into its present situation because of public sector overborrowing.”
    – Only the timing of the disaster is changed by the banks, the inevitability of the bubble’s effects on both public spending and private indebtedness meant the economy was in for a shock that would lead to crisis. This is the lesson of the EM crises… we would still have had the IMF, still have had an austerity program, but might have escaped with just a different lender. Hungary and Latvia have not defaulted, but then they had smaller bubbles and they have cut…

    “Of course, there is a way for Ireland to escape responsibility. Just wait for Greece to restructure its debt, at which point there will be general confusion and the markets will shun Ireland anyway.”
    – I thought the markets were forward looking…?

  13. As Colm notes, the article is of interest. I wouldn’t be commenting on it other than that there are a number of inaccuracies. And it is important that history is not rewritten.

    Portes claims

    Ireland is being made to pay for deciding to socialise its private debt at the end of September 2008.

    I’ve noted here
    http://www.irisheconomy.ie/index.php/2011/01/17/cowen-and-advice-relating-to-the-guarantee/#comment-118453
    that there was widespread surprise and dissatisfaction abroad with the Irish blanket guarantee in 2008. That should be clear from reading the newswire reports and official statements of the time.

    .

    reassured by Eurozone authorities, Ireland gambled that its banks were fundamentally sound.

    “Gambled, yes”. “Reassured”, no. At least I see no evidence for that, and there is plenty to the contrary. Also foreign governments, the EU and the ECB were taken by surprise back in 2008 by the actions of the Irish government at the time.

    .

    Irish sovereign spreads are today about the same as in November before the IMF programme

    Clearly false. Why false should be clear. But Portes doesn’t mention fiscal issues at all, e.g. that Ireland has the biggest deficit in the EU as a % of national income, as forecast by the EU/IMF, for 2011, and that you can’t have a some 10%+ deficit as a % of GNP (before banks) for 4 years on the trot without serious consequences indeed for the sovereign.

    .

    The programme requires some access to market funding from next year. That is not credible unless the debt is restructured.

    There is the alternative of sharp fiscal austerity, a la Latvia, but Portes prefers to ignore this. As Wellink argued lately in the Financial Times Deutschland, democracies deserve to be given the chance to avoid restructuring. But Portes like many others seems to want to assume default as the only solution.

    .

    One need not accept the claim that historical evidence shows a debt-to-GDP ratio over 90% is normally fatal.

    Well if it were so simple, there’d be no need for rating agencies or analysts.
    .

    The European governments have in effect bailed out their own banks exposed to Ireland, transferring the fiscal costs to the Irish taxpayers through the EFSF

    The amount of money raised by the EFSF for Ireland has been small so far. The fiscal costs to the Irish taxpayer was run up trhough redeeming massive amounts of Irish bank bonds over the past three years.

    ,

    For Irish taxpayers to foot the bill for German and French banks’ misguided lending exceeds the bounds of national economic responsibility

    This was in the earlier WSJ article but was understandably taken out the second time round. I’m not sure what lending he could be referring to? Direct lending to the irish banks inbetter times? Buying of their bonds? Direct lending to irish businesses? None of this went on in any significant sizes as far as I know.

    ,

    Debt restructuring would impose significant costs on German and British banks, as well as others.

    This is a new sentence in the VoxEU article. But where’s the evidence? Their risk I presume is if they hold much of the 90bn of Irish government marektable debt still outstanding (+ indirect costs on other markets of restructuring). The ECB is probably the largest holder now, and the rest is in the hands of a very large number of institutional investors.

    ,

    Elisa Parisi-Capone of Roubini Global Economics
    The link in the footnote doesn’t work. Looks like the article, otherwise with many good points, was written in a hurry. I know, it happens to me at times too.

  14. Along with the Portes article, readers might find it useful to look at the IMF’s post-bailout debt-sustainability analysis (see, in particular, the table on page 47). One relevant fact is that the IMF projects the average nominal interest rate on outstanding debt will reach 5.4 percent in 2015 (it is projected to be 3.9 percent this year). While we clearly face a huge challenge in avoiding an eventual restrucuting, I cannot agree with Colm on the reasonableness of Portes’ particular contribution.

    http://www.imf.org/external/pubs/ft/scr/2010/cr10366.pdf

  15. “The legal consequences of reneging on the guarantee are unclear, but wide experience in similar restructurings elsewhere would give the government plenty to appeal to if it went to court.”

    Wide experience.

    And why should Ireland not make that experience wider.

    So choose to make the boom boomier.

    Let’s make the experience wider.

  16. “Aside from the legal objection, there are other arguments against debt restructuring. We can ignore threats of trade sanctions, long-term loss of market access, or a significant increase in Ireland’s borrowing costs. Extensive experience shows that well-managed sovereign debt restructuring simply does not bring such consequences. This would not be Argentina. And once a settlement has been agreed with creditors, the markets are remarkably forgiving, because they are forward-looking.”

    And the reason nobody in Ireland gets this (apart from a few) is why exactly?

  17. Brilliant article.
    But when will all the professional economists who agree with this analysis put their opinions into the mainstream media?
    The general public hears mainly from careerist politicians and myopic acountants who either will not or cannot understand the bigger picture.
    The economists need to step out onto the centre stage of public debate and make their voices heard.

  18. Richard Portes asked the question,

    What is next for Ireland?

    To me, Ireland is in much the same condition, or worse, than the American navy was after the faithful day in Pearl Harbour. It is not that sailors are standing idle on the dockside, but their vessel is sunk in the harbour. I wonder sometimes, did the Americans stand around talking about haircuts, after the Japanese forces had retreated from the air? Economic policy may indeed be hard. But there are times in history, when it might be pretty simple. I wrote a few brief words on the subject of employment policy this evening, in response to a Stephen Kinsella blog entry on the subject. But it occurs to me, that in Ireland, there are too many vested interests who have a monopoly in this country about anything that has to do with employment policy. Unless those interests are broken, we cannot rebuild a new battle fleet capable of taking to the seas in the 2010s and 2020s. BOH

    http://designcomment.blogspot.com/2011/04/sunk-in-harbour.html

  19. ” And even if foreign financing were completely cut off, the current-account deficit is now only 2%, so adjustment should not be too difficult, and no more public servants need be sacked (or go unpaid) than currently planned. ”

    So what’s all the cribbing and moaning about that 5.8% then…..?

    Why is he soo keen to give the impression the blanket guarantee was Merrills fault?

  20. “According to Ireland’s new Minister of Finance, “the ECB says you can’t”. With great respect, where in the world can the central bank tell the government what it can or cannot do in fiscal matters? And what authority has the ECB to do this under the treaties? Ministers ask who will pay for Irish teachers, nurses – indeed, parliamentarians and ministers – if “Europe”, including the ECB, calls back its loans. But “Europe” is not so foolish. The costs to the ECB and member states would far exceed the benefits.”

    Its good to see this line being picked up on more than it was before – i saw colm mccarthy going on about it as well – Ive being trying to bang on about this abit but I don’t have the expertise to really make the argument as well as I think it could be made.

  21. This column highlights the pitfalls of comment by those highly competent in their disciplines – even excpetionally insightful Nobel Laureates – on circumstances about which they are not fully familiar. Colm McCarthy has highlighted one explicit fallacy in this piece – a belief that two different measures that reduce debt by the same amount are somehow not equivalent in policy effect and may be seen as alternatives; and has further highlighted an implicit fallacy (perhaps unintended) – that debt restructuring is some sort of panacea.

    We have seen reams of this underinformed commentary by well-respected economists in the last two years that have succour to the ‘burn the bondholders and with one bound we’re free’ brigade. These comment pieces feed the naive belief that doing this will be sufficient, that there will be no need for fiscal retrenchment or a concerted effort to reduce the fiscal deficit and that, before we know it, we’ll be back to business as usual. Anything that gives comfort to those who hold this view is both dangerous and misleading.

    Yes, there will have to be some sort of EU-wide ‘settlement’ as the debt burden being borne by the peripherals is unsustainable, but the primary responsibility will be on the peripherals to take the measures that will assist their escape from the pit in to which their woeful misgovernance has landed them.

  22. @ All

    On the issue of the lack of democratic accountability of the ECB, there may be interest in a degree paper at NYU from 2000 to which a link is provided below. The issue has been at the heart of the debate in relation to the establishment of the euro from the very beginning and the Lisbon Treaty, if anything, copperfastens the role of the bank as it is at present constituted. It became a full institution of the Union (Article 13.1 TEU). Curiously, the bank itself was opposed to this political decision.

    The near total independence of the ECB is deliberate and designed with just one aim in mind: maintenance of the value of the currency.

    http://centers.law.nyu.edu/jeanmonnet/papers/00/001101.html

  23. Apropos, was the analysis on Vincent Brown last night off the wall? Power, Constantine G and Maquire seemed to be in agreement that the Euro will be attacked if the big boys don’t supply the necessary funding to support it. In the same context they said our debt will exceed €200bn by 2015, when all is added up.

  24. With Greece now at 25.1% for 2 year money it seems increasingly inevitable that a restructuring will occur. We are best placed by keeping quiet and observe the fallout.

  25. Portes highlights :

    “For the guaranteed bank debt, the government would have to repudiate its predecessor’s commitment.3 The legal consequences of reneging on the guarantee are unclear, but wide experience in similar restructurings elsewhere would give the government plenty to appeal to if it went to court.”

    As well as circumstances through hubris or otherwise, when it was decided not to take the advice of the ECB, our ‘european partners’, e.g the horror expressed by Alistair Darling, who wasn’t informed and feared for a run on the UK banks as a result of our guarantee, the occasion of the guarantee was fed by false information on the liquidity of the banks from the banks themselves.

    Why the banks have not already been pursued to openly account for this is astonishing.

    We would have plenty to appeal if we reneged on the guarantee and faced court because of this.

    Clearly the guarantee has not worked, the EU/IMF bailout hasn’t worked, the patient is deteriorating instead of recovering. Portes doesn’t highlight enough the need for speed, the benefit that would accrue from immediate restructuring, the possibility of a fast economic turnaround supported by the markets in the near term, as happened in Chopra’s Finland in the early nineties.

    The alternative as proposed by our present Government is long term negotiation as they comfortably settle into the role of economic moles of the ECB willing to sit by while the Irish economy bleeds to debt.

    Portes has an interesting reference list on restructuring, debt and default at end of his piece.

  26. The ECB will continue to represent the interests of the powerful elites it represents. Anyone who believes they are acting in the interests of European citizens in general has not been awake since this crisis started. They are going to try and avoid default until as many bond holders are made whole as possible. Their objective is to ensure that as much of the losses as possible become sovereign. It is nice to see the new prospective head of the ECB (Super Mario) will come from such respectable stock “One shadow hanging over Mr Draghi is his time as vice-president of Goldman Sachs from 2002 to 2005.” Mr Portes contribution is full of factual errors but his main thrust is one the Irish need to encourage our government to push for.
    The main error is the size of the restructuring required.
    If the size of the banking and sovereign debt is about 240bill as suggested on VB last night then we would need to burn over 100 billion to get to an 80% of gdp. Only one small problem 🙂 There isn’t 100 billion to burn.

  27. @Greg
    Portes is obviously right in the same way that those who wanted Britain to abandon the gold standard in 1931 were right. You ask “If he’s right, why does almost nobody in Ireland get it?” as if this were a counter-argument.
    Why did nobody in Ireland get it that allowing banks to lend money to people who could never pay it back and paying money to politicians who were told they never needed to try to pay it back was a bad idea. Same people, many of them.

  28. @DOCM
    As far as this Dork can make out the liabilties of the ICB lie with the state and control resides in Frankfurt.
    The dramatic final act in November when Governor Honahan became the de facto Taoiseach of this juristiction was proof enough.

    @ALL
    As for growth , we need to ask ourselfs the simple question – why do we need “growth”
    When banks produce credit they also produce deposits – these liabilties are savings from the future brought back in time today.
    But what if there is not enough savings in the future – what do we do then.

    Do we destroy what is left of our productive capacities to service these fraudulent unpaypable deposits ?
    Talk of becoming more effecient in the global economy is wearing thin – what is the purpose of this dramatic efficiency if the redundency in systems is taken apart – piece by piece
    A thoroughbred racehorse grazing on the African Savannah will most likely have a brief but eventful life folks – such constructions are vulnerable

    THE MONETORY SYSTEM IS FLAWED

    Efforts to keep the compromised system afloat will result in greater tragedy

  29. Before everybody start quoting Richard Portes I suggest you read one of his co-authored papers from 2006 – The Internationalisation of Iceland’s Financial Sector. By Richard Portes and Friðrik M. Baldursson.

    http://faculty.london.edu/rportes/Iceland%20final.pdf

    If you don’t feel like reading the whole paper I have attached some of their conclusions.

    “The internationalisation of the Icelandic financial sector proceeded from market liberalisation, European integration, and privatisation, on the base of a strong, funded pension system and an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks; good supervision and regulation have contributed to that, using EU legislation. And they have grown spectacularly fast.”

    “Yet in spite of their strong performance, Icelandic banks have lower ratings than their Nordic peers, and a much higher risk premium is being placed on their debt during the present turmoil. We see no justification for this in their risk exposure. This suggests that either the markets are not fully aware of their situation or markets place a country premium on the banks.”

    Ahhh 2006 those were simplier times…

  30. @ Christy

    Back to basics.

    The country can and will be told what to do because of the structural deficit. You get put in charge of the country by promising not to cut public expenditure a lot. This means you are dependent on the EU/IMF credit line since the markets think you are idiotic.

    While transparently dependent for political legitimacy on that credit line the government will do what it is told.

  31. @ John McHale

    Re “One relevant fact is that the IMF projects the average nominal interest rate on outstanding debt will reach 5.4 percent in 2015 (it is projected to be 3.9 percent this year). While we clearly face a huge challenge in avoiding an eventual restrucuting, I cannot agree with Colm on the reasonableness of Portes’ particular contribution.”

    From your link and also the following:

    http://www.cso.ie/releasespublications/documents/economy/2009/iip_2009.pdf

    Leaving aside the 5.4% above, which far exceeds our ability to repay at current growth rates, what I’m curious about is the relationship between external assets e.g those calculated in the above docs under the category e.g of the IFSC, and external liabilities under the same category.

    Aside from the impact of Corporation Tax on profits, could someone explain the impact on GDP of trading balances that at the IFSC refer to assets that are either liabilities or credits?

    I presume this explanation would account for the impact of share dealing e.g by financial companies at the IFSC on e.g derivatives/CDO’s and their subsequent impact on Corporation Tax.

    While the sale by Microsoft of a dvd box of win 7 is simple to equate to Ireland’s GDP, the financial relationship of companies in this financial sector to Ireland’s GPD is something due to my ignorance on the matter that slips my understanding.

    Final question, the docs above seem to calculate what otherwise would be understood as external private debt liabilities or private assets existing somewhere outside Ireland into Ireland’s public liabilities on behalf of the government and people of Ireland.

    To what extent do both impact on one another. In simples please for the non expert? Or forget I asked:)

  32. Is anybody confident that our state apparatus has the competence to implement a unilateral restructuring if the Government made a policy decision to do so?

    The received wisdom appears to be that once restructuring becomes inevitable the optimum solution is to do it as early as possible and as smoothly as possible.

    If we have been “at the gates of hell” since late last year then surely we should be preparing for descent into the next circle of the inferno by putting together a major contingency plan for implementing restructuring.

    Unfortunately, I rather fear that the “cognoscenti” are probably still going around saying that if that happens things will be so bad it won’t matter what we do. Perhaps they need another lie-down. No doubt they are looking forward to their summer holidays. Hopefully they will be able to put the war ‘on hold’ unlike last year.

  33. @ Barry T

    Thanks for the video. As I watched it, the awful thought crept into my mind: the learned professor is talking through his hat. This did not really come as a surprise given the shredding his contribution to the WSJ has received on this thread.

    Countries everywhere have stepped in to save their banks at considerable cost to their taxpayers. They have all done so for the same reason: systemic risk i.e. the fear that the failure to do so would bring down their entire banking system. The only thing that is really different about Ireland (and Iceland) is that the banks in question were allowed – by the Irish authorities – to become so large relative to the sovereign that they now risk sinking the latter.

    As many contributors to this blog have pointed out, even without the bank crisis Ireland would be in deep financial difficulty. But the two problems are now irretrievably bound up in one another thanks to the previous government’s decision to “bet the farm” rather than to consider less drastic options.

    One can see at the moment a frenzy being whipped up in the anglo-saxon financial press on the subject of Greece’s debt spreads. But why should this be the case? There is no need for the country to go to the markets for the moment. That was the purpose of the bailout. The same holds true of Ireland and will shortly be the case with regard to Portugal. The answer, it seems to me, is as old as the markets: by panicking existing holders of an asset into selling, there is money to be made (and an opportunity for lucrative side-bets by means of the totally unregulated CDS market should a government be seen as possibly succumbing to siren voices). No movement means no profits. The pot has to be kept stirred.

    If statements by the German members of the ECB are any guide, a few shirts may be lost on this occasion – and this time by the markets – as there is no sign of any change of direction by the major decision-makers (despite the advice being liberally spread around by many who either (i) simply do not know what they are talking about or (ii) have their own agenda).

  34. @DOCM

    What the crisis of the euro has demonstrated over and over again is that – as the system is presently established – banks are the responsibility of their national supervisory authorities and ultimately the governments to which the latter are responsible.

    So, Ireland had the responsibility to underwrite all the debts of Irish banks but not the power to renegotiate them? Be serious, that’s not a legal obligation but an intensely political European policy decision.

    The issue is not a fiscal one but of how the legal obligations in respect of senior bondholders are met having regard to the status of their holdings.

    Most amusing how the “independent” ECB decided that protecting large investors from their own incompetency and greed was an essential condition of maintaining price stability.

    One can see at the moment a frenzy being whipped up in the anglo-saxon financial press on the subject of Greece’s debt spreads. But why should this be the case?

    It is not just the Anglo Saxon financial press but their allies on the European left and those Nobel prize winning rootless cosmopolitans in the US who are part of this vast international conspiracy.

    A conspiracy which has as its nefarious goal nothing less than painting the bailout and the whole dire thrust of European policy after the global financial crisis as merely a grubby struggle to see who gets stuck with the cost of preserving the European financial system in its current configuration and staying ahead in the reserve currency battle.

    The enemy is everywhere, and multiplying. Be ever vigilant.

  35. Anyone know why the two pillars of society listed 45 billion of papers on the ISE today?

  36. @ SB

    On your first point, read what I wrote! Ireland has the responsibility and is free to exercise it as she chooses, including a default. What she cannot expect is for other countries to take on that responsibility.

    On your second point, I suggest that you read the paper by Karl Lannoo, especially the comments that he makes at pages 7 and 8 in relation to the application of the new EU rules. In the meantime, the legal obligations in respect of senior bondholders remain, a point which even Portes accepts but glibly tells us “not to worry” about the consequences: just jump!

    cf. the action contemplated by the UK

    http://www.ft.com/cms/s/0/e2554d38-6460-11e0-a69a-00144feab49a.html#axzz1Kf1ZlUmE

    On your last point, you might care to explain why the market for Greek debt is in such an agitated state – with knock-on consequences for Ireland and Portugal – given the fact that the country has no need to return to the markets in terms of its bailout programme before 2012.

    Your belief in the innocence of market players is matched only by your belief in the infallibility of “Nobel” prizewinners (the prize is actually awarded by the Swedish Central Bank in memory of Alfred Nobel).

    The “vast international conspiracy” to which you refer is a figment of your imagination, not mine.

  37. @DOCM

    Not too fond of Portes eh! Why not try Kevin O’Rourke …

    http://www.voxeu.org/index.php?q=node/6017

    And remember Minsky’s (b) – if insolvent; face up to it; move on …

    BTW I hear poor Lorenzo Bini-Smaghi, your Idol, is getting the P45 later in year – replaced by a Frenchwoman ….. as part of the Mario deal …. hope this does not upset you too much …..

  38. @DOCM As you know, Greece is apparently expected to fund 50% of it’s requirements via the markets in 2012 and fully return to it in 2013.

    It seems that you yourself are a sporting man. Would you care to quote me some odds (with size) on this fairy tale coming true?

    Greece is utterly insolvent. You will find that this situation is not contingent on the approval of either the German Chancellor or the ECB. The markets may have worked this out already.

  39. @DOCM

    If I have time I will read those pieces but I’ll rephrase my earlier points in less idiomatic English.

    * Why is support of the current bailout policy restricted to the centre right of the European establishment?
    * Why are there no significant public intellectuals who support it?
    * Why does opposition to it come from such a wide range of the political spectrum?
    * Why does support for it disproportionately come from those involved in the European financial sector?
    * Why is so much of the support for such a clearly political decision justified though reference to law rather than necessity or social benefit? (at least people have stopped bandying about “parri passu” as if major economic policy decisions depend chiefly on bond/equity/deposit privilege)

    Some clues might be found in the words “clearly immoral” , “political opportunism”, “doomed to fail” and “serving chiefly the interests of capital.”

    Lastly, I am not among the 1% of people with a vague interest in economics who are unaware of the provenance of its fake Nobel and I would be wary of claiming that the architects of the bailouts have superior powers of analysis based on their comparative lack of contribution to economics, intellectual or public life.

  40. @DOCM

    (i) On your first point, read what I wrote! Ireland has the responsibility and is free to exercise it as she chooses, including a default.

    Not so. The Irish government acts as directed, not as it dictates. The size of each budget adjustment, to the nearest 100k it seems, is dictated by EU Commission. The ability to hit senior bondholders, or not, is dictated by the ECB.

    (ii) The legal obligations in respect of senior bondholders remain, a point which even Portes accepts but glibly tells us “not to worry” about the consequences: just jump!

    There are certainly legal obligations remaining with respect to the contracts related to senior bonds. These legal obligations apply to the parties that made these contracts, not to other parties uninvolved in these contracts (e.g. taxpayers for unguaranteed bonds). You seem to keep overlooking this simple point.

    (iii) One can see at the moment a frenzy being whipped up in the anglo-saxon financial press on the subject of Greece’s debt spreads.

    Central Europeans like to have a go at the “Anglo-Saxon” press/financial system/economic model whatever. Take a recent speech by LBS. While talking about the failure of financial supervision he lumped “Ireland and the UK” together. Recent IMF data has shown that the net cost of the crisis in Germany has been much greater than in both the USA and the UK. Logically therefore LBS should have lumped “Ireland and Germany” together – after all aren’t bank problems the result of the failure of national supervisors, so German supervisors must have failed more than their USA and UK counterparts? But wait – that wouldn’t fit in with the “Anglo-Saxon” bashing would it, so why let the facts get in the way of a good tirade? It also helps to have a very short memory in terms of historical events.

  41. @Bryan G,

    “Central Europeans like to have a go at the “Anglo-Saxon” press/financial system/economic model whatever.”

    You have hit precisely on what is fundamental to how this whole Euro crisis mess has evolved and, hopefully, will be resolved. Central European and, in particular, German anger, regret and, to a considerable extent, its policy stance is being driven by a recognition of the damage that Neocon ideology and Anglo-Saxon financial capitalism has done to the Rhineland Capitalism model and a resolve that it will never be allowed to do this damage again. The irony is that senior politicians, policy-makers and regulators, particularly in the US and the UK, had a pretty good grasp of what had gone wrong and why it had gone wrong and were better able to take remedial action. They also had an appropriate institutional and procedural framework. There’s still a lot of heavy-lifting to be done, but the basics are in place.

    In contrast, in the core EZ, there was no proper understanding of how the innovations of Anglo-Saxon financial capitalism (some of which have proved of no economic or social use) would interact with the staid, fusty institutions and arrangements of Rhineland Capitalism. And, when the inevitable damage was done, the instituional and procedural arrangements were inadequate – at both the national and EZ level – to deal with the fallout. Denial, bluster, abuse of existing institutions and the sacrifice of the vulnerable have been the order of the day. But this is not sustainable and the end has to be in sight.

  42. In reply to the posts above, and as briefly as I can, here are my replies.

    Ireland retains the responsibility for the banks under her supervision. But she also retains full sovereign powers as to how to deal with this situation, including, for example, following the approach of Iceland (as effectively recommended by Portes). That this would not meet with the approval of the ECB and the countries of the euroarea would be an understatement but that is not the same as arguing – as seems to be the case – that we are prevented from doing so by the big, bad ECB (which, in the meantime, is keeping the country afloat). Indeed, the fact that we gave the blanket guarantee in the first instance is confirmation of our freedom to make national decisions in the matter of bank systemic risk.

    Neither this government (following some initial throwing of shapes), nor the previous one, is following the approach of Iceland, not because it cannot do so, but because it would be -as a member of a currency union – a very, very stupid thing to do.

    As to senior bonds, the legal obligations apply, of course, to the parties to them. Who else would they apply to? It is the issue of how these bonds are treated as part of the capital requirements for banks that is at issue. Karl Lannoo is again recommended for a better understanding. I found his paper to be highly informative.

    Incidentally, one of the points that strike me in the replies is the assumption that my view is somehow incompatible with Ireland actually negotiating a better deal. The very opposite of the case. If we want such a deal, we must identify the defensive weak points of the opposition, not be arguing about how morally justified our own case is. There are plenty of such weak points as Paul De Grauwe has underlined in a recent paper a link to which I would post once again. Having just re-read it, I find the basic argument to be very plausible and a reality with which Germany, in particular, will eventually have to come to terms.

    http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

    Which brings us back to Greece and the point made by Toxic Avenger. I agree that Greece is insolvent. But, for the moment, as in the case of Ireland, the country is being funded by loans raised by the EU27 (EFSM) and the euroarea (EFSF). My own guess would be that (i) the present market agitation will be ignored and (ii) when push comes to shove in 2012, the euroarea countries will be compelled to continue funding both Greece and Portugal and, if we do not get our act together, also Ireland, under the ESM. However, the implications of Merkel forcing an institutional solution outside the treaties on her partners to meet a non-existent threat -that of being obliged to breach the existing treaties and accept the responsability for other euroarea countries debt – have not, in my opinion, been fully worked out.

    P.S. The IIEA has posted full details of the address by Regling yesterday.

  43. @all

    This is now increasingly recognised in Germany – From Axel Weber at one end of political spectrum (and within its Finance ministry) to the ATTAC-Network & Scientific Council on left of centre (see below). European Project, let alone Euro, is at stake – and this is a political project. Not to mention many many leading economists [what they say now more relevant than their prior errors or omissions (and many do remain tied to spurious failed ideologies] and European public intellectuals … (the concept of Irish public intellectual is for another day)

    Manifesto for the EuroZone

    http://www.attac-netzwerk.de/fileadmin/user_upload/Gremien/Wissenschaftlicher_Beirat/ATTAC%20Scientific%20Council%20Germany%20Mainfesto%20on%20the%20crisis%20of%20the%20Euro%20march%202011.pdf

    European Citizens to, hopefully, cop themselves on and place pressure on political leadership to lead, as distinct from craven capitulation to the forces of capital ….

  44. P.S. I forgot to insert one important qualification on my prognosis and that is, of course, what the markets decide with regard to Spain. My money is also on Rhineland Capitalism. Whether the rest of the country would share that opinion is very open to doubt.

  45. @DOCM,

    The EU’s Grand Panjandrums are keeping their fingers crosses that they have built a big enough firebreak between the small peripherals and Spain (and Italy and Belgium). Time and the sovereign bond market will tell.

    I’m not so much placing my money on Rhineland Capitalism as seeking to highlight the fundamental strategic choice facing Irish policy-makers when considering the future of a small open regional economy. When times were good we had the best of both worlds. We could lean towards Boston while safely ensconced within the EU institutional framework with Berlin providing the lynch-pin.

    Now, as a result of woeful misgovernance, we’re trapped by the EU’s institutional inadequacies and at the whim of Berlin. And we’re no longer of as much use or interest to Boston as we were.

    It’s probably too difficult to contemplate and all we’ll get is the usual denial and bluster – and suspension of disbelief.

  46. @Bryan G

    “There are certainly legal obligations remaining with respect to the contracts related to senior bonds. These legal obligations apply to the parties that made these contracts, not to other parties uninvolved in these contracts (e.g. taxpayers for unguaranteed bonds). You seem to keep overlooking this simple point.”

    Its not as simple or clearcut as you would have us believe. Simply put, taxpayers were not party to those senior bond contracts. This is a simple but crucial point.

    We should follow the example of the Icelanders in regard to Icesave, in our case, in regard to Anglo, refuse to pay the senior bondholders, set any haircuts based only on the ability to pay and shared loss.

    Shared loss should be reflected in debt for equity swaps and/or haircuts, not on the ridiculous assumption taxpayers should pay what they neither morally should pay, nor can pay.

    The matter should go before the courts. The Icelanders have sent their case against Iceland to the courts.

    It should be easy enough to prove how Irish taxpayers were heisted by Anglo false accounting, B&B helicopter money, and false information given at the time of the guarantee.

    Heist above meaning Anglo couldn’t pay so bill taxpayers for a non domestic private banking loss!!

    Perhaps the courts could sort out the Valartis Anglo deal as well
    http://kathleenbarrington.blogspot.com/2011/01/lenihan-silent-on-issue-of-anglos.html

  47. @ Colm Brazel

    ‘It should be easy enough to prove how Irish taxpayers were heisted by Anglo false accounting, B&B helicopter money, and false information given at the time of the guarantee’

    The courts will not hear such a case because the counsel will not have prepared the brief. Solicitors would not have moved the necessary legal motions or sought the relevant advice of counsel. The necessary documentation will not have been discovered because the motions will not have been entered.

    The clients will not issue the instuctions to the solicitors in the first place. They have a(n entirely realistic and understandable) fear that the action might bring to light certain matters which might be damaging, even ruinous, to them, their careers, their institutiion, their family or their friends and neighbours.

    This is Ireland. What you propose is an appalling vista. Our major stakeholders are determined to preserve a crumbling status quo. Unless there is siginificant outside pressure, it will take years of public disquiet, as well a grinding economic and social regression before the debacle can be examined openly.

  48. @paul quigley

    “Our major stakeholders are determined to preserve a crumbling status quo”

    Indeed, if I may say so, well said. Those at the coalface of so-called dissent know very well the obstacles to uncovering the truth. But we can choose to be educated and informed and refuse to swallow ignorance, deception and banker coverups.

    The situation is not insurmountable. The bailout hasn’t worked, NAMA hasn’t worked. They are fast running out of options and time, and have made a big mess bigger:

    Let’s have some fun and bring it down!

    http://www.youtube.com/watch?v=NZZvtQtdbzM

    I’m neither republican nor nationalist, but Who would have guessed as we approach the 100th anniversary of our independence, that this independence would have been lost to ‘Irish banks’ and the ECB/IMF, not by the people, but by democratically elected ‘Irish’ governments acting against the will of the Irish people.

    This evolving situation is far from over!

  49. @ Colm

    ‘Things fall apart. The centre cannot hold’

    I have lived up north long enough to know how critical it is is to bring something down safely. Social chaos is a very real risk.

    Joe Lee is too intelligent, decent and humble to say that he diagnosed the fatal flaws in our state years ago, so I’ll say it for him.
    Ireland 1912-85 Cambridge University Press. Take a bow Prof. Long life and health to you.

  50. “Good comfort food no doubt for those who woild like to see their bubble incomes mintained.”

    Only if they are dim enough not to realise that he glossed over a point that will be important to them. While a low current account deficit gives the government space to go it alone, that will not protect it from needing to bring the primary deficit to zero pronto if EU institutions are at all uncooperative.

    My take on the article is that while the fact checking is weak, the analysis is broadly sound if one’s interest is in protecting the collective interests of the Irish people, or in protecting the interests of holders of Irish sovereign debt.

  51. @ Paul

    Not a history buff, always believed history was written by stakeholders such as the collection of 14 ex croney bankers and Department of Finance officials who produced the thin on fact based evidence Nyberg Report, but I will read Joe Lee. Also, from

    http://www.gov.ie/en/essays/twentieth.html

    “This was a factor in the defeat of Minister for Health Noel
    Browne’s Mother and Child scheme, an effort to introduce free
    medical health care, which illustrated that there was concerted
    opposition in Ireland to the concept of the welfare state from
    many quarters”

    For me the above has many echoes in the revealing response to our economic debacle of the moment by the above stakeholder descendants who see their edifice crumbling. As before, in above example, what is of benefit to citizenry at large in this country, is superimposed by what is of benefit to stakeholders.

    I don’t belong to the apocalyptic, “centre cannot hold”, vision of social breakdown following default. Quite the opposite, Irish citizens would knit together to face such challenges and be supportive of a state supporting citizens. Rather, I see slow breakdown through slow deterioration of our economy being led back to the 50’s and 30’s under current policy.

    But we do not have a 32 county mature democratic republic. Our president with a retinue of 72 staff living in palatial splendour on a palatial salary is fond of speeches that use the symbols of ‘radiator’ and ‘drain’. Radiators radiate confidence and positivity….drain with criticism.

    I guess I’m a drain. Lol.

    Used to be people were encouraged to take positive stands on matters of injustice. But we heard not a word as the dodgy draconian legislation on the banks went through, though now today McAleese I believe has spoken on something close to the stakeholders’ heart, Corporate Tax.

    I also believe we do have a choice. That choice involves economic independence. It could even mean EU withdrawal, though I’m a supporter of membership of the EU but not of the EMU, which creates problems re withdrawal from the EU; our choice should include the choice of becoming a 51st dollar state; it should also include the option of handing back the keys to the Queen and return of the island to 32 county dominion status; it could include restoration to some semblance of the 1916 vision. But as the dollar collapses against the euro other forces will be brought to bear here.

    These options arrived the moment Ajai Chopra’s IMF/ECB team arrived officially making us a dominion of the EU as well as IMF/ECB

    Meanwhile its worth campaigning to have all the facts re above brought out, don’t you think:)

  52. @ Colm

    Agree with much of that. It is indeed worth campaigning to bring the facts to light, and the more the economy deteriorates, the stronger that pressure will become. One of the great merits of this board is that people get an opportunity to take apart received truths, often by referencing or reframing material which is already in the public domain. Our first responsibility, surely, is to use what we already have. We have much more than we sometimes think.

    It’s clear from your posts that you are highly conscious of issues of power. Some forms of power are very subtle, and new forms are emerging all the time. The old saying, ‘fool me once shame on you, fool me twice shame on me’, comes to mind. It’s not just Ireland who will learn the lessons from the Great Crash of the 21st century.

    Orthodox economics tends to elide or disregard power issues. I don’t find always follow the Dork of Cork’s thinking too well, but I am pretty sure that he is right that MMT and heterodox stuff is a key to progress. Steve Randy Waldman’s ‘Interfluidity’ blog is well worth a look.

    Maybe Nyborg report is a case of glass half empty or half full. While it doesn’t hang any individuals, it certainly leaves a few of our institutions dangling. As Louis Brandeis, later US Supreme Court Justice said in his classic Other People’s Money (1914) ‘Sunlight is the best disinfectant’. Nyborg has provided an unanswerable case for a root and branch reform of governance in our financial sector. Many of those reforms are in the same direction as those described in the Lannoo paper recently referenced by DOCM.

    As someone who is not employed in finance, but who is affected by it, my most minimal expectation is that gross conflicts of interest be targeted. Persons with signifcant financial clout are going to have to accept serious curtailment of their right to privacy. ‘Out, out, out’ as Maggie Thatcher liked to say, and well and truly outed these operators must expect to be. In its most simplistic terms, the issue is democracy versus plutocracy, and the latter is just too dangerous to society, let alone the biosphere.

    The social order of modern society depends on quite complex mechanisms, which can break down if the funding arrangements and authority relationships are not sustained. This is not the world of an tOileanach, who proudly stated that he had never broken a custom. Many of us have forgottten, if we ever knew, how to keep the peace.

    Egpyt is not so far from Greece and Greece is not so far from us. We too have our throngs of idle young adults. I am not sure that the level of citizenship or solidarity is as good as you suggest, and I suspect that many are quite despairing and alienated.

    Organising begins at the level of ideas. Pierre Bourdieu, a 20th c giant of sociology, had a great deal to say on social power, and the relationship between economy and society. As Gregory Bateson, one of the founders of systems theory put it, ‘Only connect’. Enjoy the long weekend and more power to your elbow.

  53. @ Colm

    I met Noel Browne when there were plans to turn “Against the Tide”, his autobrography, into a Movie, and I was asked to write a script.

    Standouts, from memory, include:

    (1) His dawning realisation that around the Cabinet Table no one actually understood the budget or the economy, or could give a clear answer to simple questions.

    (2) His contempt for Haughey and Lenihan who he saw as fronting as Civil War patriots, but actually were just power seekers using the language.

    (3) As a Minister, the way he galvanised his team for the mission of the eradication of TB, and the confident delegation of his duties (including the car and letting them sign things in his name), when he was sure they were on-side.

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